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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-26793
BIGSTAR ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-399-5258
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
</TABLE>
<TABLE>
<S> <C>
19 Fulton Street - 5th Floor - New York, New York 10038
(Address of principal executive offices) (Zip Code)
</TABLE>
(212) 981-6300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, $.001 par value, as of the latest practicable date:
10,187,495 shares of common stock as of November 8, 2000
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BIGSTAR ENTERTAINMENT, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000
(unaudited) and December 31, 1999......................... 2
Consolidated Statements of Operations for the three months
ended September 30, 2000 (unaudited) and September 30,
1999 (unaudited) and the nine months ended September 30,
2000 (unaudited) and September 30, 1999 (unaudited)....... 3
Consolidated Statements of Cash Flows for the three months
ended September 30, 2000 (unaudited) and September 30,
1999 (unaudited) and the nine months ended September 30,
2000 (unaudited) and September 30, 1999 (unaudited)....... 4
Notes to Condensed Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.................................. 16
Item 2. Changes in Securities and Use of Proceeds.......... 17
Item 3. Defaults Upon Senior Securities.................... 17
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 17
Item 5. Other Information.................................. 17
Item 6. Exhibits and Reports on Form 8-K................... 17
Signatures.................................................. 18
</TABLE>
1
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PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
BIGSTAR ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 7,731,431 $ 17,422,817
Accounts receivable, net of Allowance....................... 593,415 1,129,454
Short-term investments...................................... -- 6,902,234
Prepaids and other current assets........................... 676,799 1,387,903
------------ ------------
Total current assets...................................... 9,001,645 26,842,408
------------ ------------
Property and equipment, net................................. 3,013,344 2,253,109
Other assets................................................ 602,207 756,546
------------ ------------
Total assets................................................ $ 12,617,196 $ 29,852,063
============ ============
LIABILITIES:
Accounts payable............................................ $ 2,766,332 $ 3,729,806
Accrued expenses............................................ 658,006 2,146,552
Accrued payroll costs....................................... 50,000 695,000
------------ ------------
Total current liabilities................................... 3,474,338 6,571,358
------------ ------------
MINORITY INTEREST........................................... 192,780 --
STOCKHOLDERS' EQUITY:
Preferred stock............................................. -- --
Common stock................................................ 10,186 10,032
Additional paid-in capital.................................. 48,151,461 47,885,409
Deferred compensation....................................... (10,570) (509,059)
Accumulated deficit......................................... (39,200,999) (24,105,677)
------------ ------------
Total stockholders' equity.................................. 8,950,078 23,280,705
------------ ------------
Total liabilities and stockholders' equity.................. $ 12,617,196 $ 29,852,063
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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BIGSTAR ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES........................... $ 1,364,320 $ 2,865,361 $ 8,161,475 $ 6,557,122
COST OF SALES....................... 891,692 2,902,738 7,024,976 7,718,879
----------- ----------- ------------ ------------
Gross profit...................... 472,628 (37,377) 1,136,499 (1,161,757)
OPERATING EXPENSES
Sales and marketing............... 571,515 3,220,788 6,468,839 6,543,418
Website and software
development.................... 2,003,700 1,371,261 6,682,321 3,239,581
General and administrative........ 973,999 889,175 3,800,911 2,431,932
----------- ----------- ------------ ------------
Total operating expenses.......... 3,549,214 5,481,224 16,952,071 12,214,931
----------- ----------- ------------ ------------
Loss from operations.............. (3,076,586) (5,518,601) (15,815,572) (13,376,688)
INVESTMENT INCOME................... 112,196 181,816 662,804 252,294
----------- ----------- ------------ ------------
Loss before minority interest....... (2,964,390) $(5,336,785) $(15,152,768) $(13,124,394)
Minority interest................... 57,220 -- 57,220 --
----------- ----------- ------------ ------------
NET LOSS.......................... $(2,907,170) $(5,336,785) $(15,095,548) $(13,124,394)
=========== =========== ============ ============
PER SHARE INFORMATION:
Net loss per share --
Basic and diluted.............. $ (0.29) $ (0.70) $ (1.49) $ (2.26)
=========== =========== ============ ============
Weighted average common shares
outstanding --
Basic and diluted.............. 10,185,641 7,645,572 10,155,333 5,805,801
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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BIGSTAR ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss................................ $(2,907,170) $(5,336,785) $(15,095,548) $(13,124,394)
Adjustments to reconcile net loss to net
cash used in operating activities --
Minority interest....................... (57,220) (57,220)
Depreciation and amortization........... 642,321 100,892 1,183,284 219,624
Non-cash common stock option and warrant
expenses............................. 94,284 91,671 651,956 205,949
Amortization of investment discount..... -- -- (42,767) --
Changes in assets and liabilities --
Cash in Escrow....................... -- -- -- 453,000
Allowance for Doubtful Accounts...... 100,000 655 130,000 15,000
Accounts receivable.................. 46,452 (268,096) 406,039 (517,410)
Other current assets................. 96,523 (811,420) 258,387 (1,046,417)
Other non-current assets............. 99,498 (518,790) 154,339 (545,901)
Accounts payable and accrued
expenses........................... (2,810,060) 1,889,475 (3,266,473) 3,673,467
----------- ----------- ------------ ------------
Net cash used in operating
activities......................... (4,695,372) (4,852,398) (15,678,003) (10,667,082)
----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................... (80,990) (455,094) (1,487,943) (1,032,527)
Redemption of Investments............... -- -- 6,945,000 --
----------- ----------- ------------ ------------
Net cash used in investing
