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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 000-26793
BIGSTAR ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-399-5258
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(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
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19 FULTON STREET - 5TH FLOOR - NEW YORK, NEW YORK 10038
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 981-6300
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, $.001 par value, as of the latest practicable date:
10,158,278 shares of common stock as of May 10, 2000
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BIGSTAR ENTERTAINMENT, INC.
FORM 10-Q
FOR THE QUARTER ENDED March 31, 2000
INDEX
PART I.
FINANCIAL INFORMATION
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PAGE NO.
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ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 2000 (unaudited) and December 31, 1999 ..............2
Consolidated Statements of Operations for the three-month periods ended March 31, 2000
(unaudited) and March 31, 1999 (unaudited) ...................................................3
Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2000
(unaudited) and March 31, 1999 (unaudited) ...................................................4
Notes to Condensed Consolidated Financial Statements ........................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ................................................................................8
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PART II
OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS...................................................................15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ..........................................15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................................15
ITEM 5. OTHER INFORMATION ..................................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................................15
SIGNATURES ..................................................................................15
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BIGSTAR ENTERTAINMENT
CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2000 1999
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(unaudited)
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ASSETS:
Cash and cash equivalents $ 13,986,186 $ 17,422,817
Accounts receivable, net of allowance 1,249,787 1,129,454
Short-term investments 3,943,554 6,902,234
Prepaids and other current assets 1,463,362 1,387,903
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Total current assets 20,642,889 26,842,408
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Property and equipment, net 2,433,840 2,253,109
Other assets 752,146 756,546
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Total assets $ 23,828,875 $ 29,852,063
============ ============
LIABILITIES:
Accounts payable $ 4,184,507 $ 3,729,806
Accrued expenses 2,484,041 2,146,552
Accrued payroll costs 262,532 695,000
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Total current liabilities 6,931,080 6,571,358
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MINORITY INTEREST 250,000 --
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 10,152 10,032
Additional paid-in capital 48,171,119 47,885,409
Deferred compensation (395,841) (509,059)
Accumulated deficit (31,137,635) (24,105,677)
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Total stockholders' equity 16,647,795 23,280,705
============ ============
Total liabilities and stockholders' equity $ 23,828,875 $ 29,852,063
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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BIGSTAR ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
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NET SALES $ 5,230,591 $ 1,453,780
COST OF SALES 3,855,789 1,253,839
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Gross profit 1,374,802 199,941
OPERATING EXPENSES
Sales and marketing 4,765,588 1,725,632
Web site and software development 2,354,568 782,398
General and administrative 1,568,435 675,202
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Total operating expenses 8,688,591 3,183,232
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Loss from operations (7,313,789) (2,983,291)
INVESTMENT INCOME 281,831 17,524
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Net Loss $ (7,031,958) $ (2,965,767)
============ ============
PER SHARE INFORMATION:
Net loss per share -
Basic and diluted $ (0.70) $ (0.77)
============ ============
Weighted average common shares
outstanding -
Basic and diluted 10,107,597 3,863,606
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
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BIGSTAR ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (7,031,958) $ (2,965,767)
Adjustments to reconcile net loss to net
cash used in operating activities -
Depreciation and amortization 242,653 47,484
Allowance for doubtful accounts 30,000 8,146
Non-cash common stock option
and warrant expenses 295,978 28,545
Amortization of investment discount (41,320) --
Changes in assets and liabilities -
Cash in escrow -- 453,000
Accounts receivable (150,333) (302,248)
Prepaids and other current assets (250,453) (160,929)
Other assets 4,400 (11,333)
Accounts payable and accrued expenses 303,792 715,180
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Net cash used in operating activities (6,597,241) (2,187,922)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (347,454) (314,301)
Redemption of Investments 3,000,000 --
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Net cash used in investing activities 2,652,546 (314,301)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 508,064 5,431,072
Proceeds from private placement pending closing -- (453,000)
Deferred registration costs -- (30,000)
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Net cash provided by financing activities 508,064 4,948,072
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Net (decrease) increase in cash
and cash equivalents (3,436,631) 2,445,849
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CASH AND CASH EQUIVALENTS, beginning of period 17,422,817 363,124
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CASH AND CASH EQUIVALENTS, end of period $ 13,986,186 $ 2,808,973
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Capital lease obligations incurred $ -- $ --
SUPPLEMENTAL SCHEDULE OF NON-CASH
OPERATING ACTIVITIES:
Warrants issued for future services $ 41,667 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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6
BIGSTAR ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Overview
BigStar Entertainment, Inc. and subsidiary (the "Company") is an online
direct marketer of filmed entertainment products. 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 generating more repeat
visits to the Company's web site, higher page views and greater customer loyalty
and revenue.
bigstar.com's extensive content also includes movie trailers and feature
films that the user can stream and view on their computer. The user information
provided during visits to the Company's site allows the Company to market
directly to consumers using Advaya, its proprietary, internally-developed,
direct marketing software.
