<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 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)
DELAWARE 13-399-5258
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
19 FULTON STREET - 5TH FLOOR - NEW YORK, NEW YORK 10038
-------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 981-6300
-------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/. No / /.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, $.001 par value, as of the latest practicable date:
10,187,495 shares of common stock as of August 10, 2000
<PAGE> 2
BIGSTAR ENTERTAINMENT, INC.
FORM 10-Q
FOR THE QUARTER ENDED June 30, 2000
INDEX
PART I.
FINANCIAL INFORMATION
PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2000 (unaudited) and
December 31, 1999.................................................... 3
Consolidated Statements of Operations for the six months ended June
30, 2000 (unaudited) and June 30, 1999 (unaudited) and the three
months ended June 30, 2000 (unaudited) and June 30, 1999 (unaudited). 4
Consolidated Statements of Cash Flows for the six months ended June
30, 2000 (unaudited) and June 30, 1999 (unaudited) and the three
months ended June 30, 2000 (unaudited) and June 30, 1999 (unaudited). 5
Notes to Condensed Consolidated Financial Statements................. 6
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................... 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 16
ITEM 5. OTHER INFORMATION........................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 16
SIGNATURES........................................................... 17
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BIGSTAR ENTERTAINMENT
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 12,757,793 $ 17,422,817
Accounts receivable, net of 739,867 1,129,454
allowance
Short-term investments - 6,902,234
Prepaids and other current assets 857,023 1,387,903
------------ ------------
Total current assets 14,354,683 26,842,408
------------ ------------
Property and equipment, net 3,308,779 2,253,109
Other assets 701,705 756,546
------------ ------------
Total assets $ 18,365,167 $ 29,852,063
============= ============
LIABILITIES:
Accounts payable $ 4,576,573 $ 3,729,806
Accrued expenses 1,708,050 2,146,552
Accrued payroll costs 0 695,000
------------ ------------
Total current liabilities 6,284,623 6,571,358
------------ ------------
MINORITY INTEREST 354,062 --
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 10,186 10,032
Additional paid-in capital 48,031,503 47,885,409
Deferred compensation (21,153) (509,059)
Accumulated deficit (36,294,054) (24,105,677)
------------ ------------
Total stockholders' equity 11,726,482 23,280,705
============ ============
Total liabilities and stockholders' equity $ 18,365,167 $ 29,852,063
============ ============
</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 OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 6,797,155 $ 3,691,761 $ 2,590,617 $ 2,264,611
COST OF SALES 6,133,284 4,816,141 2,121,576 3,072,897
------------ ------------ ------------ ------------
Gross profit 663,871 (1,124,380) 469,041 (808,286)
OPERATING EXPENSES
Sales and marketing 5,897,324 3,322,630 2,311,708 2,113,033
Website and software development 4,678,621 1,868,320 2,324,053 1,085,922
General and administrative 2,826,912 1,542,757 1,258,477 867,555
------------ ------------ ------------ ------------
Total operating expenses 13,402,857 6,733,707 5,894,238 4,066,510
------------ ------------ ------------ ------------
Loss from operations (12,738,986) (7,858,087) (5,425,197) (4,874,796)
INVESTMENT INCOME 550,608 70,478 268,777 52,954
------------ ------------ ------------ ------------
Net Loss $(12,188,378) $ (7,787,609) $ (5,156,420) $ (4,821,842)
============ ============ ============ ============
PER SHARE INFORMATION:
Net loss per share -
Basic and diluted $ (1.20) $ (1.60) $ (0.51) $ (0.82)
============ ============ ============ ============
Weighted average common shares
outstanding -
Basic and diluted 10,140,012 4,862,962 10,172,427 5,851,330
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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BIGSTAR ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(12,188,378) $ (7,787,609) $ (5,156,420) $ (4,821,842)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization 540,963 118,732 298,310 71,248
Non-cash common stock option and warrant expenses 557,672 114,278 261,694 85,733
Amortization of investment discount (42,767) -- (1,447) --
Changes in assets and liabilities -
Cash in Escrow -- 453,000 -- --
Allowance for Doubtful Accounts 30,000 14,345 -- 6,199
Accounts receivable 359,587 (249,314) 509,920 52,934
Other current assets 161,864 (234,997) 412,317 (74,068)
Other non-current assets 54,841 (27,111) 50,441 (15,778)
Accounts payable and accrued expenses (456,413) 1,780,999 (760,205) 1,065,819
------------ ------------ ------------ -----------
Net cash used in operating activities (10,982,631) (5,817,677) (4,385,390) (3,629,755)
------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,406,953) (577,433) (1,059,499) (263,132)
Redemption of Investments 6,945,000 -- 3,945,000 --
------------ ------------ ------------ ----------
Net cash used in investing activities 5,538,047 (577,433) 2,885,501 (263,132)
------------ ------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 779,560 11,937,986 271,496 6,506,914
Subscribed stock -- (453,000) -- --
Deferred registration costs -- (858,618) -- (828,618)
------------ ------------ ------------ -----------
Net cash provided by financing activities 779,560 10,626,368 271,496 5,678,296
------------ ------------ ------------ -----------
Net increase (decrease) in cash (4,665,024) 4,231,258 (1,228,393) 1,785,409
------------ ------------ ------------ -----------
CASH, beginning of period 17,422,817 363,124 13,986,186 2,808,973
