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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 000-26793
BIGSTAR ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE NO. 13-339-5258
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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19 FULTON STREET, 5TH FLOOR
NEW YORK, NEW YORK 10038-2100
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 981-6300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the common stock on March
24, 2000 as reported on the Nasdaq National Market system, was approximately
$38,115,000. Shares of common stock held by each officer and director and by
each person who owns 10% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 24, 2000, the registrant had outstanding 10,141,695 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K:
(1) Proxy Statement for the 2000 Annual Meeting of Stockholders -- Items
10, 11, 12 and 13.
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BIGSTAR ENTERTAINMENT, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6 Selected Financial Data..................................... 17
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A Quantitative and Qualitative Disclosure about Market Risk... 22
Item 8 Financial Statements........................................ 22
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 22
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 23
Item 11 Executive Compensation...................................... 23
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 23
Item 13 Certain Relationships and Related Transactions.............. 23
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 24
Signatures............................................................ 25
Financial Statements.................................................. F-1
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PART I
Except for historical information, the following description of our
business contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those set forth
in these forward-looking statements as a result of a number of factors,
including those set forth below in this Form 10-K report under the caption "Item
1. Business -- Risk Factors."
ITEM 1. BUSINESS
BigStar Entertainment, Inc. ("BigStar") is an online direct marketer of
filmed entertainment products. Our main web site, bigstar.com, is a leading
online Shop-A-Tainment(TM) destination, based on our internal analysis of
traffic, sales and other metrics. Through bigstar.com we sell more than 40,000
videos and DVDs, or digital video discs, including feature films, children's
movies and educational, health and fitness, and instructional videos.
Shop-A-Tainment combines an engaging online shopping experience with a
consumer's desire for entertainment. Our Shop-A-Tainment strategy integrates
captivating information about movies and movie stars within a fun shopping site,
which we believe results in more repeat visits to our web site, higher page
views, greater customer loyalty and revenue. In the fourth quarter of 1999,
bigstar.com received over 8,200,000 unique visits, as measured by internal
systems, demonstrating the appeal of bigstar.com's content.
In addition to featuring more than 4,000 biographies, 2,000 movie stills
and 300 star interviews, bigstar.com also features our state-of-the-art BigStar
Broadband Theater(TM). This innovation offers visitors to our web site the
ability to stream and view on their computer more than 6,500 movie trailers and
10 feature films. We believe that BigStar Broadband Theater provides one of the
largest selections of streaming movie trailers and films available on the Web.
The user information provided during visits to bigstar.com allows us to
market directly to consumers with our proprietary, internally-developed direct
marketing software, BigStar Direct. We believe our BigStar Direct software helps
us increase sales through one-to-one-marketing with consumers. This innovative
software creates personalized and targeted e-mails based upon user-provided
demographic information, indicated preferences and purchasing habits. BigStar
Direct can also deliver html email, with graphics and text, to enhance the
effectiveness of e-mail promotions. BigStar has further developed this software
for use by third parties and has begun to license its use to other direct
marketers, as part of our strategy to realize the value of this technology.
In addition to bigstar.com, we also hold many other web domain names
including abcbigstar.com, bigstardvd.com, bigstardrivein.com,
bigstartheater.com, mpeg4.com, cinemagram.com, astrophile.com and
digitalfirstlook.com, as well as domain names registered in foreign countries.
These domain names also link to bigstar.com, which facilitates consumer access
to our site from different locations on the Internet and allows consumers to
reach us through various search terms. Each of our domain sites targets an
important and distinct audience, but uses the same delivery and content
integration software.
GROWTH OF THE INTERNET, ONLINE COMMERCE AND DIRECT MARKETING
The Internet has radically altered both communications and commerce.
Through the Internet, computer users can instantaneously and efficiently search
databases worldwide, share information and purchase goods and services.
According to the 1999 Veronis, Suhler & Associates Communications Industry
Forecast, the percentage of U.S. households with Internet access rose to 27.9%
in 1998 and is estimated to reach 50% by 2003, totaling 54 million households.
The increasing affordability of cable modems and digital subscriber lines will
also increase the use of broadband technologies on the Internet. Technological
innovations in the delivery of audio and video content, coupled with the
expansion of broadband availability, will continue the Internet evolution from
text-based pages to a more dynamic multimedia environment.
The increases in availability and functionality of the Internet have
facilitated online commerce. An increasing number of products and services are
sold online, including books, financial services, computers, entertainment
products and travel services. International Data Corporation estimates that
sales to U.S. households over the Internet will increase from approximately
$12.4 billion in 1998 to approximately $60.6 billion in 2002.
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Retailers are able to sell effectively to consumers through the Internet by
providing:
- visual product presentations, including streamed audio and video;
- up-to-date pricing and product availability information;
- personalized customer support, including order status;
- product offerings tailored to customer preferences; and
- electronic billing and payment systems.
In addition, for filmed entertainment products, fulfillment is potentially
instantaneous and more cost effective since the product is digital in nature.
We believe that the opportunities for direct marketing over the Internet
are significant as well. The Direct Marketing Association estimates that $160
billion was spent on direct marketing in 1998. Realizing the efficiency of the
internet, businesses are increasing their allocation of online advertising and
online direct marketing. Forrester Research projects that total Internet
advertising expenditures in the U.S. will increase from $1.3 billion in 1998 to
over $10 billion in 2002. Forrester also estimates that Internet direct
marketing will account for 60%, or $6.2 billion, of these expenditures in 2002,
up from 15% in 1998.
THE FILMED ENTERTAINMENT INDUSTRY
Within the filmed entertainment industry, total home video spending on both
videos and DVDs is forecast to reach $26.6 billion in 2003, according to the
Veronis, Suhler & Associates 1999 Communications Industry Forecast.
Videos
Over the last several years, consumer video spending habits have shifted
from renting videos to purchasing them. This trend has been driven by falling
prices and broader distribution. According to the Veronis, Suhler & Associates
1999 Communications Industry Forecast, the average household with a video
cassette recorder purchased 7.8 tapes in 1998, compared with only 3.6 tapes in
1992. According to the Veronis, Suhler & Associates, revenues from retail sales
of videos are expected to total nearly $8.7 billion in 2003. However, we cannot
make any assurance regarding BigStar's future sales.
Digital Video Discs
DVD players have shown the fastest acceptance of any consumer electronic
device ever introduced. We believe the increased acceptance of DVDs will help
grow the market for filmed entertainment products. This new storage medium is
capable of storing substantially more data than videos, allows for easier
searching and frequently has better audio and video quality. DVD players may be
purchased as a component in a home entertainment system or integrated into a
computer system as a DVD-ROM drive. Although DVD-ROM drives are primarily for
computer software storage and playback, they also may be used to view filmed
entertainment on a computer screen.
Paul Kagan Associates estimates that the installed base of DVD players in
U.S. households will increase from 1.1 million in 1998 to 18.4 million in 2003,
representing a compound annual growth rate of 75.7%. Paul Kagan Associates
estimates that retail sales of DVDs in the United States will increase from
approximately 14.3 million discs in 1998 to approximately 228.4 million discs in
2003, representing a compound annual growth rate of 74.0%. Additionally,
Veronis, Suhler & Associates estimate that annual U.S. revenue from retail sales
of DVDs was approximately $311 million in 1998, and is expected to increase to
approximately $4.6 billion in 2003, representing a compound annual growth rate
of 71.4%. We cannot assure you that BigStar's sales will increase
proportionately with the market.
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Delivery of Filmed Entertainment
Within the next few years, new technologies may enable consumers to stream
or download digital filmed entertainment directly into the home. We believe the
potential of this new market will depend on the expansion of affordable systems
that can accommodate delivery of video, audio, data and other services to
households and sales of significant numbers of storage devices capable of
receiving and recording large amounts of digital information. We plan to capture
a portion of this new market by developing the means to sell digital filmed
entertainment products to consumers. In February 2000, in its full first month
of operation, visitors to bigstar.com viewed more than 105,000 streaming
previews and full-length films through BigStar's Broadband Theater.
CHALLENGES OF ONLINE RETAILING
Web-based retailers of filmed entertainment products face challenges in
promoting and sustaining online sales, including the following:
- Competition from traditional retail industry. Most consumers purchase
filmed entertainment products from traditional store-based retailers,
many of which have longer operating histories, larger customer bases and
greater brand recognition than online retailers. Online retailers must
convince customers that purchasing filmed entertainment on the Internet
offers distinct advantages, such as larger product selection, better
prices and greater convenience.
- Attracting and retaining customers. The online commerce market is new,
rapidly evolving and intensely competitive. Online retailers must
heighten their brand awareness, attract new customers, develop customer
trust and loyalty and increase levels of customer traffic to their web
sites.
THE BIGSTAR ADVANTAGES
We are well-positioned to meet the challenges facing online filmed
entertainment retailers because of the following key strengths:
Strategic Alliances
In December 1999, we entered into a strategic alliance with ValueVision
International, Inc.; NBC and General Electric own approximately 40% of
ValueVision. The strategic alliance included a $10 million investment in BigStar
by ValueVision, at $7 per share. As part of the alliance, BigStar and
ValueVision are developing a weekly television show featuring entertainment news
about movies and celebrities. The show will also offer BigStar's filmed
entertainment products for sale. The show is currently scheduled to premiere in
the second quarter of 2000.
The partnership with ValueVision is expected to bring BigStar's
Shop-A-Tainment strategy to the approximately 33 million cable-subscriber
households with access to the ValueVision network, and positions both companies
at the digital crossroads of the Internet and television. Pursuant to the
strategic agreement, BigStar is the exclusive filmed entertainment retailer on
both the ValueVision network, which will soon be renamed SnapTV, as well as
ValueVision's e-commerce web site, vvtv.com. We believe that the strategic
partnership extends BigStar's position as a leading Shop-A-Tainment web site.
Fulfillment of Wider Selection with Lower Costs
We currently offer more than 40,000 filmed entertainment products for sale.
BigStar has supply agreements in place with Valley Media and Baker & Taylor.
Because we use third parties to fulfill orders, we do not need to carry physical
inventory. In contrast, traditional filmed entertainment retailers and some
online retailers must make significant investments in inventory, real estate and
personnel for each store location. The amount of space available in a physical
store also limits the number of titles and the amount of inventory that a
traditional retailer can carry in any one store.
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Further, because movies and filmed entertainment products are now produced
digitally, as part of our BigStar Broadband Theater, we are developing the
infrastructure to deliver filmed entertainment products on-line. As bandwidth
for consumers increases, BigStar intends to provide consumers the ability to
both stream and download films directly to their own storage devices for later
playback. We expect that distributing filmed entertainment digitally, directly
to consumers, will lower the distribution costs to BigStar, while providing
greater value to customers.
Business-to-Business Application of BigStar Direct
BigStar Direct is being adapted for use by third parties to direct market
other products and services to online buyers. Online direct marketing, or
e-marketing, utilizes the power of email, which is the most widely used Internet
application as well as one the most effective online marketing techniques. Some
of e-marketing's advantages over paper-based direct marketing include:
- response rates of 8-15% on average services versus 1-2% for offline
direct marketing, according to Forrester Research;
- faster customer response and feedback cycle of hours versus weeks;
- no printing or mailing costs; and
- increased customization for each user.
Because many companies do not have the in-house expertise to design,
segment and analyze an e-mail campaign, nor the systems to manage subscription
lists and send e-mail, we believe a significant opportunity exists to provide a
solution to these businesses. Accordingly, subsequent to December 31, 1999, we
incorporated a subsidiary, BigStar Direct. To date, the subsidiary has received
minimal external funding, but we intend to further capitalize this subsidiary
and develop this new business. We have recently signed contracts to license this
service to other online commerce companies to help them expand their online
businesses through e-marketing.
Targeted Web Site
We have developed separate areas within our web site for different
demographic segments who purchase filmed entertainment products. We target
several distinct online groups, including:
- people seeking well-known feature films, as well as titles in specialty
genres such as educational, health and fitness, instructional and how-to
videos;
- parents seeking to educate and entertain their children with filmed
entertainment products;
- owners of DVD players who seek a wide variety of titles and in-depth
technical and product information;
- movie fans seeking extensive information about films;
- independent film enthusiasts; and
- fans seeking to view movie trailers as part of their shopping experience.
We believe that customers are more receptive to web sites that provide
information and products tailored to their interests. Our strategy of using
separate areas is designed to increase initial and repeat visits and sales.
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OUR STRATEGY TO BECOME THE PREMIER ONLINE DIRECT MARKETER OF FILMED
ENTERTAINMENT
Continue to Grow Customer Base
We intend to continue to grow our customer base through online and offline
advertising, strategic marketing relationships and our affiliate partner
network. For example, we intend to continue advertising on leading web sites and
other traditional media and developing additional business alliances and
partnerships.