Through the Advaya subsidiary, the Company also provides e-marketing
services to third parties who do not have the in-house expertise to design,
segment and analyze an e-mail campaign, nor the systems to manage subscription
lists and deliver e-mail communications.
The Company operates in the online industry, which is new, rapidly
evolving and intensely competitive. The Company competes primarily with
traditional retail outlets and other entities that maintain similar commercial
web sites, as well as other providers of direct marketing services.
Basis of Presentation
The consolidated balance sheet as of March 31, 2000 and the balance sheet
as of December 31, 1999, and the consolidated statements of operations and cash
flows for the three months ended March 31, 2000 and the statements of operations
and cash flows for the three months ended March 31, 1999 have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The unaudited (consolidated) financial statements have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial information
included in accordance with generally accepted accounting principles. Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such SEC rules and regulations. The results of
operations for the interim period ended March 31, 2000 are not necessarily
indicative of the results which may be reported for any other interim period or
for the year ending December 31, 2000.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue consists of sales of filmed entertainment in popular formats,
primarily videos and DVDs, over the Company's web sites and online advertising
and promotional revenues. The Company recognizes revenue from its web sites 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 for the three-month periods ended March 31, 2000 and March
31, 1999 include sales to customers who used $1,024,053 and $26,630,
respectively, 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 (consolidated) 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 returns
experience.
For the three months ended March 31, 2000, net sales included barter
revenues of 4.5%. The Company places advertisements on its customers' web sites
in exchange for placing its customers' advertisements on the BigStar web site.
Revenues from these transactions are based upon the Company's "cost per thousand
impressions", utilized in similar transactions, and the number of impressions
delivered. Revenues are recognized ratably over the term of the contract. Barter
expenses, which approximate barter revenues, are recorded in sales and marketing
expenses in the
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accompanying consolidated statements of operations. There were no barter
transactions for the three months ended March 31, 1999.
Cost of sales
Cost of sales includes the cost of the filmed entertainment, as well as
outbound shipping and handling costs.
Dependence on Suppliers
Although the Company has agreements with several third parties to provide
filmed entertainment products and related order fulfillment services, it has no
fulfillment operation or warehouse facility of its own and, accordingly, is
dependent on maintaining its existing fulfillment relationships. There can be no
assurance that the Company will maintain its relationships with these vendors
beyond the term of the existing agreements which first expire, subject to
renewal, in the first quarter of 2001. Further, should the Company's
relationship with any one of these vendors terminate unexpectedly, 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.
Net Loss Per Share
The Company accounts for net loss per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". In accordance with SFAS No.
128, basic earnings per share is computed using the weighted average number or
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of the incremental common shares issuable upon
the exercise of stock options and warrants (using the Treasury Stock Method);
common equivalent shares are excluded from the calculation if their effect is
anti-dilutive. Diluted loss per share for the three months ended March 31, 2000,
and March 31, 1999 does not include the impact of 2,725,725 and 1,653,648 common
stock options and warrants then outstanding, respectively, as the effect of
their inclusion would be anti-dilutive.
Computer Software Developed for Internal Use
In January 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed for Internal Use" ("SOP
98-1"), which provides guidance for determining whether computer software is
internal use software and on accounting for the proceeds of computer software
originally developed for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use.
For the three months ended March 31, 2000, the Company capitalized
$247,719 of external direct costs related to increased functionality of its web
site, which will be amortized over the related useful life of two years. No
costs were capitalized for the three months ended March 31, 1999. All costs
incurred for upgrades, maintenance, and enhancements, which did not result in
additional functionality, were expensed.
Comprehensive Income
During 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. The adoption of this standard has had no impact on
the Company's consolidated financial statements. Accordingly, the Company's
comprehensive net loss is equal to its net loss for the three months ended March
31, 2000, and the three months ended March 31, 1999.
New Accounting Pronouncements
In January 2000, the Company adopted EITF Issue 99-17, "Accounting for the
Advertising of Barter Transactions" ("EITF Issue 99-17"), which changed the
method by which barter revenues can be recognized as revenue. Barter
transactions entered into after January 20, 2000 should be accounted for at fair
value on a one-for-one basis with revenue received by the seller of the
advertising for similar advertising sold for cash. The adoption of EITF Issue
99-17 did not impact the Company's consolidated financial statements as the
Company did not enter any new barter transactions after January 20, 2000.