activities......................... (80,990) (455,094) 5,457,057 (1,032,527)
----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of/proceeds from issuance of
common stock......................... (250,000) 22,008,918 529,560 33,946,904
Subscribed stock........................ -- -- -- (453,000)
Repayment of capital lease obligation... -- -- -- (2,993)
Deferred registration costs............. -- 858,618 -- --
----------- ----------- ------------ ------------
Net cash used in financing
activities......................... (250,000) 22,867,536 529,560 33,490,911
----------- ----------- ------------ ------------
Net increase (decrease) in cash...... (5,026,362) 17,560,044 (9,691,386) 21,791,302
----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 12,757,793 4,594,382 17,422,817 363,124
----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period.................................. $ 7,731,431 $22,154,426 $ 7,731,431 $ 22,154,426
=========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest............................. $ -- $ -- $ -- $ --
SUPPLEMENTAL SCHEDULE OF NON-CASH
OPERATING ACTIVITIES:
Value of options and warrants issued for
future services...................... $ 119,959 $ 11,306 $ 252,292 $ 159,793
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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BIGSTAR ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Overview and Summary of Significant Accounting Policies:
Overview
BigStar Entertainment, Inc. and subsidiary (the "Company") is an online
direct marketer of filmed entertainment products and provider of e-marketing
services. The Company operates bigstar.com, a Shop-A-Tainment(TM) destination
site providing information on filmed entertainment products and related
personalities, as well as offering for sale approximately 45,000 filmed
entertainment products, including feature films, childrens' movies and
educational, health and fitness, and instructional videos. The Company's
Shop-A-Tainment strategy integrates captivating information about movies and
movie stars in a fun shopping site, with the goal of generating more repeat
visits to the Company's web site, higher page views and greater customer loyalty
and revenue.
bigstar.com's extensive content also includes movie trailers and feature
films that the user can view by streaming to their computer. The user
information provided during visits to the Company's site allows the Company to
market directly to consumers using Advaya, its proprietary,
internally-developed, direct marketing software.
Through Advaya its majority-owned subsidiary, the Company also provides
digital direct marketing services for businesses and companies that want to
communicate directly with their customers online. Advaya provides a variety of
e-marketing services and products to its customers including a personalized,
targeted permission-based e-messaging and e-mail service. Through its
proprietary Web-based software tool, Advaya enables clients to manage their
subscriber databases, build, schedule, test, send and analyze targeted messages
to their users. Advaya also provides consulting services for building subscriber
lists, developing creative digital direct marketing strategies and data
warehousing services for clients.
The Company operates in the online 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, as
well as other providers of on-line direct marketing services.
Basis of Presentation
The consolidated balance sheet as of September 30, 2000 and the balance
sheet as of December 31, 1999, and the consolidated statements of operations and
cash flows for the three and nine-month periods ended September 30, 2000 and the
statements of operations and cash flows for the three and nine-month periods
ended September 30, 1999 have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). The unaudited
consolidated financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary to state
fairly the financial information included in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such SEC
rules and regulations. The results of operations for the interim periods ended
September 30, 2000 are not necessarily indicative of the results that may be
reported for any other interim period or for the year ending December 31, 2000.
Certain amounts in the prior periods' financial statements have been
reclassified to conform to the current period's classification.
Use of Estimates
The preparation of consolidated 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 consolidated
financial
5
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BIGSTAR ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 the video and DVD
formats over the Company's web sites, as well as online advertising and
promotional revenues and fees for providing e-marketing services. The Company
recognizes revenue from its web sites when the products are shipped to customers
and when advertisements and promotional items are served and marketing
promotions delivered. Outbound shipping and handling charges are also included
in net sales. In accordance with EITF issue 00-14, "Accounting For Certain Sales
Incentives", revenues for the three and nine-month periods ended September 30,
2000 are net of approximately $40,000 and $1,262,000, respectively, of coupons
used by customers for discounts on their purchases of filmed entertainment
products. Accordingly, revenues for the three and nine-month periods ended
September 30, 1999 are net of approximately $806,000 and $1,569,000,
respectively, of coupons used by customers for discounts on their purchases of
filmed entertainment products. Previously the cost of these coupons was included
in sales and marketing expenses; however, all prior period financial statements
presented have been reclassified to conform to the current period's
classification. 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 products from
customers are accepted in accordance with standard industry practice. The
Company provides an allowance for sales returns based on historical returns
experience.
There were no barter revenues for the three months ended September 30,
2000. For the nine-month period ended September 30, 2000, net sales included
barter revenues of 3%. For the three and nine-month periods ended September 30,
1999, net sales included barter revenues of 12% and 10%, respectively. For
barter transactions, the Company places advertisements on its customers' web
sites in exchange for placing its customers' advertisements on the BigStar web
site. Revenues from these transactions are based upon the Company's "cost per
thousand impressions", utilized in similar transactions, and the number of
impressions delivered. Revenues are recognized ratably over the term of the
contract. Barter expenses, which approximate barter revenues, are recorded in
sales and marketing expenses in the accompanying consolidated financial
statements.