Continue to Use Direct E-mail Marketing
BigStar uses direct e-mail marketing to attract new customers and increase
purchases by existing customers. At March 1, 2000, we had a database of more
than 1.5 million e-mail addresses of current and prospective customers who have
elected to receive promotional materials from us. We have found that our focused
e-mails have higher response rates and purchase levels than other marketing
campaigns. We expect the benefits of direct e-mail marketing to improve as our
database grows and we refine our segmenting techniques.
Provide a Superior Shopping Experience
By providing customers with a superior shopping experience, we believe that
we can increase both our customer base and repeat customer purchases. Our web
site is designed to be easy to use and contains search functions, an electronic
shopping cart, personalized user profiles, secure credit card payment processing
and choice of delivery options. In addition, we believe we offer our customers a
superior shopping experience through informative and entertaining editorial
content.
Continue to Improve Technology
We believe that innovative technology is essential to successfully
providing online retail services. As a result, we have developed our BigStar
Direct software. We also have developed technology that enables affiliated web
sites to create their own filmed entertainment web sites that link to
bigstar.com. We intend to continue to develop, acquire and implement
enhancements to our web sites and order processing systems.
Pursue Additional Revenue Opportunities
We intend to pursue additional revenue opportunities, which may include the
following:
- expand to fulfill international orders;
- expand into new product categories, such as movie soundtracks,
merchandise and memorabilia;
- acquire complementary businesses or technologies; and
- develop the capacity to sell filmed entertainment through the streaming
and downloading of these products over the Internet.
WEB SITE FEATURES
Our web site has several key features designed to enhance each customer's
shopping experience.
Content
We have enhanced our web site by adding editorial content. We believe that
the inclusion of editorial content on our web site increases the time each
customer spends on our web site, as well as the likelihood and frequency of
subsequent visits and purchases. Examples of our editorial content include
reviews, biographies, news, photos and other editorial programming. We license
the majority of our editorial content from third parties, rather than develop it
internally, because we believe that this approach is more cost-effective. In
addition, we have original editorial features including polls, chats and trivia.
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Searching
Visitors can search our web site by genre, category, title, actor, director
or other criteria. For example, in the kids section, an age-rated search allows
parents to select suitable filmed entertainment products for children according
to age. We also have developed software that make it easier for users to refine
their search by year, format, category or motion picture rating.
Introduction of Broadband Features
We recently introduced a streaming product on bigstar.com known as BigStar
Broadband Theater. Now, before making a purchase, visitors can access and view
in real time thousands of movie trailers. In addition, visitors can also view
full-length streaming movies over their Internet connection. We are currently
developing additional features that will enable us to offer more broadband
content. We plan to use BigStar Broadband Theater as the platform for the
development of our technical infrastructure in order to deploy digital streaming
and downloads of filmed entertainment on a larger commercial scale. We believe
that BigStar Broadband Theater provides one of the largest selections of
streaming movie trailers and films available on the Web.
Electronic Shopping Cart
Our web site allows a customer to put each selected item into an electronic
shopping cart by clicking on the item. Customers can continue shopping while
adding to or deleting items from the electronic shopping cart. Once the customer
has finalized his or her selection, the customer submits an order. In addition,
a customer may save the items in the shopping cart and purchase them during a
later visit to our web site.
Personalized Features
Visitors to our web site can enter a profile that personalizes the web
site. Users that enter a profile are then greeted by name when they log on to
our web site. They also receive personalized recommendations through e-mail and
other customized services such as personalized sales offers and notices of
exclusive sale promotions. We also send web site news, periodic updates about
new movies, featured selections and special offers to these customers.
Secure Credit Card Payment
We utilize secure server software for transactions. Our software encrypts
all of the customer's personal information, including credit card number, name
and address, to ensure security and privacy.
Order Fulfillment
Customers can select from several delivery options, including overnight
delivery. For customers that purchase filmed entertainment for others, multiple
addresses can be conveniently saved to be used for subsequent orders. We use
e-mail to notify customers that their orders have been received and shipped.
Most of our products are available for shipment within one to three days.
Customers can also view the current shipping status of their orders through our
web site and see a history of all past orders.
MARKETING AND PROMOTION OF OUR ONLINE FILMED ENTERTAINMENT SUPERSTORE
We use a variety of methods, which are discussed below, to attract users to
our web site. In addition, we are not dependent on any single method of
promotion or marketing partner. We plan to continue to make marketing and sales
expenditures to attract additional first-time visitors and repeat customers.
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Online-and Offline Advertising Campaigns
We have online marketing campaigns on a number of high traffic web sites.
During the quarter ended December 31, 1999, we conducted campaigns on more than
forty-five web sites. These campaigns use a variety of online marketing
techniques, including:
- click-through banners that bring consumers directly to our web sites;
- campaigns that collect the e-mail addresses of visitors who wish to
receive online promotions;
- affiliate promotion campaigns;
- coupons, contests and other sponsorships; and
- inclusion of our search technology in relevant content areas of other web
sites.
We also conduct special promotions at various times during the year, such
as the holiday season and the Academy Awards(R) season. For example, we ran a
Valentine's day promotion with tie-ins to other e-commerce vendors.
We generally enter into advertising commitments that are paid on
performance or can be canceled on 60 days notice. Accordingly, we can cancel and
quickly replace advertising that performs poorly.
In addition to online marketing and advertising, we also use or plan to use
print, radio, outdoor and television advertising.
The BigStar Show
Under our strategic partnership agreement with ValueVision, we plan to
produce a weekly television show featuring entertainment news and celebrity
merchandise. We expect the television show to premiere in the second quarter of
2000. The show will leverage ValueVision's expertise in creating shows that
provide several short, unique segments that target specific themes and products.
The show will also offer BigStar's filmed entertainment products for sale. In
addition, BigStar is the exclusive filmed entertainment retailer on
ValueVision's network, soon to be renamed SnapTV, as well as the exclusive
filmed entertainment retailer for ValueVision's e-commerce web site.
Strategic Marketing Relationships
We have entered into strategic marketing relationships with ValueVision,
StarMedia Network, Yahoo!, AOL MovieFone, EarthLink Network, The New York Times
on the Web, Mail.com, MyWay.Com and Nerve.Com.
We entered into a strategic partnership with StarMedia Network in December
1999. As part of our agreement, BigStar became an official vendor on the
StarMedia Shopping Network. Our products, including many Spanish subtitled and
dubbed movies, are now promoted in Spanish through joint online and offline
marketing efforts. In addition, BigStar's content is also translated and
integrated into StarMedia's popular channels, providing the growing population
of Hispanics in the U.S. and Puerto Rico with access to our extensive selection
of movie stills, biographies, interviews and reviews.
The BigStar Celebrity Chat series is hosted by BigStar on Yahoo! Chat. This
series features chats with movie stars and celebrities. These chats are
showcased and archived for future reference on our web sites. We believe that
the BigStar Celebrity Chat series is a highly effective means of promoting our
web sites because it reaches a large number of users on Yahoo! Chat and Geo
Cities. The Chat series has recently featured Tom Hanks, Wynona Ryder, Lynn
Redgrave and Adam Sandler among others. BigStar is planning to use this type of
feature, as well as other compelling celebrity program elements, within the
weekly "BigStar Show" on ValueVision.
BigStar is also the exclusive provider of videos and DVDs for AOL
MovieFone, the largest provider of movie tickets online. Our agreement with AOL
MovieFone also allows us to send electronic mailings to AOL MovieFone's mailing
list and advertise our products to AOL MovieFone's online users.
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We have also entered into a strategic marketing agreement with EarthLink
Network, one of the largest U.S. Internet service providers. We are the
exclusive online provider of filmed entertainment products on EarthLink's web
site. Pursuant to the agreement, a link has been established to a co-branded
home page from EarthLink's home page. The agreement also provides for the
placement of BigStar advertisements on EarthLink's home page and other
placements on the EarthLink web site.
In addition, we build customized filmed entertainment stores for our
strategic partners, such as the stores we have created for Star Media and
Nerve.com. These stores attract new customers and increase sales for BigStar.
Affiliate Partner Network
Our affiliate program enables other web sites to create their own filmed
entertainment web site and link to BigStar. When visitors link to our online
superstore from one of our more than 22,000 affiliates and make a purchase, the
affiliated web site receives a commission ranging from eight percent to twelve
percent of any resulting sale. Because there is no payment unless a sale occurs,
the program is an efficient means of acquiring new customers and advertising
online.
In order to encourage other web sites to participate in the affiliate
program, we provide without charge all of the necessary software to establish
the filmed entertainment area and link, as well as other technical and customer
service support. BigStar has created software that allows affiliates to build
customized web sites using information found on bigstar.com. Affiliate web site
builders can create filmed entertainment commerce and content sites with little
or no computer programming experience.
Other Promotions
In the first quarter of 2000, we announced the launch of a CD-ROM magazine,
Drive-In, that is available to current BigStar customers and can be ordered at
no charge on our web site. Drive-In is an Internet-enabled CD-ROM that allows
Internet users to watch broadcast-quality movie trailers from our web site,
regardless of whether they have a dial-up modem or high-speed access. Drive-In
features access to our editorial content, product purchase pages on bigstar.com,
and movie trailers for recent theatrical and home video releases.
ORDER FULFILLMENT AND CUSTOMER SERVICE
We utilize electronic links with our fulfillment partners to process
orders. Our products are usually shipped directly from our fulfillment partners
to the customer on the same day they receive an order from us. Because we use
fulfillment partners to source and ship our products, we currently do not
maintain an inventory of products. In some instances, we conduct contests or
offer special promotions to customers where prizes or promotional items may be
shipped directly from BigStar's offices.
For the year ended December 31, 1999, we purchased from Baker & Taylor
substantially all of the filmed entertainment products that we sold to
customers. Our distribution agreement with Baker & Taylor extends through
December 31, 2000 and automatically renews for additional 24-month terms unless
cancelled by either party by prior written notice 90 days before the end of the
term. Either party may terminate the agreement upon the failure of the other
party to fulfill its obligations or a breach of warranty under the agreement or
the bankruptcy of the other party. BigStar has no obligation to make minimum
purchases under this agreement.
We also have contractual relationships with Valley Media, Inc. and Rentrak
Corporation. We purchased a small percentage of products from these fulfillment
partners during 1999, which were generally used for promotional purposes. In
March 2000, we entered into a new agreement with Valley Media, Inc. that extends
through March 2002 and automatically renews for a one-year term unless cancelled
by either party by prior written notice 90 days before the end of the term.
Either party may terminate the agreement upon the failure of the other party to
fulfill its obligations or a breach of warranty under the agreement. The
agreement provides for no minimum purchases by BigStar.
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We have developed software that automatically selects the fulfillment
partner to fill a particular order based on variables such as title
availability, speed of delivery and credit terms. We believe this program
reduces our cost of sales by enabling us to purchase products more efficiently.
In addition, by providing electronic access to the inventories of multiple
fulfillment partners, this program helps us increase the number of items we
offer and the number that are in stock at any given time. We anticipate using
Valley Media and Baker & Taylor in an integrated fashion to maximize inventory
available for purchase by our customers.
We believe that our ability to attract and retain customers depends in part
on the strength of our customer support. We seek to achieve frequent
communication with and feedback from our customers to continually improve our
web site and related services. Our customer service staff monitors our incoming
customer e-mails and generally responds within 24 hours. We also send automated
e-mails after a purchase has been made to inform customers of the status of
their orders. In addition, we also have a toll-free telephone number that
directs customer inquiries to a voice response system or a customer service
representative.
COMPETITION WITHIN THE RETAIL FILMED ENTERTAINMENT INDUSTRY
The online commerce market is new and rapidly evolving. We expect that our
online competition will further intensify. In addition, the broader retail
filmed entertainment industry is intensely competitive. Our competitors include:
- online sellers of videos, DVDs and other filmed entertainment products,
including Amazon.com, express.com, Reel.com, a subsidiary of Hollywood
Entertainment, CDnow and Buy.com;
- publishers and wholesalers of filmed entertainment products and related
products, such as Columbia House, Good Times Entertainment and Time Life
Video;
- traditional filmed entertainment retailers, such as Blockbuster and
Hollywood Entertainment, that currently sell filmed entertainment
products or services through stores or over the Internet; and
- specialty video retailers, mass merchandisers, department and electronic
consumer stores, as well as non-store retailers such as mail-order video
clubs.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we have. Some of BigStar's competitors, like Hollywood
Entertainment, Blockbuster and Amazon.com, also may be able to secure
merchandise from vendors on more favorable terms, devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies and devote substantially more resources to web site and
systems development than we can. We believe that the principal competitive
factors in our market are:
- brand recognition;
- ease of use, content quality and web site convenience;
- price;
- selection; and
- personalized services.