------------ ------------ ------------ -----------
CASH, end of period $ 12,757,793 $ 4,594,382 12,757,793 $ 4,594,382
============ ============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ -- $ 151 $ 151
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Capital lease obligations incurred $ -- $ -- $ -- --
SUPPLEMENTAL SCHEDULE OF NON-CASH
OPERATING ACTIVITIES:
Value of Options and Warrants issued for future services $ 132,229 148,487 $ 97,967 $ 31,422
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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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 40,000 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 stream and view on 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 its Advaya subsidiary, the Company also provides e-marketing
services to third parties who do not have the in-house expertise to design,
segment and analyze an e-mail campaign, nor the systems to manage subscription
lists and deliver e-mail communications.
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 June 30, 2000 and the balance sheet as
of December 31, 1999, and the consolidated statements of operations and cash
flows for the three and six month periods ended June 30, 2000 and the statements
of operations and cash flows for the three month and six month periods ended
June 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
June 30, 2000 are not necessarily indicative of the results which 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 for comparative purposes 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 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 popular 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. Revenues for the three and six month periods ended June 30, 2000
are net of approximately $198,000 and $1,222,000, respectively, of coupons used
by customers for discounts on their purchases of filmed entertainment products.
Revenues for the three and six months periods ended June 30, 1999 are net of
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approximately $737,000 and $764,000, 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 product 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 June 30, 2000. For the
six month period ended June 30, 2000, net sales included barter revenues of
3.46%. For the three and six month periods ended June 30, 1999, net sales
included barter revenues of 9.46% and 6.37%, 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. The cost of sales for the three and six
month periods ended June 30, 2000 includes approximately $71,000 and $227,000,
respectively, in promotional items. The cost of sales for the three and six
month periods ended June 30, 1999 includes approximately $516,000 and
$1,006,000, respectively, in promotional items. Previously the cost of
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 the existing agreements,
which expire, subject to renewal, in the first quarter of 2001 and 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 six month periods ended
June 30, 2000 and 1999 does not include the impact of approximately 2,463,000
and 2,378,000, 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"),
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 six month periods ended June 30, 2000, the Company
capitalized approximately $950,000 and $1,198,000, respectively, of external
direct costs related to the Advaya direct marketing technology and internal
reporting systems, which will be amortized over the related useful life of two
years. No costs were capitalized for the three and six month periods ended June
30, 1999. All costs incurred for
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upgrades, maintenance, and enhancements, which did not result in additional
functionality, were expensed.
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 consolidated financial statements. Accordingly, the Company's
comprehensive net loss is equal to its net loss for the three and six month
periods ended June 30, 2000, and the three and six month periods ended June 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. The Company has
elected to adopt the provisions of 00-14 early, beginning with the period ended
June 30, 2000. Accordingly, the cost of coupons redeemed by consumers are
deducted in the determination of net sales and the cost of promotional items
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 previous 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.
Stock Options
During the three and six month periods ended June 30, 2000, options to
purchase 32,684 and 100,943 shares of common stock, respectively, were exercised
for net proceeds of approximately $55,000 and $25,000, respectively.
Additionally, during the three and six month periods ended June 30, 2000,
the Company recorded approximately $99,000 and $233,000 respectively, of
consulting expense associated with the amortization options and warrants to
purchase shares of common stock to a 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
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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 Advaya develops.
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. Subsequent to June
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 is recognizing the cost over the vesting
period. Such cost is included in the cost of the software being developed.
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 June
30, 2000, we had an accumulated deficit of approximately $36,294,000. As we
continue our businesses, we believe that our operating expenses will exceed our
revenues primarily due to marketing, advertising and promotional expenses,
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 six month periods ended June 30, 2000 and June 30, 1999.