Cost of sales
Cost of sales includes the cost of the filmed entertainment, as well as
outbound shipping and handling costs and the cost of promotional items
distributed to customers with purchases. In accordance with EITF issue 00-14,
"Accounting for Certain Sales Incentives", the cost of sales for the nine-month
period ended September 30, 2000 includes approximately $227,000 in promotional
items. The Company did not distribute any promotional items in the three-month
period ended September 30, 2000. Accordingly, the cost of sales for the three
and nine-month periods ended September 30, 1999 includes approximately $368,000
and $1,373,000, respectively, in promotional items. Previously the cost of these
promotional items was included in sales and marketing expenses; however, all
prior period financial statements presented have been reclassified to conform to
the current period's classification.
Dependence on Suppliers
Although the Company has agreements with several third parties to provide
filmed entertainment products and related order fulfillment services, it has no
fulfillment operation or warehouse facility of its own and, accordingly, is
dependent on maintaining its existing, or developing new, fulfillment
relationships. There can be no assurance that the Company will maintain its
relationships with these vendors beyond the terms of
6
<PAGE> 8
BIGSTAR ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the existing agreements, which expire, subject to renewal, in the first quarter
of 2001 and the first quarter of 2002.
Net Loss Per Share
The Company accounts for net loss per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". In accordance with SFAS No.
128, basic earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of the incremental common shares issuable upon
the exercise of stock options and warrants (using the Treasury Stock Method);
common equivalent shares are excluded from the calculation if their effect is
anti-dilutive. Diluted loss per share for the three and nine-month periods ended
September 30, 2000 and 1999 does not include the impact of approximately
3,092,871 and 2,469,423, respectively of common stock options and warrants then
outstanding, as the effect of their inclusion would be anti-dilutive.
Computer Software Developed for Internal Use
In January 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed for Internal Use" ("SOP
98-1"), as revised by EITF issued 00-20, which provides guidance for determining
whether computer software is internal use software and on accounting for the
proceeds of computer software originally developed 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.
For the three and nine-month periods ended September 30, 2000, the Company
capitalized approximately $266,000 and $1,462,000, respectively, of external
direct costs related to the Advaya direct marketing technology, which are being
amortized over the related useful life of two years. During the three months
ended September 30, 1999, the Company capitalized $142,352 of costs incurred
related to the development of internal use software. No costs were capitalized
for earlier periods. All costs incurred for upgrades, maintenance, and
enhancements, which did not result in additional functionality, were expensed.
Comprehensive Income
The Company reports under 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. Accordingly, the Company's comprehensive net loss is equal
to its net loss for the three and nine-month periods ended September 30, 2000,
and the three and nine-month periods ended September 30, 1999.
New Accounting Pronouncements
In January 2000, the Company adopted EITF Issue 99-17, "Accounting for the
Advertising of Barter Transactions" ("EITF Issue 99-17"), which changed the
method by which barter revenues can be recognized as revenue. Barter
transactions entered into after January 20, 2000 should be accounted for at fair
value on a one-for-one basis with revenue received by the seller of the
advertising for similar advertising sold for cash. The adoption of EITF Issue
99-17 did not impact the Company's consolidated financial statements as the
Company did not enter any new barter transactions after January 20, 2000.
In May 2000 the Company adopted EITF issue 00-14 "Accounting for Certain
Sales Incentives" which specified the accounting for and classification of
coupons and promotional items. Adoption of these provisions is required for
financial statements for periods beginning after May 18, 2000. Accordingly, the
cost of coupons redeemed by consumers are deducted in the determination of net
sales and the cost of promotional items
7
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BIGSTAR ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
distributed to customers with purchases are included in cost of sales.
Previously, these costs were included in sales and marketing expenses.
Accordingly, the financial statements for prior periods presented have been
reclassified to conform with the current period's classification.
Note 2 -- Stockholder's Equity
Issuance of Capital Stock
On January 3, 2000, 3,692 shares of common stock were issued to
participants of the BigStar Entertainment, Inc. Employee Stock Purchase Plan for
proceeds of $24,317.
Warrants
On January 4, 2000, warrants to purchase 48,500 shares of common stock were
exercised for net proceeds of $59,000.
During the quarter ended June 30, 2000, the Company issued warrants to
purchase 25,000 shares of common stock at an exercise price of $5.50 per share
as part of a sales representation agreement. The Company determined the fair
value of the warrants issued using the Black-Scholes option pricing model to be
approximately $47,000. Subsequent to September 30, 2000 the agreement was
cancelled with 10,400 warrants remaining unvested with an unamortized value of
$19,500.
Stock Options
During the nine-month period ended September 30, 2000, options to purchase
100,943 shares of common stock were exercised for net proceeds of approximately
$250,000. No stock options were exercised during the quarter ended September 30,
2000.
Additionally, during the three and nine-month periods ended September 30,
2000, the Company recorded approximately $84,000 and $317,000 respectively, of
consulting expense associated with the amortization of options and warrants to
purchase shares of common stock to consultants for marketing services. The
Company used the Black-Scholes option pricing model to determine the fair value
of the options.