INTELLECTUAL PROPERTY
We use technology developed by us in our business. Most of our software and
systems have been developed internally. Some of our software is developed on our
behalf by outside consultants. We also license software from third parties.
The source code for our software is protected both as a trade secret and as
copyrighted work. We enter into confidentiality and assignment agreements with
our consultants and vendors with access to our proprietary information.
10
<PAGE> 12
We have applied for the registration of some of our trademarks and service
marks in the United States. Our service marks include BigStar, BigStarDVD,
SHOP-A-TAINMENT and ASTROPHILE.com, in addition to our trademark of BIGSTAR
DIRECT. We have no patents.
EMPLOYEES
As of December 31, 1999, we had 78 full time employees, including 27 in
technology and operations positions, 15 in marketing, 14 in site development, 12
in customer service and 10 in administrative positions. We believe our relations
with our employees are satisfactory. None of our current employees are
represented by a labor union or are the subject of a collective bargaining
agreement.
RISK FACTORS
In addition to the other information in this Form 10-K 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;
- manage growth;
- continue to develop and upgrade our technology; and
- attract, retain and motivate qualified personnel.
We lack significant revenues and expect significant continuing losses. We
have not achieved profitability and expect to continue to incur significant
operating losses and net losses for at least the next several years. As of
December 31, 1999, our accumulated deficit was $24,105,677. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We expect that our operating expenses will increase 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 require
additional financing. We may not be able to obtain the financing or obtain it on
terms acceptable to us. If revenues grow slower than we anticipate, or if
operating expenses exceed our expectations or cannot be reduced accordingly, or
if we cannot obtain additional financing, our business, operating results and
financial condition may be materially harmed.
Our success depends on the continued growth of online commerce. If online
commerce does not continue to grow or grows more slowly than expected, our
business will be materially harmed. A number of factors could slow the growth of
online commerce, including the following:
- the network infrastructure required to support a substantially larger
volume of transactions may not be developed;
- government regulation may increase;
- telecommunications capacity problems may result in slower response times;
and
- consumers may have concerns about the security of online commerce
transactions.
11
<PAGE> 13
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
rapidly evolving and increasingly 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 also is intense, and price is one of the
principal factors on which consumers base their purchasing decisions. Price
competition may reduce our gross margins, which could materially harm our
business, operating results and financial condition.
Some of our competitors use aggressive pricing policies to build market
share. Some also have adopted business models that include selling filmed
entertainment products for less than their product cost and not charging
customers for shipping and handling. Software applications are also available
that can determine which online site has the lowest price for a particular title
and could direct customers to our competitors' web sites.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than us. 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 future expansion will increase this strain.
12
<PAGE> 14
We must maintain satisfactory vendor relationships to compete
successfully. We rely on wholesalers to fill our customers' orders. Our primary
vendor of filmed entertainment products is Baker & Taylor Entertainment, from
whom we obtained substantially all of our inventory in 1998 and 1999. We also
obtain filmed entertainment products from Valley Media and Rentrak. We are
dependent upon maintaining these relationships for filling our customers' orders
because there are only a limited number of wholesalers who sell filmed
entertainment products. If we are unable to maintain suitable relationships with
vendors, we will be materially harmed.
As we continue to grow, our wholesalers will need to satisfy our increasing
product requirements on a timely basis. They also must continue to provide
adequate selections of filmed entertainment titles and competitive prices. If
our wholesalers are unable or unwilling to do so, it would materially harm our
ability to compete, which would in turn materially harm our business, operating
results and financial condition.
We could experience system failures that interfere with customers' access
to our web site. Our business depends on the efficient and uninterrupted
operation of our computer and communications hardware and software systems.
Systems interruptions that cause our web site to be unavailable or that reduce
our ability to process transactions could materially harm our business, related
operating results and financial condition. Interruptions could result from
natural disasters, as well as power loss, telecommunications failure and similar
events. We have fully redundant systems but have not yet established a formal
disaster recovery plan.
Online security breaches could harm our business. To protect confidential
information, we rely on encryption secure server 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 site 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 on line systems.
We do not publish our own editorial content, which means we must rely on
licensed third-party content on our web site. We license third-party content,
including filmed entertainment reviews, news reports and features, in order to
attract and retain web site users. If we are unable to obtain desirable content
from our content licensors or from new licensors, it could reduce visits to our
web site, which could materially harm our business. In addition, if we are
unable to obtain content at an acceptable cost, it could materially harm 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. Some of the
sites may not have licenses for the use of the intellectual property that they
display. The copyright holders of this intellectual property or their licensees
may assert infringement claims against our affiliate partner sites and us
because of our relationships with these sites.
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<PAGE> 15
Although we believe that our use of third-party material on our web site is
permitted under current provisions of copyright law, some aspects of Internet
content and commerce law are not clearly settled. We may therefore be the
subject of alleged infringement claims of the trademarks and other intellectual
property rights of third parties. If we become subject to these types of claims,
our business could be materially harmed even if we successfully defend against
the claims. It also is possible that future legal developments would prohibit us
from having rights to downloadable information, audio 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, mpeg4.com, abcbigstar.com,
bigstardvd.com, astrophile.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 laws would also be
likely to impose additional burdens on our business.
We may be subject to liability for sales and other taxes. We do not
collect sales or other similar taxes in most states, although we do so in New
York, California and Illinois. Our business could be materially harmed if
additional sales and similar taxes are imposed on us, or if penalties are
assessed on us for past nonpayment of these taxes. Recently adopted legislation
provides that, prior to October 2001, a state cannot impose sales taxes on
products sold on the Internet unless these taxes could be charged on
non-Internet transactions involving the products. During this moratorium, it is
possible that taxing mechanisms may be developed that would, following the
moratorium, impose increasing sales and similar tax burdens on us. If these
burdens are placed on us, our business could be materially harmed and there
could be a material adverse effect on our operating results and financial
condition.
Our success depends on our key personnel. Our success is substantially
dependent on the ability and experience of our senior management and other key
personnel, particularly David Friedensohn, our Chief Executive Officer and
Chairman of the Board, and David Levitsky, our Executive Vice President. We have
entered into an employment agreement with David Friedensohn. The agreement
provides that he will be employed as the Chief Executive Officer of BigStar for
an unspecified period of time. Both BigStar and Mr. Friedensohn may terminate
the agreement at any time. If terminated without cause, Mr. Friedensohn will be
entitled to severance pay equal to two years of his then current base salary. We
have no employment contracts with any of our other senior management or key
personnel. If one or more members of our management team become unable or
unwilling to continue in their present positions, our business could be
materially harmed.
We have purchased key-man life insurance in the amounts of $1,000,000 for
David Friedensohn and $500,000 for David Levitsky with BigStar as the named
beneficiary. The benefits received under these policies would not be sufficient
to compensate BigStar for the loss of the services of Mr. Friedensohn or Mr.
Levitsky should suitable replacements not be employed.
In addition, to manage our anticipated growth, we must hire more employees.
Competition for personnel, particularly those having software development and
other technical expertise, is intense. If we are unable to hire additional
qualified employees, our growth could be impaired.
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<PAGE> 16
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 year 2000 issues.
ITEM 2. PROPERTIES
Our principal executive offices are located at 19 Fulton Street, 5th Floor,
New York, New York 10038, where we lease approximately 10,000 square feet of
space. The lease expires on September 30, 2002. We anticipate that we will
require additional space as more personnel are hired. We are actively searching
for space in New York City to accommodate any further expansion of our
operations.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market system under the
symbol "BGST." The following table sets forth, for the periods indicated, the
high and low closing bid prices per share of the common stock as reported on the
Nasdaq National Market system.
<TABLE>
<CAPTION>
HIGH LOW
1999 ------- -------
<S> <C> <C>
Third Quarter (since August 2, 1999)(1)................... $8.1875 $5.4375
Fourth Quarter............................................ $8.5938 $4.5000
</TABLE>
- ---------------
(1) BigStar completed its initial public offering in August 1999. Accordingly,
there has only been an established public trading market for BigStar's
common stock since August 2, 1999.
On March 24, 2000, the closing sales price of our common stock was $4.875
per share. There were approximately 950 holders of record as of March 24, 2000.
DIVIDENDS
We have not declared or paid any cash dividends on our common stock and
intend to retain our future earnings, if any, to fund the development and growth
of our business. We do not anticipate paying any cash dividends in the
foreseeable future.
USE OF PROCEEDS FROM REGISTERED SECURITIES
In August 1999, BigStar completed an initial public offering of 2,500,000
shares of common stock, $.001 par value, at a price per share of $10.00.
Prudential Securities, Wasserstein Perella Securities, Inc. and First Security
Van Kasper acted as the managing underwriters for the offering. 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 date
and December 31, 1999, the expenses incurred in connection with the issuance and
distribution of the securities registered were as follows:
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS TO OTHERS:
- --------------------------------------
<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 December 31, 1999, the net offering proceeds
of approximately $10,000,000 were used for the following purposes:
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS TO OTHERS:
- --------------------------------------
<S> <C>
Increase marketing, advertising and promotional spending.... $ 3,500,000
Upgrade computer systems and develop additional software
programs.................................................. 1,100,000
Hire additional marketing, technical and production
personnel................................................. 500,000
Fund operating losses and general corporate purposes........ 4,900,000
-----------
Total use of proceeds....................................... $10,000,000
===========
</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 or indirect payments from the net proceeds to directors or officers of
BigStar or to affiliates or persons owning ten percent of more of the common
stock of BigStar.
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<PAGE> 18
SALE OF UNREGISTERED SECURITIES
BigStar made the following unregistered sales of common stock during the
quarter ended December 31, 1999:
<TABLE>
<CAPTION>
NAME OF
UNDERWRITER PERSON OR CLASS OF
AMOUNT OF OR PLACEMENT CONSIDERATION PERSON TO WHOM
TRANSACTION DATE SECURITIES SOLD AGENT RECEIVED SECURITIES WERE SOLD
- ---------------- ---------------- ------------ ------------- -------------------------
<S> <C> <C> <C> <C>
December 14,
1999........... 1,428,571 shares None $10 million ValueVision
International, Inc.
</TABLE>
Exemption from registration for the transaction described above was claimed
pursuant to Section 4(2) of the Securities Act of 1933, as amended, regarding
transactions by the issuer not including a public offering, in that this
transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to BigStar that the shares were
being acquired for investment.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Result of
Operations" and our consolidated financial statements and notes to those
statements and other financial information included elsewhere in this Form 10-K
report.
<TABLE>
<CAPTION>
MARCH 2, 1998
YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, TO DECEMBER 31,
1999 1998
------------ ----------------------
<S> <C> <C>
OPERATIONS DATA:
Net sales............................... $ 13,352,201 $ 789,107
Cost of sales........................... 10,223,426 714,443
------------ -----------
Gross profit.................. 3,128,775 74,664
------------ -----------
Operating Expenses:
Sales and marketing..................... 15,593,111 1,467,075
Website and software development........ 4,968,840 970,594
General and administrative.............. 3,955,007 891,970
------------ -----------
Total operating expenses...... 24,516,958 3,329,639
------------ -----------
Loss from operations.......... (21,388,183) (3,254,975)
Investment income, net.................. 530,327 7,154
------------ -----------
Net loss................................ $(20,857,856) $(3,247,821)
============ ===========
Basic and diluted net loss per
share.............................. $ (3.18) $ (1.25)
============ ===========
Weighted average shares of common stock
outstanding used in computing basic
and diluted net loss per share........ 6,567,504 2,602,784
============ ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $17,422,817 $ 363,124
Working capital (deficit)........................ 20,271,050 (946,631)
Total assets..................................... 29,852,063 1,338,090
Stockholders' equity (deficit)................... 23,280,705 (494,497)
</TABLE>
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for historical information, the statements in this Form 10-K 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, "Item 1. Business -- Risk Factors." You should read our
financial statements and the related notes to those statements and the other
financial data appearing elsewhere in this Form 10-K report.
OVERVIEW
BigStar was incorporated in March 1998. We began offering products for sale
on our main web site, bigstar.com, in May 1998. Until that time, our operating
activities related primarily to the development of the bigstar.com web site.
Since our inception, we have incurred significant operating losses. These
losses primarily result from development costs associated with building our web
sites and order processing systems, and marketing, advertising and promotional
expenses. As of December 31, 1999, we had an accumulated deficit of $24,105,677.