NET SALES. Net sales were approximately $2,591,000 for the quarter ended
June 30, 2000 compared to approximately $2,265,000 for the quarter ended June
30, 1999. For the six months ended June 30, 2000, net sales were approximately
$6,797,000 compared to approximately $3,692,000 for the six months ended June
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 for the quarter ended June 30,
2000. The Company recognized $407,000 in advertising and promotional revenues
for the quarter ended June 30, 2000 and approximately $1,164,000 for the six
months ended June 30, 2000, including $235,000 in barter transactions. In
addition, Advaya, the Company's on-line direct marketing business contributed
$66,000 in fees related to on-line marketing programs for the quarter and six
month period ended June 30, 2000. The Company had $284,000 in advertising and
promotional revenues for the quarter and six months ended June 30, 1999, all of
which were barter transactions. Sales are recognized upon the shipment of
filmed entertainment products and the serving of advertisements and marketing
programs. Product sales for the quarter and six months ended June 30, 2000 and
1999 consisted of filmed entertainment in both the videocassette and DVD
formats. Revenues for the three and six month periods ended June 30, 2000 are
net of approximately $198,000 and $1,222,000 respectively of coupons used by
customers for discounts on their purchases of filmed entertainment products.
Revenues for the three and six month periods ended June 30, 1999 are net of
approximately $737,000 and $764,000, 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 increase in sales of
filmed entertainment products primarily reflects an increase in the average
sales price for both the DVD and videocassette formats, offset by a decrease in
the number of units shipped. The increase in sales is also attributable to the
higher percentage of DVDs sold, which generally have higher selling prices than
videocassettes.
COST OF SALES. Cost of sales were $2,122,000 for the quarter ended June 30,
2000 compared to $3,073,000 for the quarter ended June 30, 1999. Gross profit
for the quarter ended June 30, 2000 was $469,000, resulting in a gross margin of
18.1%. For the quarter ended June 30, 1999 the Company had a loss on product
sales of approximately $808,000. Cost of sales for the six months ended June 30,
2000 were approximately $6,133,000 compared to $4,816,000 for the six months
ended June 30, 1999. Gross profit for the six months ended June 30, 2000 was
664,000, resulting in a gross margin of 9.8%. For the six months ended June 30,
1999, the Company had a loss on product sales of $1,124,000. Cost of sales
includes the cost of merchandise sold and outbound shipping and handling
charges, as well as the cost of promotional items distributed to customers. The
increase in the
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gross profit for the quarter and six months ended June 30, 2000, as compared to
the quarter and six months ended June 30, 1999, primarily reflects the reduction
in coupons and promotional items from approximately $1,253,000 and $1,769,000 in
the quarter and six months ended June 30, 1999, respectively, to approximately
$269,000 and $1,449,000 for the quarter and six months ended June 30, 2000,
respectively. 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 margin for the periods ended June
30, 2000.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were
approximately $2,312,000 for the quarter ended June 30, 2000 compared to
approximately $2,113,000 for the quarter ended June 30, 1999. For the six month
period ended June 30, 2000, sales and marketing expenses were approximately
$5,897,000 compared to approximately $3,323,000 for the six month period ended
June 30, 1999. Sales and marketing expenses consist primarily of the costs of
advertising, marketing programs and personnel costs. Advertising expenses were
approximately $1,551,000 and $1,864,000 for the quarters ended June 30, 2000 and
June 30, 1999, respectively, with the decrease primarily attributable to a
reduction in on-line advertising. Advertising expenses were approximately
$4,550,000 and $2,847,000 for the six month periods ended June 30, 2000 and
1999, respectively. The increase in advertising expenses for the six month
period ended June 30, 2000, compared to the six month period ended June 30,
1999, reflects additional on-line and off-line media purchases. Personnel costs
also increased in the quarter and six month periods ended June 30, 2000,
compared to the quarter and six month periods ended June 30, 1999.