Note 3 -- Formation of Subsidiary
Incorporation of Subsidiary
On January 12, 2000 Advaya, Inc. ("Advaya"), originally incorporated as
BigStar Direct, Inc., was incorporated and 1,000 shares of common stock were
issued to the Company. In consideration for the common stock received from
Advaya, the Company contributed approximately $215,000 of computer equipment and
web site development costs to Advaya. In addition, the Company received a
royalty-free license to use the Advaya software in exchange for performing beta
testing of current and future versions of software developed by Advaya.
Minority Interest
On January 15, 2000, the Company sold 50 shares of common stock in its
Advaya subsidiary to an investor for proceeds of $250,000. During the quarter
ended September 30, 2000, the Company repurchased from the investor the 50
shares for $250,000. In addition, as part of the development of the Advaya
software, a contractor received 50 "restricted" shares of Advaya stock. The
restrictions are removed monthly based upon certain performance and support
milestones. The Company has valued these shares at $250,000 and has capitalized
their cost which is being amortized over two years.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for historical information, the statements in this Form 10-Q report
(including, without limitation, the discussion under the heading "Results of
Operations") contain forward-looking statements that involve risks and
uncertainties. BigStar's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below, and the risks discussed
under the caption, "Risk Factors That May Affect Results of Operations and
Financial Condition." The following discussion should be read in conjunction
with BigStar's financial statements and the related notes to those statements
and the other financial information appearing elsewhere in this Form 10-Q.
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. In
addition to our filmed entertainment business, we have recently begun to provide
on-line marketing services using our proprietary software through our Advaya
subsidiary. 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 and the continued operation of our business. As of September
30, 2000, we had an accumulated deficit of approximately $39,201,000. As we
continue our businesses, we believe that our operating expenses will exceed our
revenues primarily due to marketing, software development, web site and
administrative costs and additional depreciation related to capital
expenditures. As a result, we expect to continue incurring operating and net
losses and negative cash flow from operations.
Results of Operations
The three and nine-month periods ended September 30, 2000 and September 30,
1999.
Net Sales. Net sales were approximately $1,364,000 for the quarter ended
September 30, 2000 compared to approximately $2,865,000 for the quarter ended
September 30, 1999. For the nine months ended September 30, 2000, net sales were
approximately $8,161,000 compared to approximately $6,557,000 for the nine
months ended September 30, 1999. Net sales reflect sales of filmed entertainment
products, net of returns, and include shipping and handling charges, as well as
advertising and promotional revenues and direct marketing fees. The Company
recognized approximately $219,000 in advertising and promotional revenues for
the quarter ended September 30, 2000 and approximately $1,383,000 for the nine
months ended September 30, 2000, including $235,000 in barter transactions. The
Company had $730,175 and $1,013,787 in advertising and promotional revenues,
including $343,787 and $627,399 of barter revenue for the quarter and nine
months ended September 30, 1999, respectively. In addition, Advaya, the
Company's on-line direct marketing business contributed $87,000 and $153,000 in
fees related to on-line marketing programs for the quarter and nine-month
periods ended September 30, 2000. There were no Advaya revenues in 1999. Sales
are recognized upon the shipment of filmed entertainment products and the
serving of advertisements and marketing programs. Product sales for the quarter
and nine months ended September 30, 2000 and 1999 consisted of filmed
entertainment in both the videocassette and DVD formats. In accordance with EITF
issue 00-14, "Accounting for Certain Sales Incentives", revenues for the three
and nine-month periods ended September 30, 2000 are net of approximately $40,000
and $1,262,000, respectively, of coupons used by customers for discounts on
their purchases of filmed entertainment products. Accordingly, revenues for the
three and nine-month periods ended September 30, 1999 are net of approximately
$806,000 and $1,569,000, respectively, of coupons used by customers for
discounts on their purchases of filmed entertainment products. Previously the
cost of these coupons was included in sales and marketing expenses; however, all
prior period financial statements presented have been reclassified to conform to
the current periods' classification. The decrease in sales of filmed
entertainment products in the quarter ended September 30, 2000 compared to the
quarter ended September 30, 1999, primarily reflects a decrease in the number of
units shipped, offset by an increase in the average sales price for both the DVD
and videocassette formats, a higher percentage of DVDs sold, which generally
have higher selling prices than videocassettes, as well as a reduction in the
value of coupons redeemed by customers. The increase in sales of filmed
entertainment products for the nine months
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<PAGE> 11
ended September 30, 2000, compared to the nine months ended September 30, 1999,
primarily reflects an increase in the number of units shipped, as well as an
increase in the average sales price for both the DVD and videocassette formats,
a higher percentage of DVDs sold, which generally have higher selling prices
than videocassettes, and a reduction in the value of coupons redeemed by
customers.