As we expand our business, we believe that our operating expenses will increase
primarily due to increased marketing, advertising and promotional expenses, and
software development costs and additional depreciation and amortization related
to capital expenditures. As a result, we expect to incur operating and net
losses and negative cash flow from operations for the next several years.
RESULTS OF OPERATIONS
Described below are selected statement of operations data for the year
ended December 31, 1999 and the period from March 2, 1998 (date of inception) to
December 31, 1998. This information is derived from our audited financial
statements that include, in the opinion of management, all adjustments necessary
for a fair presentation of the information for these periods.
Results of operations for any period are not expected to be indicative of
results for any future period.
<TABLE>
<CAPTION>
MARCH 2, 1998
YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, TO DECEMBER 31,
1999 1998
------------ ----------------------
<S> <C> <C>
Net sales................................................. $ 13,352,201 $ 789,107
Cost of sales............................................. 10,223,426 714,443
------------ -----------
Gross profit............................................ 3,128,775 74,664
Operating expenses
Sales and marketing..................................... 15,593,111 1,467,075
Web site and software development....................... 4,968,840 970,594
General and administrative.............................. 3,955,007 891,970
------------ -----------
Total operating expenses........................ 24,516,958 3,329,639
Loss from operations............................ (21,388,183) (3,254,975)
Investment income......................................... 530,327 7,154
------------ -----------
Net loss........................................ $(20,857,856) $(3,247,821)
============ ===========
</TABLE>
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<PAGE> 20
The year ended December 31, 1999 and the period from March 2, 1998 (date of
inception) to December 31, 1998
Net Sales. Net sales were $13,352,201 for the year ended December 31, 1999
and $789,107 for the period from March 2, 1998 (date of inception) to December
31, 1998. BigStar recognized $1,859,120 in advertising and promotional revenues,
including $925,000 of barter revenues, for the year ended December 31, 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 beginning in the second quarter of 1999. Sales are recognized upon the
shipment of filmed entertainment products and the serving of advertisements and
promotions. For the year ended December 31, 1999 revenues also include sales to
customers who used $2,693,793 of coupons for discounts on their purchases of
filmed entertainment products. The corresponding cost of these coupons is
included in sales and marketing expenses.
Until November 1998, sales of filmed entertainment products consisted
primarily of videos. Beginning in November 1998, we commenced selling DVDs.
Based upon units shipped, DVDs and videos accounted for approximately 49% and
57%, respectively, of filmed entertainment products sold for the year ended
December 31, 1999. Due to the higher selling prices of DVDs, compared to videos,
revenue from DVD sales was approximately 56% compared to 44% for videos, for the
year ended December 31, 1999. Sales of DVDs for the period from March 2, 1998
(date of inception) to December 31, 1998 were not material.
As of December 31, 1999, BigStar had approximately 250,000 customers
compared to approximately 24,000 as of December 31, 1998. Total orders increased
to approximately 485,000, for the year ended December 31, 1999, from
approximately 26,000 for the period from March 2, 1998 (date of inception) to
December 31, 1998, of which over 160,000 orders were in the fourth quarter of
1999, an increase of over 140,000 from the approximately 19,000 orders placed
during the fourth quarter of 1998. In order to increase our customer base, we
promote selected products through aggressive pricing. We may, in the future,
continue to offer selected products at deeper than normal discounts in response
to our competition or to attract or retain customers. We are unable to
anticipate the impact that these potential pricing structures will have on our
ability to attract or retain customers or on our gross margins because they
depend on our competitors' pricing, as well as the mix of all products sold and
their related gross margins.
Cost of Sales. For the year ended December 31, 1999, cost of sales were
$10,223,426 resulting in a gross profit of $3,128,775 and a gross margin of
23.4%, compared to a cost of sales of $714,443 for the period from March 2, 1998
(date of inception) to December 31, 1998, resulting in a gross profit of $74,664
and a related gross margin of 9.5%.
Cost of sales consists of the cost of merchandise sold and shipping and
handling costs. The increase in gross margin for the year ended December 31,
1999, compared to the period from March 2, 1998 (date of inception) to December
31, 1998 is attributable to advertising and promotional revenues, as well as
selling prices on filmed entertainment products reflecting smaller discounts
from their suggested retail prices and lower shipping and handling costs as a
percentage of selling prices. The higher gross margins earned from sales of
videos were partially offset by the lower gross margins from sales of DVDs,
which are typically sold at deeper discounts to their suggested retail price.
BigStar's primary provider of filmed entertainment and related order fulfillment
services is Baker & Taylor, from whom BigStar obtained substantially all of its
filmed entertainment products in 1999 and 1998.
Sales and marketing expenses. Sales and marketing expenses were
$15,593,111 for the year ended December 31, 1999 and $1,467,075 for the period
from March 2, 1998 (date of inception) to December 31, 1998.
Sales and marketing expenses consist primarily of payments related to
advertising, promotion and marketing programs. Sales and marketing expenses also
include the costs of promotional filmed entertainment products that are made
available to customers who agree to receive notification of future promotions
and coupons. BigStar records the cost of promotional filmed entertainment
products and coupons upon shipment to the customer based upon the charge to
BigStar by its supplier or the value of the coupon redeemed.
19
<PAGE> 21
Shipping charges on promotional filmed entertainment products are included in
cost of sales and the related customer billings are included in revenues.
Advertising expenses were $9,599,754 for the year ended December 31, 1999,
of which $3,277,280 related to offline advertising to build BigStar brand
awareness. The cost of promotional filmed entertainment products totaled
$1,673,204 for the year ended December 31, 1999 and $255,443 for the period from
March 2, 1998 (date of inception) to December 31, 1998. Sales and marketing
expenses for the year ended December 31, 1999 also include $2,693,793 in coupons
distributed to consumers for discounts on purchases of filmed entertainment
products. In addition to increased expenditures for the above mentioned
advertising, coupon and promotional costs, the higher sales and marketing
expenses for the year ended December 31, 1999, compared to the period from March
2, 1998 (date of inception) to December 31, 1998, reflect the costs of
additional sales and marketing employees.
Web site and software development expenses. Web site and software
development expenses were $4,968,840 for the year ended December 31, 1999 and
$970,594 for the period from March 2, 1998 (date of inception) to December 31,
1998.
Web site and software development expenses consist primarily of personnel
costs and related expenses for the design, development and management of our web
sites. The costs for web site and software development personnel totaled
$3,811,556 for the year ended December 31, 1999 and $812,659 for the period from
March 2, 1998 (date of inception) to December 31, 1998. These expenses also
include the costs of systems and telecommunication services of $755,655 for the
year ended December 31, 1999 and $81,640 for the period from March 2, 1998 (date
of inception) to December 31, 1998. The cost of content purchased and licensed
from third parties increased to $293,429 for the year ended December 31, 1999
from $130,900 for the period from March 2, 1998 (date of inception) to December
31, 1998.
General and administrative expenses. General and administrative expenses
were $3,955,007 for the year ended December 31, 1999 and $891,970 for the period
March 2, 1998 (date of inception) to December 31, 1998.
General and administrative expenses include personnel costs and related
expenses for executive, accounting and administrative personnel, of $1,890,391
for the year ended December 31, 1999 and $355,697 for the period from March 2,
1998 (date of inception) to December 31, 1998. Also included in general and
administrative expenses are professional fees, of $418,529 for the years ended
December 31, 1999 and $191,368 for the period from March 2, 1998 (date of
inception) to December 31, 1998.
Net loss. BigStar's net loss was $20,857,856 for the year ended December
31, 1999 compared to a net loss of $3,247,821 for the period from March 2, 1998
(date of inception) to December 31, 1998. Because of the uncertainty regarding
our future profitability, the future tax benefits of our losses have been fully
reserved for and, therefore, no benefit for the net operating loss has been
recorded. Under Section 382 of the Internal Revenue Code, this net operating
loss may be limited due to ownership changes.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operating cash requirements primarily
through sales of our common stock. Prior to our initial public offering, we
raised net proceeds of approximately $14,045,724 through the sale of 5,829,299
shares of common stock and the exercise of 193,612 warrants. In August 1999, we
completed our initial public offering of 2,500,000 shares of common stock
resulting in proceeds to BigStar of $22,008,918, net of an underwriting discount
of $1,750,000 and other offering expenses of $1,241,082 that primarily related
to legal and printing costs. In December 1999, we entered into a strategic
relationship with ValueVision. As part of this agreement, ValueVision invested
$10,000,000 in BigStar by purchasing 1,428,571 shares of our common stock.
Net cash used in operating activities for the year-ended December 31, 1999
of $17,411,907 was primarily due to our net loss of $20,857,856. The cash
requirements associated with the loss were reduced by an increase in accounts
payable and accrued expenses of $4,738,771, the availability of $453,000 held in
escrow from a private placement that was initiated in 1998, as well as
depreciation and amortization of $387,316 and non-
20
<PAGE> 22
cash stock options and warrant expenses of $324,199, which is the result of the
issuance of options and warrants to purchase 619,269 shares of common stock to
consultants for investment advisory, marketing, web site design and technical
services and warrants to purchase 19,400 shares in exchange for occupancy
services.
21
<PAGE> 23
These sources of cash flows were offset by the increase in accounts receivable
of $1,083,333, an increase in prepaid and other current assets of $866,133, and
an increase in other assets of $468,459. During 1998, net cash used in operating
activities was $1,727,702 and was primarily due to our net loss of $3,247,821,
offset by an increase in accounts payable and accrued expenses of $1,820,587. In
addition, during 1998 we recognized $192,156 of non-cash expenses, which was the
result of the issuance of options and warrants to purchase 507,562 shares of
common stock to consultants for investment advisory, marketing, web site design
and technical services and warrants to purchase 184,300 shares of common stock
in exchange for marketing, advertising and occupancy services.
At December 31, 1999 the Company had working capital of $20,271,050
compared to a working capital deficit of ($946,631) at December 31, 1998. The
increase in working capital is primarily attributable to the cash and cash
equivalents and short-term investments of $24,325,051, received from the
financing activities discussed above, less the accounts payable and accrued
expenses of $6,571,358.
At December 31, 1998 and 1999, the increase in accounts payable and accrued
expenses resulted primarily from the increase in purchases of filmed
entertainment and promotional products over the preceding period, as well as
additional advertising. The increase in accounts receivable was due to the lag
between the shipment of filmed entertainment products and the resulting
settlement with our credit card processor, and the related lag between the
acceptance by the processor of the charges and the remittance of funds to
BigStar.
Net cash used in investing activities of $9,036,113 for the year-ended
December 31, 1999 related to the purchase of $6,847,822 in investment securities
and $2,188,291 in computer equipment and related software while the net cash
used for investing activities of $470,342 for the period from March 2, 1998
(date of inception) through December 31, 1998 was used primarily for purchases
of computer equipment and related software.
We currently have agreements with our principal suppliers under which our
total credit availability is $6,000,000 for the purchase of filmed entertainment
products and related fulfillment costs, with payment terms ranging from 30-60
days.
At December 31, 1999, our principal commitments consisted of obligations
for advertising under cancelable agreements. The minimum amounts payable under
these agreements was approximately $1,304,626.
We have no material commitments for capital expenditures, but anticipate
expenditures of approximately $1,300,000 for hardware and related software
enhancements of our web site during the next 12 months. These expenditures would
expand the capabilities of our web site to allow access by more customers and to
enhance customers' experiences on our web site. We expect to fund these
expenditures from existing resources.
We believe that our existing cash and cash equivalent and short-term
investments 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 caption titled "Item 1. Business -- Risk Factors." In
addition, we will, from time to time, consider the acquisition of or investment
in complementary businesses, services and technologies, which might increase our
liquidity requirements or cause us to issue additional equity or debt
securities. We cannot assure you that we will not require additional financing
within this time frame or that such additional funding, if needed, will be
available on terms acceptable to us or at all. We do not currently use
derivative financial instruments.
SEASONALITY AND REVENUE FLUCTUATIONS
BigStar's limited operating history and rapid growth make it difficult to
ascertain the effects of seasonality on our business. Seasonal fluctuations in
sales of filmed entertainment products may affect our sales. Fluctuations in
revenue also may result from the timing of hit releases on video and/or DVD.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance for determining whether computer software is internal-use software and
accounting
21
<PAGE> 24
for the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public. SOP 98-1 also provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. BigStar adopted SOP 98-1 in 1999 and has
capitalized $564,805 related to internally developed website software.
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133. The
Statement defers for one year the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was issued in June 1998 and
established accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 will now apply to all fiscal
quarters of all fiscal years beginning after June 15, 2000. Management believes
that the implementation of SFAS No. 133 during the third quarter of year ended
December 31, 2000 will not have a material impact on the Company's results of
operations.