WEB SITE AND SOFTWARE DEVELOPMENT EXPENSES. Web site and software
development expenses were approximately $2,324,000 for the quarter ended June
30, 2000 compared to approximately $1,086,000 for the quarter ended June 30,
1999. For the six month period ended June 30, 2000, web site and software
development expenses were approximately $4,679,000 compared to approximately
$1,868,000 for the six month period ended June 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 $1,374,000 and $880,000 for the quarters ended June 30, 2000 and
1999, respectively, and approximately $3,150,000 and $1,419,000 for the six
month periods ended June 30, 2000 and 1999, respectively, reflecting the growth
in personnel necessary to enhance and support the Company's web sites. These
expenses also include third party production and content costs which increased
to approximately $426,000 for the quarter ended June 30, 2000, from
approximately $86,000 for the quarter ended June 30, 1999, and approximately
$501,000 and $139,000 for the six month periods ended June 30, 2000 and 1999,
respectively. These increases for the periods ended June 30, 2000, compared to
the periods ended June 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 $1,258,000 for the quarter ended June 30, 2000 compared to
approximately $868,000 for the quarter ended June 30, 1999. For the six month
period ended June 30, 2000, general and administrative expenses were
approximately $2,827,000 compared to approximately $1,543,000 for the six month
period ended June 30, 1999. General and administrative expenses include payroll
and related expenses for executive, accounting and administrative, and customer
service personnel, which were approximately $538,000 and $347,000 for the
quarters ended June 30, 2000 and 1999, respectively, and approximately $930,000
and $634,000 for the six month periods ended June 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. The costs of
facilities also increased to approximately $204,000 from $100,000 for the
quarters ended June 30, 2000 and 1999, respectively, and to approximately
$451,000 and $227,000 for the six month periods ended June 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 $5,156,000 for the quarter
ended June 30, 2000 and $4,822,000 for the quarter ended June 30, 1999,
respectively, and approximately $12,188,000 and $7,788,000 for the six month
periods ended June 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 June 30, 2000, there
were no material capital transactions.
Net cash used in operating activities for the six months ended June 30,
2000 of approximately $10,983,000 was primarily due to our net loss of
approximately $12,188,000, offset by non-cash depreciation and amortization of
approximately $541,000 and non-cash common stock option and warrant expenses,
of approximately $558,000. Decreases in accounts receivable and other current
assets from the balances at December 31, 1999 of approximately $360,000 and
$162,000, respectively, net of a decrease in accounts payable and accrued
expenses of approximately $456,000 from the balance of December 31, 1999 also
impacted the net cash used. Net cash used in operating activities for the six
months ended June 30, 1999 of approximately $5,818,000 was primarily due to our
net loss of approximately $7,788,000 offset by an
<PAGE> 11
increase in accounts payable and accrued expenses of approximately $1,781,000
and the reduction in cash in escrow of $453,000. Additional operating uses of
cash were the increase in accounts receivable and prepaids of approximately
$250,000 and 235,000, respectively. In addition, during the six months ended
June 30, 1999 we issued options and warrants to purchase 573,011 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 June 30, 2000 the Company had working capital of approximately
$8,070,000 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 June 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 June
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, as well as
the decrease in advertising sales.
Net cash provided by investing activities for the quarter ended June 30,
2000 of $2,886,000 was primarily provided by the redemption of investments less
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 in the
first quarter of 2001 and 2002.
At June 30, 2000, BigStar's principal commitments consisted of obligations
for advertising under cancelable agreements, which were approximately $105,000
and guaranteed lease obligations of approximately $558,000. BigStar also has an
obligation to pay $50,000 installments for television production costs 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. BigStar estimates that its commitment to produce The BigStar Show
through December 31, 2000 will be approximately $300,000. If the show continues
to be produced on a weekly basis through July 2003, BigStar will be obligated
to ValueVision for an additional $7,150,000 in production costs.
We have no material commitments for capital expenditures but anticipate
future purchases of approximately $250,000 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 and enhance customers'
experiences on our web sites. We expect to fund these expenditures from
existing resources.
In light of the decline in our stock price at the time, and in an effort to
retain our employee base, we offered to reprice options held by all employees,
including our executive officers. The Compensation Committee of the Board of
Directors approved an adjustment to the exercise price for all employees,
including our executive officers. 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.
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 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;
- successfully compete against other companies that sell our products;
- maintain current and develop new strategic relationships;
11
<PAGE> 12
- 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 June 30, 2000, our accumulated deficit
was approximately $36 million. SEE "ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
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. The closing bid price for BigStar's
common stock has remained below $1 since July 27, 2000. If we are unable to
satisfy the Nasdaq criteria for maintaining listing, our securities would be
subject to delisting. 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
12
<PAGE> 13
condition.
Some of our competitors use aggressive pricing policies to build market
share. Some also have adopted business models that include selling filmed
entertainment products for less than their product cost and not charging
customers for shipping and handling. Software applications are also available
that can determine which online site has the lowest price for a particular title
which could direct customers to our competitors' sites.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we have. In addition, we believe some of our
competitors devote substantially more resources to web site and systems
development than we do.
WE DEPEND UPON STRATEGIC MARKETING RELATIONSHIPS TO GENERATE SALES. We use
strategic marketing relationships to attract new customers, and this is an
important part of our growth strategy. 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.
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 and control costs. Our
anticipated continued expansion will increase this strain.