Cost of Sales. Cost of sales was approximately $892,000 for the quarter
ended September 30, 2000 compared to approximately $2,903,000 for the quarter
ended September 30, 1999. Gross profit for the quarter ended September 30, 2000
was $473,000, resulting in a gross margin of 34.6%. The loss on sales for the
quarter ended September 30, 1999 was approximately $37,000. Cost of sales for
the nine months ended September 30, 2000 was approximately $7,025,000 compared
to approximately $7,719,000 for the nine months ended September 30, 1999. Gross
profit for the nine months ended September 30, 2000 was approximately
$1,136,000, resulting in a gross margin of 13.9%. The loss on sales for the nine
months ended September 30, 1999 was approximately $1,162,000. Cost of sales
includes the cost of merchandise sold and outbound shipping and handling
charges, as well as in accordance with EITF Issue 00-14, "Accounting for Certain
Sales Incentives" the cost of promotional items distributed to customers. The
increase in the gross profit for the quarter and nine months ended September 30,
2000, as compared to the quarter and nine months ended September 30, 1999,
primarily reflects the reduction in coupons and promotional items from
approximately $1,174,000 and $2,943,000 in the quarter and nine months ended
September 30, 1999, respectively, to approximately $1,489,000 for the nine
months ended September 30, 2000. There were no promotional items distributed to
customers during the quarter ended September 30, 2000. Sales prices reflecting
lower discounts from products' suggested prices, offset by a higher percentage
of DVD sales, which typically have lower margins, also contributed to the higher
gross margins for the periods ended September 30, 2000.
Sales and Marketing Expenses. Sales and marketing expenses were
approximately $572,000 for the quarter ended September 30, 2000, compared to
approximately $3,221,000 for the quarter ended September 30, 1999. For the
nine-month period ended September 30, 2000, sales and marketing expenses were
approximately $6,469,000 compared to approximately $6,543,000 for the nine-month
period ended September 30, 1999. Sales and marketing expenses consist primarily
of the costs of advertising programs and personnel costs. Advertising expenses
were approximately $100,000 and $2,786,000 for the quarters ended September 30,
2000 and September 30, 1999, respectively, with the decrease primarily
attributable to a reduction in both on-line, as well as off-line advertising
programs. Advertising expenses were approximately $4,650,000 and $5,633,000 for
the nine-month periods ended September 30, 2000 and 1999, respectively. The
decrease in sales and marketing expenses for nine-month period ended September
30, 2000, compared to nine months ended September 30, 1999, primarily reflects
the reduction in both on-line and off-line media purchases, offset by additional
personnel costs, primarily in the first two quarters of the 2000 period.
Web Site and Software Development Expenses. Web site and software
development expenses were approximately $2,004,000 for the quarter ended
September 30, 2000, compared to approximately $1,371,000 for the quarter ended
September 30, 1999. For the nine-month period ended September 30, 2000, web site
and software development expenses were approximately $6,682,000 compared to
approximately $3,240,000 for the nine-month period ended September 30, 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
which totaled approximately $886,000 and $1,067,000 for the quarters ended
September 30, 2000 and 1999, respectively, and approximately $4,036,000 and
$2,485,000 for the nine month periods ended September 30, 2000 and 1999,
respectively, reflecting the growth in personnel necessary to enhance and
support the Company's web sites primarily in the first two quarters of the 2000
period. These expenses also include third party production and content costs
which decreased to approximately $95,000 for the quarter ended September 30,
2000, from approximately $201,000 for the quarter ended September 30, 1999, and
approximately $604,000 and $459,000 for the nine-month periods ended September
30, 2000 and 1999, respectively. These increases for the periods ended September
30, 2000, compared to the periods ended September 30, 1999, were primarily due
to the production costs of "The BigStar Show" which aired on cable television
beginning May 2000.
General and Administrative Expenses. General and administrative expenses
were approximately $974,000 for the quarter ended September 30, 2000 compared to
approximately $889,000 for the quarter
10
<PAGE> 12
ended September 30, 1999. For the nine-month period ended September 30, 2000,
general and administrative expenses were approximately $3,801,000 compared to
approximately $2,432,000 for the nine-month period ended September 30, 1999.
General and administrative expenses include payroll and related expenses for
executive, accounting and administrative, and customer service personnel, which
were approximately $349,000 and $456,000 for the quarters ended September 30,
2000 and 1999, respectively, and approximately $1,279,000 and $1,089,000 for the
nine-month periods ended September 30, 2000 and 1999, respectively. The increase
in these costs is attributable to the hiring of additional staff during the
third and fourth quarters of 1999 offset by a reduction in personnel during the
quarter ended September 30, 2000. The costs of facilities also increased to
approximately $145,000 from $130,000 for the quarters ended September 30, 2000
and 1999, respectively, and to approximately $596,000 from $363,000 for the
nine-month periods ended September 30, 2000 and 1999, respectively, reflecting
the increase in office space rented and related supply costs to support the
Company's additional personnel.
Net Loss. BigStar's net loss was approximately $2,907,000 for the quarter
ended September 30, 2000 and approximately $5,337,000 for the quarter ended
September 30, 1999, respectively, and approximately $15,096,000 and $13,124,000
for the nine-month periods ended September 30, 2000 and 1999, respectively.
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 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 quarter ended September 30, 2000,
there were no material capital transactions.