In January 2000, the Emerging Issue Task Force of the Financial Accounting
Standards Board reached a consensus on EITF Issue 99-17, "Accounting for
Advertising Barter Transactions," 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 as a cash transaction.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
We are exposed to changes in interest rates primarily from our short-term
investments in money market fund and commercial paper. We do not currently use
interest rate derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point adverse move in interest rates along the
entire yield curve would not materially affect the fair value of
interest-sensitive financial instruments at December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are included in this Form
10-K report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein will be reported in our Proxy Statement for
the 2000 Annual Meeting of Stockholders, which will be filed on or before April
28, 2000, and is incorporated herein by reference.
CERTAIN FILINGS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
BigStar's directors and executive officers and persons who own more than ten
percent of a registered class of BigStar's equity securities to file with the
Commission initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of BigStar. Directors, officers and
greater than ten percent stockholders are required by the Commission to furnish
BigStar with copies of all Section 16(a) forms they file.
Based on a review of such timely filed forms received by us and
representations by persons that would be required to file such forms, BigStar
believes that all required filings by current executive officers and directors
have been timely filed, except that Form 4 statements for December 1999 and
January 2000 for Mr. D. Jonathan Merriman were filed late. Additionally, the
Form 3 statement of Stuart Goldfarb was filed late.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein will be reported in our Proxy Statement for
the 2000 Annual Meeting of Stockholders, which will be filed on or before April
28, 2000, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein will be reported in our Proxy Statement for
the 2000 Annual Meeting of Stockholders, which will be filed on or before April
28, 2000, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein will be reported in our Proxy Statement for
the 2000 Annual Meeting of Stockholders, which will be filed on or before April
28, 2000, and is incorporated herein by reference.
23
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements as of December 31, 1999 and 1998 Together
with Auditors' Report. See page F-1.
(2) Financial Statement Schedule. See page S-2.
(3) Exhibits are incorporated herein by reference or are filed with
this report as indicated below (numbered in accordance with Item
601 of Regulation S-K).
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
- ------- --------------------------------
<C> <S>
3.1 Certificate of Incorporation.*
3.2 Certificate of Amendment to Certificate of Incorporation.*
3.3 Certificate of Amendment to Certificate of Incorporation.*
3.4 Form of BigStar's Common Stock Certificate.*
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, 1998 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.*
21.1 Subsidiaries.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to BigStar's registration statement on Form S-1,
Registration No. 333-77963.
(b) No reports on Form 8-K were filed during the fourth quarter of 1999.
24
<PAGE> 27
SIGNATURES
The undersigned officers and directors of BigStar Entertainment, Inc.
hereby constitute and appoint David Friedensohn and David Levitsky and each of
them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorney-in-fact with full
power to execute in our name and behalf in the capacities indicated below this
Annual Report on Form 10-K and any and all amendments thereto and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission and hereby ratify and confirm all
that such attorneys-in-fact, or any of them, or their substitutes shall lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) 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 as of the 29th day of
March, 2000.
BIGSTAR ENTERTAINMENT, INC.
By: /s/ DAVID FRIEDENSOHN
------------------------------------
David Friedensohn
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE OF CAPACITIES DATE
--------- ------------------- ----
<C> <S> <C>
/s/ DAVID FRIEDENSOHN Chief Executive Officer and Chairman March 29, 2000
- ------------------------------------------------ of the Board
David Friedensohn
/s/ DAVID LEVITSKY Executive Vice President, General March 29, 2000
- ------------------------------------------------ Manager, Secretary and Director
David Levitsky
/s/ ROBERT S. YINGLING Chief Financial Officer March 29, 2000
- ------------------------------------------------
Robert S. Yingling
/s/ D. JONATHAN MERRIMAN Director March 29, 2000
- ------------------------------------------------
D. Jonathan Merriman
/s/ WILLIAM LANSING Director March 29, 2000
- ------------------------------------------------
William Lansing
/s/ STUART GOLDFARB Director March 29, 2000
- ------------------------------------------------
Stuart Goldfarb
/s/ MARLEEN MCDANIEL Director March 29, 2000
- ------------------------------------------------
Marleen McDaniel
/s/ I. MARTIN POMPADUR Director March 29, 2000
- ------------------------------------------------
I. Martin Pompadur
</TABLE>
25
<PAGE> 28
INDEX
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................. F-2
Balance Sheets as of December 31, 1999 and 1998........... F-3
Statements of Operations for the Year Ended December 31,
1999 and for the Period from March 2, 1998 (date of
inception) to December 31, 1998........................ F-4
Statements of Stockholders' Equity (Deficit) for the Year
Ended December 31, 1999 and for the Period from March
2, 1998 (date of inception) to December 31, 1998....... F-5
Statements of Cash Flows for the Year Ended December 31,
1999 and for the Period from March 2, 1998 (date of
inception) to December 31, 1998........................ F-6
Notes to Financial Statements............................... F-7 - F-20
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BigStar Entertainment, Inc.:
We have audited the accompanying balance sheets of BigStar Entertainment,
Inc. (a Delaware corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
year ended December 31, 1999 and the period from March 2, 1998 (date of
inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BigStar Entertainment, Inc.
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the year ended December 31, 1999 and the period from March 2, 1998
(date of inception) to December 31, 1998, in conformity with accounting
principles generally accepted in the United States.
New York, New York
February 4, 2000
F-2
<PAGE> 30
BIGSTAR ENTERTAINMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
ASSETS:
Current assets --
Cash and cash equivalents.............................. $ 17,422,817 $ 363,124
Cash held in escrow.................................... -- 453,000
Accounts receivable, net of allowance of $20,000 and
$5,000 as of December 31, 1999 and 1998,
respectively......................................... 1,129,454 61,121
Short-term investments................................. 6,902,234 --
Prepaid expenses and other current assets.............. 1,387,903 8,711
------------ -----------
Total current assets.............................. 26,842,408 885,956
Property and equipment, net................................. 2,253,109 452,134
Other assets................................................ 756,546 --
------------ -----------
Total assets...................................... $ 29,852,063 $ 1,338,090
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Current liabilities --
Accounts payable....................................... $ 3,729,806 $ 830,088
Accrued expenses....................................... 2,146,552 759,259
Accrued payroll costs.................................. 695,000 243,240
------------ -----------
Total current liabilities......................... 6,571,358 1,832,587
------------ -----------
Commitments and Contingencies (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 10,000,000 shares
authorized; no shares issued and outstanding at
December 31, 1999 and 1998, respectively............... -- --
Common stock, $.001 par value; 40,000,000 shares
authorized; 10,032,506 and 3,022,307 issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 10,032 3,022
Additional paid-in capital................................ 47,885,409 2,361,716
Subscribed stock.......................................... -- 453,000
Deferred compensation..................................... (509,059) (64,414)
Accumulated deficit....................................... (24,105,677) (3,247,821)
------------ -----------
Total stockholders' equity (deficit).............. 23,280,705 (494,497)
------------ -----------
Total liabilities and stockholders' equity
(deficit)....................................... $ 29,852,063 $ 1,338,090
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE> 31
BIGSTAR ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 2, 1998
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ----------------------
<S> <C> <C>
Net Sales................................................. $ 13,352,201 $ 789,107
Cost of Sales............................................. 10,223,426 714,443
------------ -----------
Gross profit.................................... 3,128,775 74,664
------------ -----------
Operating Expenses:
Sales and marketing..................................... 15,593,111 1,467,075
Web site and software development....................... 4,968,840 970,594
General and administrative.............................. 3,955,007 891,970
------------ -----------
Total operating expenses........................ 24,516,958 3,329,639
------------ -----------
Loss from operations............................ (21,388,183) (3,254,975)
Investment Income......................................... 530,327 7,154
------------ -----------
Net loss........................................ $(20,857,856) $(3,247,821)
============ ===========
Per Share Information:
Net loss per share -- Basic and diluted.............. $ (3.18) $ (1.25)
============ ===========
Weighted average common shares outstanding -- Basic
and diluted........................................ 6,567,504 2,602,784
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE> 32
BIGSTAR ENTERTAINMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM MARCH 2, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN SUBSCRIBED DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK COMPENSATION DEFICIT EQUITY (DEFICIT)
---------- ------- ----------- ---------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 2, 1998
(inception)............... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
to founders............. 1,940,000 1,940 8,060 -- -- -- 10,000
Issuance of common stock
for services............ 19,400 19 81 -- -- -- 100
Issuance of common stock
and warrants, net of
$23,000 of issuance
costs................... 939,717 940 1,947,268 -- -- -- 1,948,208
Subscribed stock.......... -- -- -- 453,000 -- -- 453,000
Issuance of stock options
for services............ -- -- 117,000 -- -- -- 117,000
Issuance of warrants for
services................ -- -- 54,300 -- -- -- 54,300
Issuance of warrants to
director for consulting
services................ -- -- 6,150 -- -- -- 6,150
Employee stock option
compensation............ -- -- 14,706 -- -- -- 14,706
Deferred employee stock
option compensation..... -- -- 64,414 -- (64,414) -- --
Exercise of warrants...... 123,190 123 149,737 -- -- -- 149,860
Net loss.................. -- -- -- -- -- (3,247,821) (3,247,821)
---------- ------- ----------- --------- --------- ------------ ------------
Balance, December 31,
1998...................... 3,022,307 3,022 2,361,716 453,000 (64,414) (3,247,821) (494,497)
Issuance of common stock
and warrants, net of
$664,045 of issuance
costs................... 4,378,153 4,378 21,803,751 -- -- -- 21,808,129
Issuance of common stock
upon exercise of
warrants................ 132,046 132 143,534 -- -- -- 143,666
Issuance of stock options
and warrants............ -- -- 968,827 -- -- -- 968,827
Issuance of subscribed
stock................... -- -- -- (453,000) -- -- (453,000)
Initial public offering,
net of $2,991,082 of
issuance costs.......... 2,500,000 2,500 22,006,418 -- -- -- 22,008,918
Deferred stock option and
warrants costs.......... -- -- 601,163 -- (601,163) -- --
Amortization of deferred
stock option
compensation............ -- -- -- -- 156,518 -- 156,518
Net loss.................. -- -- -- -- -- (20,857,856) (20,857,856)
---------- ------- ----------- --------- --------- ------------ ------------
Balance, December 31,
1999...................... 10,032,506 $10,032 $47,885,409 $ -- $(509,059) $(24,105,677) $ 23,280,705
========== ======= =========== ========= ========= ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE> 33
BIGSTAR ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR MARCH 2, 1998
ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(20,857,856) $(3,247,821)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 387,316 30,208
Allowance for doubtful accounts........................ 15,000 5,000
Noncash common stock option and warrant expenses....... 324,199 192,156
Amortization of investment discount.................... (54,412) --
Changes in assets and liabilities --
Cash held in escrow.................................... 453,000 (453,000)
Accounts receivable.................................... (1,083,333) (66,121)
Prepaid expenses and other current assets.............. (866,133) (8,711)
Other assets and noncurrent assets..................... (468,459) --
Accounts payable, accrued expenses and accrued payroll
costs................................................ 4,738,771 1,820,587
------------ -----------
Net cash used in operating activities............. (17,411,907) (1,727,702)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (2,188,291) (470,342)
Purchase of investments................................... (6,847,822) --
------------ -----------
Net cash used in investing activities............. (9,036,113) (470,342)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 43,960,713 2,108,168
Proceeds from private placement pending closing........... (453,000) 453,000
------------ -----------
Net cash provided by financing activities......... 43,507,713 2,561,168
------------ -----------
Net increase in cash and cash equivalents......... 17,059,693 363,124
Cash and Cash Equivalents, beginning of year................ 363,124 --
------------ -----------
Cash and Cash Equivalents, end of year...................... $ 17,422,817 $ 363,124
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING ACTIVITIES:
Warrants issued for future services......................... $ 801,146 $ --
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 34
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
BigStar Entertainment, Inc. (the "Company") is an online direct marketer of
filmed entertainment products. The Company operates bigstar.com, a leading
Shop-A-Tainment(TM) destination site based upon internal analysis of traffic,
sales and other metrics. The Company offers 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 more repeat visits to the
Company's web site, higher page views, 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 its proprietary, internally-developed, direct
marketing software.
The Company operates in the online retail industry which is new, rapidly
evolving and intensely competitive. The Company competes primarily with
traditional retail outlets and other entities that maintain similar commercial
web sites.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased. Included in the
balance at December 31, 1999 is a certificate of deposit for $180,600 securing a
letter of credit issued in connection with the Company's facility lease (Note
8).
Cash Held in Escrow
At December 31, 1998, $453,000 represented cash held in escrow for shares
of the Company's common stock which were issued in January 1999.