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. Interruptions could result from
natural
13
<PAGE> 14
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 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
14
<PAGE> 15
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, and David Levitsky, our Executive Vice President. 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 and $500,000 for David Levitsky with BigStar as the named
beneficiary. The benefits received under these policies would not be sufficient
to compensate BigStar for the loss of the services of Mr. Friedensohn or Mr.
Levitsky should suitable replacements not be employed.
In addition, to manage our anticipated growth, we must hire more employees.
Competition for personnel, particularly those having software development and
other technical expertise, is intense. If we are unable to hire additional
qualified employees, our growth could be impaired.
WE 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.
15
<PAGE> 16
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.
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 June 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 June 30, 2000, the net offering proceeds of
approximately $19,250,000 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.............. 6,926,000
------------
Total use of proceeds............................................. $ 19,250,000
============
</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.
At the Annual Meeting of Stockholders held on June 21, 2000, the following
proposals were adopted by the margins indicated:
1. To elect two Class I directors to the Board of Directors of BigStar.
Number of Shares
For Withheld
Martin Pompadur 8,821,159 31,577
Stuart Goldfarb 8,821,159 31,577
2. To ratify the appointment of Arthur Andersen LLP as the independent
public accountants of BigStar for the fiscal year ending December 31,
2000.
For 8,843,571
Against 7,425
Abstain --
3. To approve an increase in the authorized number of shares of common stock
reserved for issuance upon the exercise of stock options or the grant of
securities under BigStar's Amended 1999 Stock Option and Incentive Plan
by 1,000,000 shares to 2,455,000 shares.
For 6,394,519
Against 386,422
Abstain 24,456
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
------ --------------------------------
<S> <C>
3(i).1 Certificate of Incorporation*
3(i).2 Certificate of Amendment to Certificate of Incorporation*
3(i).3 Certificate of Amendment to Certificate of Incorporation*
3(ii) Amended and Restated By-laws*
10.1 Form of Indemnification Agreement*
10.2 1998 Stock Option and Incentive Plan*
10.3 Amended 1999 Stock Option and Incentive Plan*
10.4 Employment Agreement dated March 15, 1999, by and between David
Friedensohn and BigStar*
10.5 Distribution Agreement dated February 18, 1999 by and between
Baker & Taylor and BigStar*
10.6 Strategic Marketing Agreement dated as of May 1999 by and between
Baker & Taylor and BigStar*
10.7 Rights Agreement among BigStar and each of the stockholders
identified therein*
10.8 Agreement of Lease dated February, 1999, between Seaport
Associates, LP and BigStar*
10.9 1999 Employee Stock Purchase Plan*
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to BigStar's registration statement on Form S-1,
Registration No. 333-77963
16
<PAGE> 17
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000:
On June 2, 2000, BigStar filed a report on Form 8-K that (i) announced the
appointment and promotion of several BigStar employees to new positions within
the BigStar organization and its direct marketing systems division, Advaya, and
(ii) announced the resignation of three officers (Donna M. Williams, Senior Vice
President - Marketing and Business Development; Anthony Witek, Vice President -
Technology and Operations; and Bruuke Bessert, Vice President - Site
Development).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIGSTAR ENTERTAINMENT, INC.
Dated: August 14, 2000 By:/s/ David Friedensohn
--------------------------------------
David Friedensohn, Chief Executive
Officer
Dated: August 14, 2000 By:/s/ Robert S. Yingling
--------------------------------------
Robert S. Yingling, Chief Financial
Officer
EXHIBIT INDEX
List of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description and Method of Filing
------ --------------------------------
<S> <C>
3(i).1 Certificate of Incorporation*
3(i).2 Certificate of Amendment to Certificate of Incorporation*
3(i).3 Certificate of Amendment to Certificate of Incorporation*
3(ii) Amended and Restated By-laws*
10.1 Form of Indemnification Agreement*
10.2 1998 Stock Option and Incentive Plan*
10.3 Amended 1999 Stock Option and Incentive Plan*
10.4 Employment Agreement dated March 15, 1999, by and between David
Friedensohn and BigStar*
10.5 Distribution Agreement dated February 18, 1999 by and between
Baker & Taylor and BigStar*
10.6 Strategic Marketing Agreement dated as of May 1999 by and between
Baker & Taylor and BigStar*
10.7 Rights Agreement among BigStar and each of the stockholders
identified therein*
10.8 Agreement of Lease dated February, 1999, between Seaport
Associates, LP and BigStar*
10.9 1999 Employee Stock Purchase Plan*
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to BigStar's registration statement on Form S-1,
Registration No. 333-77963
17