Net cash used in operating activities for the nine months ended September
30, 2000 of approximately $15,678,000 was primarily due to our net loss of
approximately $15,096,000, offset by non-cash depreciation and amortization of
approximately $1,183,000 and non-cash common stock option and warrant expenses,
of approximately $652,000. An increase in accounts receivable and a decrease in
other current assets from the balances at December 31, 1999 of approximately
$406,000 and $258,000, respectively, net of a decrease in accounts payable and
accrued expenses of approximately $3,266,000 from the balance at December 31,
1999 also impacted the net cash used. Net cash used in operating activities for
the nine months ended September 30, 1999 of approximately $10,667,000 was
primarily due to our net loss of $13,124,000 offset by an increase in accounts
payable and accrued expenses of $3,673,000. Additional operating uses of cash
were the increase in accounts receivable, prepaids and other current assets, and
other assets of $517,000, $1,046,000 and $546,000, respectively. In addition,
during the nine months ended September 30, 1999 we issued options and warrants
to purchase 581,011 shares to board members, consultants for investment
advisory, marketing, web site design and technical services and warrants to
purchase 19,400 shares in exchange for occupancy services at exercise prices
from $3.73 to $20.62.
At September 30, 2000 the Company had working capital of approximately
$5,527,000 compared to approximately $20,271,000 at December 31, 1999. The
decrease in working capital is primarily attributable to the cash used to fund
the net loss discussed above. At September 30, 2000 the decrease in accounts
payable and accrued expenses resulted primarily from the decrease in advertising
and promotional expenditures compared to December 31, 1999. The decrease at
September 30, 2000 in accounts receivable from the balance at December 31, 1999
is due to the decrease in net sales for the three-month periods then ended.
Net cash used in investing activities for the quarter ended September 30,
2000 of $81,000 was primarily due to capital expenditures.
We currently have agreements with our principal suppliers under which our
total credit availability exceeds $4,000,000 for the purchase of filmed
entertainment products and related fulfillment costs, with payment terms ranging
from 30-60 days. The agreements with our two principal suppliers expire, subject
to renewal, in the first quarter of 2001 and the first quarter of 2002.
11
<PAGE> 13
At September 30, 2000, BigStar's principal commitments consisted of
obligations for advertising under cancelable agreements, which were
approximately $45,000 and guaranteed lease obligations of approximately
$558,000. BigStar also has an obligation to pay television production costs of
$50,000 per show to ValueVision International, Inc. to produce The BigStar Show.
It had initially been contemplated that this show would be produced weekly.
However, the production schedule has been modified and the parties are
negotiating a new schedule. As of September 30, 2000 the Company could have an
obligation to ValueVision for an additional $7,100,000 in production costs for
future editions of The BigStar Show, if the show continues to be produced.
BigStar and ValueVision International, Inc. are currently negotiating an
amendment to the production agreement which would substantially reduce the
Company's financial commitment to ValueVision.
We have no material commitments for capital expenditures and do not
anticipate any significant future purchases for hardware and related software
enhancements of our web sites during the next 12 months. We expect to fund any
expenditures from existing resources.
In light of the decline in our stock price, and in an effort to retain our
employee base, the Compensation Committee of the Board of Directors approved an
adjustment to the exercise price for all options held by our employees,
including our executive officers, as well as certain consultants. The revised
exercise price was established by reference to the closing bid price of the
Company's common stock on July 17, 2000, which was $1.00. Options to purchase
approximately 992,000 shares of common stock were repriced. The repriced options
follow the vesting schedule of the original options granted. Beginning in the
quarter ended September 30, 2000, these options will be subject to variable plan
accounting. This accounting requires a charge to income for the vested options
when the market price of the Company's stock exceeds $1.00. Because the closing
bid price at September 30, 2000 was less than $1.00, there was no charge to
income for these options for the quarter ended September 30, 2000.
As of September 30, 2000 we believe that our existing cash and cash
equivalent will be sufficient to meet our anticipated cash needs for working
capital, operating losses and capital expenditures for the next 12 months. Our
future liquidity and capital requirements will depend upon numerous factors
discussed under the section entitled "Risk Factors That May Affect Our Results
Of Operations And Financial Condition". 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 have retained an investment
advisor to help us seek and evaluate strategies to increase shareholder value.
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 videocassettes and
DVD.
Risk Factors That May Affect Results of Operations and Financial Condition
In addition to the other information in this Form 10-Q report, the
following factors should be considered carefully in evaluating BigStar's
business and prospects:
We have a limited operating history and may face difficulties typically
encountered by development stage companies in new and rapidly evolving
markets. We commenced operations in March 1998 and face the risks and
difficulties frequently encountered by early stage companies in new and rapidly
evolving markets, such as online commerce. These risks include our ability to:
- continue to expand our customer base;
- generate repeat business from existing customers;
- respond to changes in a rapidly evolving and unpredictable business
environment;
12
<PAGE> 14
- successfully compete against other companies that sell our products;
- maintain current and develop new strategic relationships;
- manage growth;
- continue to develop and upgrade our technology; and
- attract, retain and motivate qualified personnel.
We lack significant revenues and expect significant continuing losses. We
have not achieved profitability and expect to continue to incur significant
operating losses and net losses. As of September 30, 2000, our accumulated
deficit was approximately $39 million. SEE "-- Results of Operations and
Liquidity and Capital Resources".