Investments
All investments with a maturity greater than three months are accounted for
under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company determines the appropriate classification at the time of purchase. At
December 31, 1999, all investments were classified as held-to-maturity based on
management's intent and ability to hold the investments until maturity. The
carrying amounts and estimated fair values of the Company's investments at
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1999
------------------------
CARRYING FAIR MARKET
AMOUNT VALUE
---------- -----------
<S> <C> <C>
Commercial Paper............................................ $3,905,381 $3,883,416
Auction Rate Securities..................................... 2,000,000 2,000,000
Certificate of Deposit...................................... 996,853 994,510
---------- ----------
Total.................................................. $6,902,234 $6,877,926
========== ==========
</TABLE>
Fair values of short-term investments are based upon quoted market prices
and approximate their carrying value due to their short-term maturities. All of
the Company's investments have a maturity of less than one year from the date of
purchase. No charge has been recorded in the accompanying statements of
operations for the unrealized loss of $24,308.
F-7
<PAGE> 35
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts in the prior period's financial statements have been
reclassified for comparative purposes to conform to the current period
presentation.
Revenue Recognition
Revenue consists of sales of filmed entertainment in popular formats,
primarily videos, and DVDs, over the Company's web site and online advertising
and promotional revenues. The Company recognizes revenue from its web site when
the products are shipped to customers and when advertisements and promotional
items are served. Outbound shipping and handling charges are also included in
net sales. Revenues also include sales to customers who used $2,693,793 of
coupons for discounts on their purchases of filmed entertainment products. The
corresponding cost of these coupons is included in sales and marketing expenses
in the accompanying statements of operations. Revenue from gift certificates is
recognized upon product shipment following redemption. Provision is made for the
estimated effect of sales returns where right-of-return privileges exist.
Returns of product from customers are accepted in accordance with standard
industry practice. The Company provides an allowance for sales returns based on
historical return experience.
For the year ended December 31, 1999, net sales included barter revenues of
6.9%. The Company places an advertisement 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 cash transactions, and the number of
impressions delivered. Revenues are recognized ratably over the term of the
contract. No barter revenues were recorded for the period from March 2, 1998
(date of inception) to December 31, 1998. Barter expenses, which approximate
barter revenues, are recorded in sales and marketing expenses in the
accompanying statements of operations
Cost of Sales
Cost of sales includes the cost of the filmed entertainment product, as
well as shipping and handling costs.
Dependence on Supplier
The Company's primary provider of filmed entertainment and related order
fulfillment services is Baker & Taylor, Inc. ("B&T") from whom the Company
obtained substantially all of its inventory in 1999 and 1998. Although the
Company has agreements with several order fulfillment providers, it has no
fulfillment operation or warehouse facility of its own and, accordingly, is
dependent on maintaining its existing fulfillment relationships. There can be no
assurance that the Company will maintain its relationship with B&T beyond the
term of its existing strategic marketing agreement. Further, should the
Company's relationship with B&T terminate unexpectedly, or should its
relationships terminate with other providers of filmed entertainment products
and related fulfillment services, it may not be able to find an alternative,
comparable vendor capable of providing fulfillment services on satisfactory
terms to the Company and, therefore, there may be an adverse effect on the
Company's results of operations.
On May 3, 1999, the Company entered into a Strategic Marketing Agreement
("Supplier Agreement") with B&T. The Supplier Agreement expires in December
2000, but has an automatic renewal option for
F-8
<PAGE> 36
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
24 months unless canceled in writing by either party with ninety days notice
prior to the end of the preceding term, and includes specific credit terms as
defined in the agreement. In connection with this Supplier Agreement, the
Company issued warrants to B&T to purchase 29,100 shares of the Company's common
stock at a price of $8.25 per share, exercisable at any time over the next three
years. The warrants were valued at $30,000, using the Black-Scholes option
pricing model, which is being amortized over the life of the Supplier Agreement.
Web Site and Software Development
Web site and software development expenses consist primarily of payroll and
related expenses for web site development, systems and telecommunications
operations personnel and consultants, systems and telecommunications
infrastructure related to the web sites. For the year ended December 31, 1998,
all web site and software development costs have been expensed as incurred. In
January 1999, the Company adopted Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" ("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 or obtained for internal use and then subsequently sold to
the public. It also provides guidance on capitalization of the costs incurred
for computer software developed or obtained for internal use.
For the year ended December 31, 1999, the Company capitalized certain
external direct costs related to increased functionality of it's web site, which
are being amortized on a straight-line basis over the related useful life of two
years (Note 3). All costs incurred for upgrades, maintenance, and enhancements,
which did not result in additional functionality, were expensed.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of those assets. Computer equipment, office equipment and furniture are
depreciated over estimated useful lives of three years. Leasehold improvements
and equipment held under capital lease are amortized utilizing the straight-line
method over the lesser of the estimated useful life of the asset or the term of
the lease.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets under the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." This statement establishes financial accounting and
reporting standards for the impairment of long-lived assets and for long-lived
assets to be disposed of. An impairment loss is measured as the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Management
has performed a review of all long-lived assets and has determined that no
impairment of the respective carrying values has occurred as of December 31,
1999.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
results of operations in the period that includes the enactment date. Because of
the uncertainty regarding the Company's future profitability, the future tax
F-9
<PAGE> 37
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
benefits of its losses have been fully reserved for. Therefore, no benefit for
the net operating loss has been recorded in the accompanying financial
statements.
Advertising Expense
Advertising and promotional costs are expensed as incurred. Advertising
expenses include the costs of online, as well as traditional media. Promotional
expenses include the product costs of promotional items and the value of coupons
utilized for purchases. The Company records the charge for promotional expenses
upon shipment to the customer, based upon the cost charged to the Company by its
supplier for promotional items, or the estimated value of coupons distributed
that are expected to be redeemed. The total expense related to redeemed and
expected to be redeemed coupons amounted to $2,693,793 for the year ended
December 31, 1999. There were no expenses related to coupons for the period from
March 2, 1998 (date of inception) to December 31, 1998. Accrued expenses include
the estimated value of coupons distributed prior to December 31, 1999 that are
expected to be redeemed in the year ended December 31, 2000. Shipping charges on
the promotional filmed entertainment products are included in cost of sales, and
the related customer billings are included in revenues. These promotional items
are primarily videos distributed to customers who agree to receive notification
of future promotions. Advertising expenses were approximately $9,599,754 and
$959,000 for the year ended December 31, 1999, and for the period from March 2,
1998 (date of inception) to December 31, 1998, respectively. Promotional costs
were $1,673,204 and $255,000 for the year ended December 31, 1999 and for the
period from March 2, 1998 (date of inception) to December 31, 1998,
respectively.
Stock-Based Compensation
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock options as if the fair value based method of accounting in SFAS
No. 123 had been applied to these transactions.
The Company accounts for nonemployee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
Basic and Diluted Net Loss Per Common Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." In accordance with SFAS No.
128, 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
antidilutive. Diluted loss per share for the year ended December 31, 1999 and
the period from March 2, 1998 (date of inception) to December 31, 1998, does not
include the impact of 2,837,231 and 951,434 common stock options and warrants
then outstanding, respectively, as the effect of their inclusion would be
antidilutive.
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
F-10
<PAGE> 38
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
Company's financial statements. Accordingly, the Company's comprehensive net
loss is equal to its net loss for the year ended December 31, 1999 and the
period from March 2, 1998 (date of inception) to December 31, 1998.
New Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133. The
Statement defers for one year the effective date of SFAS No. 133, Accounting for
Derivative instruments and Hedging Activities, which was issued in June 1998 and
established accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 will now apply to all fiscal
quarters of all fiscal years beginning after June 15, 2000. Management believes
that the implementation of SFAS No. 133 during the third quarter of year 2000
will not have a material impact on the Company's results of operations.
In January 2000, the Emerging Issue Task Force of the Financial Accounting
Standards Board reached a consensus on EITF Issue 99-17, "Accounting for
Advertising Barter Transactions," 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 as a cash transaction.
2. BUSINESS AND CREDIT CONCENTRATIONS
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash, accounts receivable, accounts payable
and accrued liabilities. The carrying amounts of these instruments approximate
fair value.
The Company maintains cash with domestic financial institutions and invests
in investment grade securities. The Company performs periodic evaluations of the
relative credit standing of the institutions. From time to time, the Company's
cash balances with the financial institutions may exceed Federal Deposit
Insurance Corporation insurance limits.
The Company's customers are primarily concentrated in the United States.
The Company performs credit card authorizations before products are shipped to
reduce the risk of fraudulent credit card use.
At December 31, 1999 and 1998, the Company had gross receivable balances
consisting of $713,528 relating to advertising sales and $435,926 of trade
receivables.
No individual customer accounted for greater than 10% of revenues for the
year ended December 31, 1999 and the period from March 2, 1998 (date of
inception) to December 31, 1998. In addition, no individual customer accounted
for greater than 10% of gross accounts receivable at December 31, 1999 and 1998.
F-11
<PAGE> 39
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1999 1998
---------- --------
<S> <C> <C>
Computer equipment.......................................... $1,937,949 $449,548
Website development costs................................... 564,805 --
Office equipment and furniture.............................. 142,521 32,794
Leasehold improvements...................................... 25,358 --
---------- --------
2,670,633 482,342
Less -- Accumulated depreciation and amortization........... 417,524 30,208
---------- --------
$2,253,109 $452,134
========== ========
</TABLE>
Depreciation expense for the year ended December 31, 1999 and the period
March 2, 1998 (date of inception) to December 31, 1998 was $387,316 and $30,208,
respectively.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1999 1998
---------- --------
<S> <C> <C>
Advertising and promotional costs........................... $1,432,340 $364,586
Professional and consulting fees............................ 226,269 78,025
Accrued purchased equipment................................. -- 141,794
Other....................................................... 487,943 174,854
---------- --------
$2,146,552 $759,259
========== ========
</TABLE>
Accrued advertising costs represent the cost of online and traditional
media services provided to the Company prior to year end for which the Company
was billed subsequent to year end and promotional costs representing the
estimated value of coupons distributed prior to year end that are expected to be
redeemed during the year ended December 31, 2000.
5. INCOME TAXES
No provision for U.S. federal or state income taxes has been recorded for
the year ended December 31, 1999 and for the period from March 2, 1998 (date of
inception) to December 31, 1998 as the Company has incurred operating losses.
F-12
<PAGE> 40
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets, net:
Net operating loss carryforwards........................ $ 8,195,930 $ 1,104,259
Allowance for sales returns and bad debt................ 15,300 10,200
Deferred compensation................................... 44,141 5,000
Less -- Valuation allowance............................. (8,255,371) (1,119,459)
----------- -----------
Deferred tax assets, net........................ $ -- $ --
=========== ===========
</TABLE>
Realization of deferred tax assets is dependent upon available future
earnings. The Company has recorded a full valuation allowance against its
deferred tax assets since management believes that it is more likely than not
that these assets will not be realized. No income tax benefit has been recorded
for any of the presented periods, as a result of the aforementioned valuation
allowance.
As of December 31, 1999 and 1998, the Company had net operating loss
carryforwards ("NOLs") for federal income tax purposes of $24,105,677 and
$3,247,821, respectively. There can be no assurance that the Company will
realize the benefit of the NOLs. The federal NOLs are available to offset future
taxable income and expire in 2019 if not utilized. Under Section 382 of the
Internal Revenue Code, these NOLs may be limited due to ownership changes.
6. STOCKHOLDERS' EQUITY (DEFICIT)
Issuance of Capital Stock
Upon incorporation in March 1998, the Company issued 1,940,000 shares of
its common stock to its founders at $0.0052 per share. In addition, 19,400
shares of common stock were issued for legal services rendered in connection
with the incorporation of the Company. The Company valued the 19,400 shares
issued at a price of $0.0052 per share, which management deemed to be the fair
value of the common stock on the date of issuance. As such, the Company recorded
a charge to operations of $100, based upon the Company's determination of the
fair value of the shares issued, which was more readily measurable than the
value of the services performed.
From March through May 1998, the Company entered into Stock Purchase
Agreements with several investors pursuant to which the Company sold 472,677
shares of its common stock at $1.22 per share, of which 196,910 shares were sold
to a principal stockholder of the Company, for net proceeds of $575,008. The
Company also issued a warrant to the principal stockholder to purchase 123,190
shares of common stock at a price per share of $1.22. The Company allocated the
net proceeds from the sale of the common stock to the common stock and to the
warrant. The Company determined the fair value of the warrant issued under the
Black-Scholes option pricing model to be approximately $8,077. The warrant was
exercised in full during 1998.
From July through October 1998, the Company entered into Stock Purchase
Agreements with several investors pursuant to which the Company sold 467,040
shares of its common stock at $2.99 per share for net proceeds of $1,373,200. In
addition, warrants to purchase 45,745 shares of the Company's common stock at
$2.99 per share, exercisable at any time through December 31, 2002, were issued
for investment advisory services. The Company determined the fair value of the
warrants issued under the Black-Scholes option pricing model to be approximately
$12,183.
F-13
<PAGE> 41
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
In January and February 1999, the Company sold 1,554,806 shares of its
common stock at $3.73 per share for total proceeds of $5,345,404, net of
issuance costs of $465,086. In addition, warrants to purchase 141,651 shares of
the Company's common stock at $3.73 per share were issued to placement agents as
part of these transactions, of which 61,300 of the warrants were granted to
First Security Van Kasper, of which one of the Company's directors is the
managing director. The warrants are exercisable at any time prior to February
18, 2003. The Company allocated the net proceeds from the sale of the common
stock to the common stock and to the warrants. The Company determined the fair
value of the warrants issued under the Black-Scholes option pricing model to be
approximately $93,956.
During April 1999, the Company sold 802,758 shares of common stock to
Storie Partners, of which one of the Company's directors is the managing
director, at a price of $3.73 per share for proceeds of $2,844,904, net of
issuance costs of $155,100. The Company also issued a warrant to purchase
116,400 shares of the Company's common stock at $5.15 per share, exercisable at
any time prior to April 1, 2003. As such, the Company determined the fair market
value of the warrants to be immaterial under the Black-Scholes option pricing
model as the warrants were issued at an exercise price that was above the then
fair market value of the Company's common stock. In connection with the sale of
the common stock, warrants to purchase 69,840 shares of the Company's common
stock at $6.45 per share were distributed to the placement agent, First Security
Van Kasper. The Company allocated the net proceeds from the sale of the common
stock to the common stock and to the warrants. The Company determined the fair
value of the warrants issued under the Black-Scholes option pricing model to be
approximately $24,322.
In addition, during April 1999, the Company sold an additional 592,018
shares of common stock at a price of $6.19 per share for total proceeds of
$3,661,680.
Included in the offering expenses for the equity financings in February and
April 1999 is $310,360 in fees paid to First Security Van Kasper. These fees
have been recorded as an offset to the equity proceeds.
On December 13, 1999 the Company sold 1,428,571 shares of common stock at a
price of $7.00 per share to ValueVision International, Inc. ("ValueVision"). The
equity investment resulted in net proceeds to the Company of $9,956,141, net of
issuance costs of $43,859. Concurrent with the equity investment, the Company
and ValueVision entered into a strategic alliance whereby the Company and
ValueVision have agreed to jointly produce a weekly television show that will
feature entertainment news and offer the Company's filmed entertainment products
for sale (Note 8).
Initial Public Offering
On August 2, 1999, the Company completed an initial public offering of
common stock. A total of 2,500,000 shares were sold at a price of $10.00 per
share. The offering resulted in net proceeds to the Company of $22,008,918, net
of underwriting discounts and offering expenses.
Concurrent with its initial public offering, the Company canceled warrants
to purchase 61,300 and 69,840 shares of the Company's common stock issued to
First Security Van Kasper on February 18, 1999 and April 20, 1999, respectively,
and a warrant to purchase 48,500 shares of the Company's common stock issued to
a director of the Company, who is also a Managing Director of First Security Van
Kasper, on January 1, 1999. Concurrently, the Company issued new warrants to
First Security Van Kasper and the Managing Director, to purchase 160,000 and
80,000 shares of common stock, respectively, exercisable at a price of $10.00
per share, fully vested and exercisable from the date of grant to August 2,
2004. The Company determined the fair value of the warrants issued under the
Black-Scholes option pricing model to be approximately $525,000 and allocated a
portion of the net proceeds from the offering to the warrants.
F-14
<PAGE> 42
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
Registration Rights Agreements
From January through April 1999, the Company entered into registration
rights agreements with private placement investors. In addition, in January
1999, the Company entered into registration rights agreements with David
Friedensohn and David Levitsky. These registration rights agreements entitle
these persons to piggyback registration rights in connection with any
registration by the Company of its securities. These persons are also entitled
to demand registration rights enabling these persons to have their shares
registered if holders of at least 25% of the then outstanding registrable shares
demand that the Company file a registration statement under the Securities Act.
Stock Split and Reverse Stock Split
On May 3, 1999, the Company enacted a four-for-one stock split of its
common stock. On July 6, 1999, the Board of Directors approved a .485-for-one
reverse stock split of the Company's common stock effective July 28, 1999.
Accordingly, all share and per share information in the accompanying financial
statements has been retroactively restated to reflect the effects of the stock
split and the reverse split.
Warrants
During 1998, in connection with certain stock purchase agreements, the
Company issued an aggregate of 193,612 warrants (of which 123,190 were issued to
a principal stockholder, as described above), each to purchase one share of
common stock at an exercise price of $1.22. The Company allocated the net
proceeds from the sale of the common stock to the common stock and to the
warrants. The Company determined the fair value of the warrants issued under the
Black-Scholes Option Pricing Model to be approximately $12,677 ($8,077 allocated
to the warrant issued to the principal stockholder).
During April 1998, a director of the Company provided investment and
business consulting services to the Company and received a warrant to purchase
48,500 shares of common stock at a price per share of $1.22, exercisable at any
time prior to January 31, 2000. The Company determined the fair market value of
the warrant issued under the Black-Scholes Option Pricing Model to be
approximately $6,150. As such, the Company recorded a charge to consulting
expense of $6,150 for the year ended December 31, 1998.
During the period from March 2, 1998 (date of inception) to December 31,
1998 warrants to purchase 123,190 shares of common stock were exercised for net
proceeds of $149,860.
In January 1999, the Company issued a warrant to a director, for investment
advisory services, to purchase 48,500 shares of common stock, exercisable at
$3.73 per share, fully vested and exercisable at any time prior to January 1,
2002. The Company determined the fair value of the warrants issued under the
Black-Scholes option pricing model to be approximately $23,119. The services
were performed in connection with a private placement of the Company's common
stock. The Company allocated the net proceeds from the sale of the common stock
in the private placement to the common stock and to the warrants issued.
On April 20, 1999, the Company issued a warrant to a director of the
Company to purchase 24,250 shares of common stock at a price per share of $4.12,
exercisable at any time prior to April 20, 2003. The Company determined the fair
value of the warrant issued under the Black-Scholes option pricing model to be
immaterial.
During the year ended December 31, 1999, warrants to purchase 70,422 shares
of common stock were exercised for net proceeds of $143,666. Additionally, in
December 1999, 84,545 warrants were converted into 61,624 shares of common
stock. In accordance with the warrant agreement, the warrant holder had the
right to initiate a cashless exercise to convert the warrants into shares of
common stock in lieu of exchanging cash. The number of shares received was
determined by dividing the aggregate fair market value of the shares minus the
aggregate exercise price of the warrants by the fair market value of one share.
F-15
<PAGE> 43
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
In November 1999, the Company entered into a strategic marketing agreement
with the Belamo Corporation ("Belamo"), the owner of the flirt.com website.
Under the agreement, BigStar issued warrants to Belamo to purchase 175,000
shares of the Company's common stock at $7.94, vesting monthly from January 1,
2000 through December 31, 2001. The value of the warrants, as determined under
the Black-Scholes option pricing model, was $576,174 and is included in prepaid
expenses and other current assets in the accompanying balance sheet at December
31, 1999. The Company received warrants to purchase 599,700 common shares of
Belamo at $1.67 per share vesting monthly from January 1, 2000 through December
31, 2001. The Company valued these warrants at $600,000 but due to the
uncertainty regarding the realizability of these warrants, the Company has
recorded a valuation reserve for the asset and corresponding deferred revenue
and will not recognize any income from the vesting of the warrants until such
time as it is realized.
During both the year-ended December 31, 1999, and the period from March 2,
1998 (date of inception) to December 31, 1998, the Company issued additional
warrants to purchase 300,700 and 203,700 shares of common stock, respectively,
for marketing, web site design and other professional services. In connection
with the issuance of these warrants, the Company recorded consulting expenses
totaling $39,265 and $54,300 for the year ended December 31, 1999 and the period
from March 2, 1998 (date of inception) to December 31, 1998, respectively. The
value of these warrants, as determined under the Black-Scholes pricing model,
was $264,237 and $54,300, respectively, for the year-ended December 31, 1999 and
the period from March 2, 1998 (date of inception) to December 31, 1998.
The following is a summary of all warrants granted for the year ended
December 31, 1999 and the period from March 2, 1998 (date of inception) to
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WARRANTS GRANTED EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at March 2, 1998......................... -- $ --
Granted............................................ 491,557 2.19
Exercised.......................................... (123,190) (1.22)
Canceled........................................... -- --
--------- ------
Outstanding at December 31, 1998..................... 368,367 2.52
Granted............................................ 1,116,341 7.10
Exercised.......................................... (132,046) (1.46)
Canceled........................................... (202,561) (4.78)
--------- ------
Outstanding at December 31, 1999..................... 1,150,101 $ 6.68
========= ======
</TABLE>
As of December 31, 1999 and 1998, the following number of warrants to
purchase common stock remain outstanding:
<TABLE>
<CAPTION>
EXERCISE PRICE 1999 1998
- -------------- --------- -------
<S> <C> <C>
$1.22....................................................... 48,500 138,322
$2.99....................................................... 67,900 133,045
$3.00 -- $5.99.............................................. 458,651 97,000
$6.00 -- $9.99.............................................. 301,100 --
$10.00 -- $22.00............................................ 273,950 --
--------- -------
1,150,101 368,367
========= =======
</TABLE>
7. STOCK OPTION PLANS
In 1998, the Company adopted the 1998 Stock Option and Incentive Plan
("1998 Plan") pursuant to which an aggregate of 485,000 shares of common stock
were reserved for issuance to directors, officers, employees and consultants of
the Company. The 1998 Plan provides for awards of both nonqualified stock
F-16
<PAGE> 44
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
options and incentive stock options within the meaning of Section 422A of the
Internal Revenue Code, stock appreciation rights, restricted stock subject to
forfeiture and restrictions on transfer, and performance awards entitling the
recipient to receive cash or common stock in the future following the attainment
of performance goals determined by the Board of Directors.
The 1998 Plan is administered by the Board of Directors, which has the sole
discretion to select the employees, officers and consultants to whom awards are
made, to determine the nature and amounts of such awards and to interpret,
construe and implement the 1998 Plan. As of December 31, 1999 and 1998, options
to purchase 470,708 and 481,217 shares, respectively, of the Company's common
stock have been granted and remain outstanding under the 1998 Plan.
In October 1998, the Company adopted the 1999 Stock Option and Incentive
Plan ("1999 Plan") pursuant to which an aggregate of 291,000 shares of common
stock were reserved for issuance to directors, officers, employees and
consultants of the Company. This number of shares was increased to 970,000
shares in March 1999 and increased to 1,455,000 shares in June 1999. The 1999
Plan provides for awards of both nonqualified stock options and incentive stock
options within the meaning of Section 422A of the Internal Revenue Code, stock
appreciation rights, restricted stock subject to forfeiture and restrictions on
transfer, and performance awards entitling the recipient to receive cash or
common stock in the future following the attainment of performance goals
determined by the Board of Directors. The 1999 Plan is administered by the Board
of Directors, which has the sole discretion to select the employees, officers
and consultants to whom awards are made, to determine the nature and amounts of
such awards and to interpret, construe and implement the 1999 Plan. Incentive
options granted to stockholders who own more than 10% of the outstanding stock
of the Company must be issued at 110% of the fair market value of the stock on
the date that the options are granted. As of December 31, 1999 and 1998, options
to purchase 1,216,422 and 101,850, respectively, of the Company's common stock
have been granted and remain outstanding under the 1999 Plan.
Had compensation under the 1999 and 1998 Stock Option Plans been determined
consistent with the provisions of SFAS No. 123, the effect on the Company's net
loss and basic and diluted loss per share would have been changed to the
following pro forma amounts for the year-ended December 31, 1999 and the period
from March 2, 1998 (date of inception) to December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Net loss, as reported.................................... $(20,857,856) $(3,247,821)
Net loss, pro forma...................................... (21,083,084) (3,280,574)
Basic and diluted loss per share, as reported............ $ (3.18) $ (1.25)
Basic and diluted loss per share, pro forma.............. (3.21) (1.26)
</TABLE>
Stock option activity under the 1999 and 1998 Plans during the periods
indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
GRANTED EXERCISE PRICE
------------ --------------
<S> <C> <C>
Options outstanding at March 2, 1998..................... -- $ --
Granted................................................ 583,067 1.56
Canceled............................................... -- --
------------ -----------
Outstanding at December 31, 1998......................... 583,067 1.56
Granted................................................ 1,233,519 4.82
Canceled............................................... (129,456) (4.11)
------------ -----------
Outstanding at December 31, 1999......................... 1,687,130 $ 3.75
============ ===========
Exercisable at December 31, 1999......................... 729,111 $ 2.45
============ ===========
</TABLE>
F-17
<PAGE> 45
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
The fair market value of each option grant has been estimated on the date
of grant using the Black-Scholes option pricing model based upon expected option
lives of four to five years; risk-free interest rate of between 4.25% and 6.1%;
expected volatility of 85% and a dividend yield of 0%.