We expect that our operating expenses will exceed our revenues 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 will also require additional financing. We may not be able to obtain the
financing or obtain it on terms acceptable to us. If revenues grow slower than
we anticipate, or if operating expenses exceed our expectations or cannot be
reduced accordingly, or if we cannot obtain additional financing, our business,
operating results and financial condition may be materially harmed.
BigStar faces potential Nasdaq delisting which could hurt the liquidity of
our common stock. We may be unable to comply with the standards for continued
listing on the Nasdaq National Market. These standards require, among other
things, that our common stock have a minimum bid price of $1 and state that a
deficiency shall exist if such minimum bid price remains below $1 for a period
of thirty consecutive business days. In addition, our common stock must maintain
a minimum market value of public float of $5,000,000 and a deficiency shall
exist if such minimum market value of public float is less than $5,000,000 for
30 consecutive trading days. The company has been informed by Nasdaq that our
common stock has failed to meet both criteria. If we are unable to demonstrate
compliance with the Nasdaq criteria for maintaining our listing, our securities
would be subject to delisting as early as mid-December. If our common stock were
to be delisted from trading on the Nasdaq National Market and were neither
relisted thereon nor listed for trading on the Nasdaq Small Cap Market, trading,
if any, in the common stock may continue to be conducted on the OTC Bulletin
Board or in the non-Nasdaq over-the-counter market. Delisting would result in
limited release of the market price of the common stock and limited news
coverage of BigStar and could restrict investors' interest in the common stock
and materially adversely affect the trading market and prices for the common
stock and our ability to issue additional securities or to secure additional
financing.
Our success depends on the continued growth of online commerce. If online
commerce does not continue to grow, or grows more slowly than expected, our
business will be materially harmed. A number of factors could slow the growth of
online commerce, including the following:
- the network infrastructure required to support a substantially larger
volume of transactions may not be developed;
- government regulation may increase;
- telecommunications capacity problems may result in slower response times;
and
- consumers may have concerns about the security of online commerce
transactions.
We compete with other online retailers and traditional filmed entertainment
retailers who may be more successful than we are in attracting and retaining
customers. The retail filmed entertainment industry is intensely competitive.
In addition, the online commerce market for retail filmed entertainment sales is
new, rapidly evolving and competitive. If we are unable to successfully compete
against other retailers of filmed entertainment products, our business,
operating results and financial condition would be materially harmed.
Price competition in our industry is also intense, and price is one of the
principal factors on which consumers base their purchasing decisions. Price
competition may reduce our gross margins, which could materially harm our
business, operating results and financial condition.
13
<PAGE> 15
Some of our competitors use aggressive pricing policies to build market
share. Some also have adopted business models that include selling filmed
entertainment products for less than their product cost and not charging
customers for shipping and handling. Software applications are also available
that can determine which online site has the lowest price for a particular title
which could direct customers to our competitors' sites.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we have. In addition, we believe some of our
competitors devote substantially more resources to web site and systems
development than we do.
We depend upon strategic marketing relationships to generate sales. We use
strategic marketing relationships to attract new customers, and this is an
important part of our growth strategy. We may not be able to enter into
additional relationships or 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. If any of these events were to occur, it could materially harm
our business, operating results and financial condition.
Our reliance on e-mail marketing could leave us vulnerable if consumers
reject this marketing technique or additional governmental regulation
arises. E-mail marketing is a significant part of our growth strategy. If the
acceptance or use of e-mail marketing is limited by consumer fear of e-mail
computer viruses or additional government regulation, it could harm our
business.
To date, Congress has not enacted any legislation regulating commercial
e-mail, but a number of bills are pending. One proposed law would prohibit
online operators from sending most unsolicited commercial e-mail where the
operators have no existing or personal relationship with the recipient and the
e-mail is not sent at the request of or with the express consent of the
recipient. Another proposed law would require operators of web sites and online
services to disclose to users the personal information the operators have
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.
Growth could place a significant strain on our resources. If we are unable
to manage our growth effectively, our business could be materially harmed.
Expansion could place a significant strain on our ability to manage growth,
including our ability to monitor operations and control costs.
We must maintain satisfactory vendor relationships to compete
successfully. We rely on wholesalers to fill our customers' orders. 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 at 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.
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<PAGE> 16
Interruptions could result from natural disasters as well as power loss,
telecommunications failure and similar events. We have fully redundant systems
but have not yet established a formal disaster recovery plan.
Online security breaches could harm our business. To protect confidential
information, we rely on encryption technology, which transforms information into
a code designed to be unreadable by third parties. We also use authentication
technology that utilizes passwords and other information to prevent unauthorized
persons from accessing a customer's information. If a person circumvents our
security measures, he or she could misappropriate confidential information about
us, or our customers, or cause interruptions in our operations. Security
breaches that result in access to confidential information also could damage our
reputation and expose us to a risk of loss or liability. In addition, we may be
required to make significant expenditures and expend considerable effort to try
and protect against security breaches or remedy problems caused by these
breaches.
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
digitized filmed entertainment to consumers through online systems.
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 visitors. If we are unable to obtain desirable
content from existing licensors or from new licensors, it could reduce visits to
our web sites, which could materially harm our business. In addition, if we are
unable to obtain content at an acceptable cost, it could materially harm our
ability to compete and our operating results and financial condition.