The weighted average remaining life of the options outstanding at December
31, 1999 and December 31, 1998 is 8.9 and 5.7 years, respectively. The weighted
average fair value of options granted is $1.84 and $1.67, respectively, at
December 31, 1999 and 1998.
For the period from March 2, 1998 (date of inception) to December 31, 1998,
the Company recorded deferred compensation and compensation expense of $64,414
and $14,706, respectively, in connection with the grant of 44,620 options to
employees. The Company calculated the deferred compensation as the difference
between the fair value of the common stock and the exercise price of the options
on the date of the grant and is recognizing the compensation expense over the
vesting period of the related options. In addition the Company recorded
consulting expense of $117,000 in connection with the grant of 225,080 options
to consultants for marketing, website design and technical services rendered.
For the year ended December 31, 1999, the Company recorded deferred
compensation and compensation expense of $408,965 and $74,617 respectively, in
connection with the grant of 122,705 options to employees representing the
difference between the fair value of the Company's common stock at the date of
grant and the exercise price of the related options. Additionally, $40,400 of
compensation expense was recognized relating to options granted to employees
during 1998.
During the year ended December 31, 1999, the Company recorded consulting
expense and deferred costs of $128,428 and $192,198, respectively, on the date
of the grant in connection with the grant of 162,969 options issued to
consultants for marketing, web site maintenance, and other services rendered.
The Company determined the fair value of the options issued under the
Black-Scholes option pricing model to be approximately $320,626. During 1999
$41,489 of these deferred costs were amortized as the expenses were incurred. As
such, the Company will amortize this amount over the vesting period as services
are rendered. Deferred compensation is presented as a reduction of stockholders'
deficit and amortized over the service period for which the options were
granted.
8. COMMITMENTS AND CONTINGENCIES
Effective February 1, 1999, the Company entered into a lease for its
facilities, which expires on September 30, 2002. Pursuant to the terms of the
lease, the Company entered into a standby Letter of Credit for $180,600 and
deposited funds of $180,600 in a certificate of deposit as collateral. In
addition, effective August 23, 1999, the Company amended the lease to assume
additional space for the duration of the original lease term. The Company's
Chief Executive Officer is a partial guarantor of this lease.
The Company maintains leases on certain equipment. Future minimum
obligations under noncancelable operating leases at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
For the year ending:
2000...................................................... $238,642
2001...................................................... 241,214
2002...................................................... 181,036
--------
$660,892
========
</TABLE>
Rent expense under its operating lease for the year ended December 31, 1999
and for the period from March 2, 1998 (date of inception) to December 31, 1998
was $219,156 and $8,000 respectively. On March 15, 1998, in lieu of cash payment
for rent, the Company issued warrants to the landlord to purchase 19,400 shares
of the Company's common stock at a price of $1.22 per share, exercisable at any
time prior to December 31,
F-18
<PAGE> 46
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
1999. The Company determined the fair value of the options issued under the
Black-Scholes Option Pricing Model to be approximately $8,000.
Strategic Marketing Agreements
The Company and ValueVision will co-produce the weekly "BigStar Show" to be
featured on the ValueVision network, soon to be renamed Snap TV. The Company has
certain minimum cash commitments to fund a fixed production cost for each show.
As part of the Company's agreement with Belamo, the Company entered into a
consulting contract, with Belamo's primary shareholder, which expires in June
2000 and is cancelable on 60 days notice. Such contract provides for options to
the consultant to purchase 25,000 shares of the Company's common stock at a
price of $7.94 per share and the option vest ratably from January 1, 2000 to
June 30, 2000. The Company determined the fair value of the options issued under
the Black Scholes option pricing model to be $82,310. The charges related to the
options are being charged to expense over the vesting period. The consulting
contract also includes certain cash payments to be paid over the term of the
agreement.
On January 29, 1999, the Company entered into a strategic advertising
partnership agreement with The New York Times Electronic Media Co. ("The Times")
for a term of one year, whereby the Company will purchase advertising media from
The Times to be run on The New York Times on the Web. Under the terms of the
agreement, the Company is obligated to pay approximately $300,000 in net fees
over the term of the agreement (of which $237,500 has been paid as of December
31, 1999), subject to the right of either party to terminate this agreement for
any reason. The Company is amortizing the payments ratably over the term of the
agreement as the Company receives advertising ratably over the term. The
remaining amounts under the contract have been paid by the Company subsequent to
year end.
On April 1, 1999, the Company entered into a strategic marketing agreement
with Icon International, Inc. ("Icon") for a term of one year, whereby the
Company may purchase advertising media and marketing consulting services from
Icon. During 1999, the Company paid $351,042 under the agreement with the
related charges reflected in sales and marketing expenses as the advertising
media was delivered and the advertising services were received. In addition, the
Company issued warrants to Icon to purchase 121,250 shares of common stock at a
price per share of $5.15, exercisable at any time before March 31, 2001. The
Company determined the fair value of the warrants issued under the Black-Scholes
option pricing model to be immaterial based on the fair market of the Company's
common stock of $3.73. The Company is expensing the cash payments as advertising
services are received.
On May 5, 1999, the Company entered into a strategic marketing agreement
with EarthLink Network ("EarthLink"), an Internet service provider. Under the
agreement, which runs through May 5, 2001, the Company is the exclusive online
provider of filmed entertainment products on EarthLink's web site. The agreement
calls for the establishment of a link to a co-branded home page from EarthLink's
home page, the inclusion of a co-branded movie store exclusively for EarthLink's
members, the placement of BigStar advertisements on EarthLink's home page and
other placements on the EarthLink web site. Under the agreement, the Company is
obligated to pay EarthLink a total of approximately $1.1 million over the
initial two years of the agreement of which $112,500 has been paid as of
December 31, 1999. The Company will amortize the payments as customers are
received. The Company has agreed to make additional payments under the agreement
to EarthLink based on a percentage of gross receipts generated under the
agreement and performance benchmarks. In addition, the Company issued warrants
to EarthLink to purchase 33,950 shares of common stock at a price per share of
$20.62, which vest over time through January 31, 2001. The Company has the right
to terminate this agreement upon 30 days' written notice in the event specific
customer goals are not met. The Company determined the fair value of the
warrants issued under the Black-Scholes option
F-19
<PAGE> 47
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
pricing model to be immaterial based upon an expected life of two years, a
risk-free interest rate of 5.00%, expected volatility of 0%, a dividend yield of
0% and a fair market of the Company's common stock of $8.50.
In December 1999, the Company extended the Icon agreement, under which it
issued additional warrants to purchase 97,000 shares of common stock at a price
of $6.56 per share, exercisable at any time prior to December 7, 2001. The
Company valued the warrants issued at $224,972 using the Black-Scholes option
pricing model. In addition, the Company has committed to spend an additional
$500,000 to purchase advertising media during the year-ended December 31, 2000.
Payments to be made under all of the Company's marketing agreements, which
are generally cancelable with 60 days' notice, are determined based upon either
fixed monthly payments, a per "click-through" basis or as a percentage of net
revenues, as defined in the related agreements. As of December 31, 1999, the
Company had committed to approximately $1,304,626 in minimum payments under
these agreements, which includes the agreements described above.
Employment Agreement
On March 15, 1999, the Company entered into an employment agreement with
its Chairman and Chief Executive Officer. The agreement obligates the Company to
pay an annual salary of $160,000 in 1999, $200,000 in 2000 and $250,000 in 2001.
The Company must pay a guaranteed bonus of $90,000 in 1999, $40,000 in 2000 and
$150,000 in 2001. In addition, the Chairman and Chief Executive Officer was
granted options to purchase 194,000 shares of common stock at an exercise price
of $4.12 per share pursuant to the 1999 Plan. In management's opinion, these
options were granted with an exercise price at or above the fair market value of
the Company's common stock at the date of grant and, therefore, no compensation
expense was incurred by the Company. The shares vest in equal installments over
48 months and are exercisable until the earlier of five years or 90 days from
the Chairman and Chief Executive Officer's termination of employment with the
Company.
Legal Proceedings
From time to time, the Company may be involved in various legal proceedings
and other matters arising in the normal course of business. The Company
currently has no material outstanding legal proceedings.
9. BENEFIT PLANS
401(k) Plan
In November 1999, the Company established a savings plan under Section
401(k) of the Internal Revenue Code. This savings plan allows eligible employees
to contribute up to 15 percent of their compensation on a pre-tax basis. There
were no discretionary Company contributions in 1999.
Employee Stock Purchase Plan
Effective August 2, 1999, the BigStar Entertainment, Inc. Employee Stock
Purchase Plan became effective. The plan is designed to allow eligible employees
of BigStar to purchase shares of common stock, at semiannual intervals, through
periodic payroll deductions. Employees who own 5% or more of the Company's
common stock are not eligible to participate. Eligible employees may contribute
from 1% to 15% of their gross earnings during a purchase period to purchase
shares equal to 85% of the lower of the fair market value of the common stock on
the first day of the offering period or the fair market value on the purchase
date. The Company has reserved 300,000 shares of issuance under the plan. As of
December 31, 1999 no shares have been issued.
F-20
<PAGE> 48
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
10. SUBSEQUENT EVENT
In January 2000, the Company incorporated BigStar Direct, Inc., the purpose
of which is to own and license the assets related to the Company's BigStar
Direct Email technology. As of February 4, 2000, the Company has not transferred
any assets to BigStar Direct, Inc. and has received minimal third party
investments in the subsidiary.
F-21
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTS ON SCHEDULE II
To BigStar Entertainment, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of BigStar Entertainment, Inc. included in this Form
10-K and have issued our report thereon dated February 4, 2000. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. This schedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
New York, New York
February 4, 2000
S-1
<PAGE> 50
SCHEDULE II
BIGSTAR ENTERTAINMENT, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
For the period from March 2, 1998
(date of inception) to December 31,
1998 --
Allowance for sales returns........ $ -- $25,000 $ -- $ -- $25,000
======= ======= ======= ======= =======
Allowance for bad debt............. $ -- $ 5,000 $ -- $ -- $ 5,000
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1999 --
Allowance for sales returns........ $25,000 $35,000 $ -- $ -- $60,000
======= ======= ======= ======= =======
Allowance for bad debt............. $ 5,000 $15,000 $ -- $ -- $20,000
======= ======= ======= ======= =======
</TABLE>
S-2
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
- ------- --------------------------------
<C> <S>
3.1 Certificate of Incorporation.*
3.2 Certificate of Amendment to Certificate of Incorporation.*
3.3 Certificate of Amendment to Certificate of Incorporation.*
3.4 Form of BigStar's Common Stock Certificate.*
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, 1998 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.*
21.1 Subsidiaries.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to BigStar's registration statement on Form S-1,
Registration No. 333-77963.
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF BIGSTAR ENTERTAINMENT, INC.
NAME JURISDICTION OF INCORPORATION
BigStar Direct, Inc. Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 4, 2000, included in this Form 10-K, into BigStar
Entertainment, Inc.'s previously filed Registration Statement File No. 333-94637
filed on Form S-8.
ARTHUR ANDERSEN LLP
New York, New York
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,422,817
<SECURITIES> 6,902,234
<RECEIVABLES> 1,129,454
<ALLOWANCES> 20,000
<INVENTORY> 0
<CURRENT-ASSETS> 26,842,408
<PP&E> 2,253,109
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,852,063
<CURRENT-LIABILITIES> 6,571,358
<BONDS> 0
0
0
<COMMON> 10,032
<OTHER-SE> 23,270,673
<TOTAL-LIABILITY-AND-EQUITY> 29,852,063
<SALES> 11,493,081
<TOTAL-REVENUES> 13,352,201
<CGS> 10,223,426
<TOTAL-COSTS> 10,223,426
<OTHER-EXPENSES> 24,501,958
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> (530,327)
<INCOME-PRETAX> (20,857,856)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,857,856)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,857,856)
<EPS-BASIC> (3.18)
<EPS-DILUTED> (3.18)
</TABLE>