We may not be able to protect our intellectual property rights. We regard
our trademarks, trade secrets and similar intellectual property as important to
our success. We have applied for the registration of some of our trademarks and
service marks in the United States. However, our efforts to establish and
protect our intellectual property rights may be inadequate to prevent
misappropriation or infringement of our intellectual property rights. If we are
unable to safeguard our intellectual property rights, it could materially harm
our business, operating results and financial condition.
We may infringe on the intellectual property rights of others. We have
established a network of links with numerous small online sites. Many of the
sites may not have licenses for the use of the intellectual property that they
display. The copyright holders of this intellectual property or their licensees
may assert infringement claims against our affiliate partner sites and us
because of our relationships with these sites.
Although we believe that our use of third-party material on our web sites
is permitted under current provisions of copyright law, some aspects of Internet
content and commerce law are not clearly settled. We may therefore be the
subject of alleged infringement claims of the trademarks and other intellectual
property rights of third parties. If we become subject to these types of claims,
our business could be materially harmed even if we successfully defend against
the claims. It is also 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,
bigstardrivein.com, bigstartheater, cinemagram.com, and digitalfirstlook.com, as
well as domain names registered in foreign countries. 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
15
<PAGE> 17
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.
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, Nevada and Minnesota. Our business could be materially harmed
if additional sales and similar taxes are imposed on us, or if penalties are
assessed on us for past nonpayment of these taxes. Recently adopted legislation
provides that, prior to October 2001, a state cannot impose sales taxes on
products sold on the Internet unless these taxes could be charged on
non-Internet transactions involving the products. During this moratorium, it is
possible that taxing mechanisms may be developed that would, following the
moratorium, impose increasing sales and similar tax burdens on us. If these
burdens are placed on us, our business could be materially harmed and there
could be a material adverse effect on our operating results and financial
condition.
Our success depends on our key personnel. Our success is substantially
dependent on the ability and experience of our senior management and other key
personnel, particularly David Friedensohn, our Chief Executive Officer and
Chairman of the Board. 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 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 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 should suitable replacements not be employed.
In addition, we must maintain our current employee base. Since competition
for personnel, particularly those having software development and other
technical expertise, is intense, if we are unable to hire qualified employees as
needed, our ability to manage our operations could be impaired.
We could still face problems related to the year 2000 issue. To date, our
customers have not reported any problems with our web sites and we have not
experienced any impairment in our internal operations with the year 2000 issue.
Nevertheless, computer experts have warned that there may still be residual
consequences stemming from the change in centuries and, if these consequences
become widespread, they could result in claims against us, a decrease in sales
of our products, increased operating expenses and other business interruptions.
We have not developed any specific contingency plan for the year 2000 issues.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently involved in any material legal proceedings. We may
from time to time become a party to various legal proceedings arising in the
ordinary course of our business.
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<PAGE> 18
Item 2. Changes in Securities and Use of Proceeds
In August 1999, BigStar completed an initial public offering of shares of
common stock, $.001 par value, at a price per share of $10.00. The managing
underwriters were Prudential Securities Incorporated, Wasserstein Perella
Securities, Inc. and First Security Van Kasper. The effective date of BigStar's
registration statement, on Form S-1 was August 2, 1999. The commission file
number for that filing is 333-77963. Between the effective data and September
30, 2000, the expenses incurred in connection with the issuance and distribution
of the securities registered were as follows:
Direct or Indirect Payments to Others
<TABLE>
<S> <C>
Underwriting discounts and commissions...................... $ 1,750,000
Other expenses.............................................. 1,241,082
-----------
Total expenses.............................................. 2,991,082
-----------
Net offering proceeds after total expenses.................. $22,008,918
===========
</TABLE>
Between the effective date and September 30, 2000, the net offering
proceeds of approximately $22,008,918 were used as follows:
Direct or Indirect Payments to Others
<TABLE>
<S> <C>
Increase marketing, advertising and promotional spending.... $ 7,500,000
Upgrade computer systems and develop additional software
programs.................................................. 3,200,000
Hire additional marketing, technical and production
personnel................................................. 1,624,000
Fund operating losses and general corporate purposes........ 9,684,918
-----------
Total use of proceeds....................................... $22,008,918
===========
</TABLE>
The amounts listed above represent a reasonable estimate of the application of
net proceeds from the offering. The use of proceeds does not represent a
material change in the use of proceeds described in the prospectus. There were
no direct of indirect payments from the net proceeds to directors or officers of
BigStar or to affiliates or persons owning ten percent or more of the common
stock of BigStar.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description and Method of Filing
------- --------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
---------------
(b) Reports on Form 8-K filed during the quarter ended September 30, 2000:
None.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIGSTAR ENTERTAINMENT, INC.
By: /s/ DAVID FRIEDENSOHN
------------------------------------
David Friedensohn, Chief Executive
Officer
Dated: November 14, 2000
By: /s/ ROBERT S. YINGLING
------------------------------------
Robert S. Yingling, Chief Financial
Officer
Dated: November 14, 2000
18
<PAGE> 20
EXHIBIT INDEX
List of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description and Method of Filing
------- --------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