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NOTE 2 - STOCKHOLDER'S EQUITY
Issuance of Capital Stock
On January 3, 2000, 3,692 shares of common stock were issued to
participants of the BigStar Entertainment, Inc. Employee Stock Purchase Plan for
proceeds of $24,317.
Warrants
On January 4, 2000, warrants to purchase 48,500 shares of common stock
were exercised for net proceeds of $59,000.
Stock Options
During the three months ended March 31, 2000, options to purchase 68,259
shares of common stock were exercised for net proceeds of $194,676. As of March
31, 2000, $63,641 of the proceeds is included in prepaid and other current
assets in the accompanying condensed consolidated balance sheets as the amount
was received subsequent to March 31, 2000.
Additionally, during the three months ended March 31, 2000, the Company
recorded $20,114 of consulting expense associated with the issuance of 4,334
options to purchase shares of common stock to a consultant for marketing
services. The Company used the Black Scholes Option Pricing Model to determine
the fair value of the options.
NOTE 3 - Formation of Subsidiary
Incorporation of Subsidiary
On January 12, 2000 Advaya, Inc. ("Advaya"), originally incorporated as
BigStar Direct, Inc., was incorporated and 1,000 shares of common stock were
issued to the Company. In consideration for the common stock
received from Advaya, the Company contributed $212,385 of computer equipment and
web site development costs to Advaya. In addition, the Company received a
royalty-free license to use the Advaya software in exchange for performing beta
testing of current and future versions of software Advaya develops.
Minority Interest
On January 15, 2000, the Company sold 50 shares of common stock in its
Advaya subsidiary for proceeds of $250,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for historical information, the statements in this Form 10-Q report
(including, without limitation, the discussion under the heading "Results of
Operations") contain forward-looking statements that involve risks and
uncertainties. BigStar's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below, and the risks discussed
under the caption, "Risk Factors That May Affect Results of Operations and
Financial Condition ." The following discussion should be read in conjunction
with BigStar's financial statements and the related notes to those statements
and the other financial information appearing elsewhere in this Form 10-Q.
OVERVIEW
BigStar was incorporated in March, 1998. We began offering products for
sale on our main web site, bigstar.com, in May 1998. Until that time, our
operating activities related primarily to the development of the bigstar.com web
site. Since our inception, we have incurred significant operating losses. These
losses primarily result from development costs associated with building our web
sites and order processing systems, and marketing, advertising and promotion
expenses and the continued operation of our business. As of March 31, 2000, we
had an accumulated deficit of $31,137,635. As we expand our business, we believe
that our operating expenses will increase primarily due to increased marketing,
advertising and promotional expenses, software development, web site and
administrative costs and additional depreciation related to capital
expenditures. As a result, we expect to continue incurring operating and net
losses and negative cash flow from operations.
RESULTS OF OPERATIONS
The three months ended March 31, 2000 and March 31, 1999.
NET SALES. Net sales were $5,230,591 for the quarter ended March 31, 2000
compared to $1,453,780 for the quarter ended March 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 for the
quarter ended March 31, 2000. The Company recognized $757,227 in advertising and
promotional revenues, including $235,000 in barter advertising revenues, for the
quarter ended March 31, 2000. The Company had no advertising and promotional
revenues for the quarter ended March 31, 1999. Sales are recognized upon the
shipment of filmed entertainment products and the serving of advertisements.
Revenues for the three-month periods ended March 31, 2000 and March 31, 1999
include sales to customers who used $1,024,053 and $26,630, respectively, of
coupons for discounts on their purchases of
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filmed entertainment products. The corresponding cost of these coupons is
included in sales and marketing expenses in the accompanying (consolidated)
statements of operations. Sales for the quarter ended March 31, 2000 and 1999,
respectively, consisted of both the videocassette and DVD formats. The increase
in sales of filmed entertainment products primarily reflects a significant
increase in units sold attributable to the growth of the Company's customer
base, as well as repeat purchases from existing customers of both videocassettes
and DVDs. The increase in sales is also attributable to the higher percentage of
DVDs sold, which generally have higher selling prices than videocassettes.
COST OF SALES. Cost of sales were $3,855,789 for the quarter ended March
31, 2000 compared to $1,253,839 for the quarter ended March 31, 1999. Gross
profit for the quarter ended March 31, 2000 was $1,374,802, resulting in a gross
margin of 26.3%. Gross profit for the quarter ended March 31, 1999 was $199,941,
resulting in a gross margin of 13.8%. Cost of sales includes the cost of
merchandise sold and outbound shipping and handling charges. The increase in the
gross profit for the quarter ended March 31, 2000, as compared to the quarter
ended March 31, 1999, reflects the increase in advertising and promotional
revenues.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $4,765,588
for the quarter ended March 31, 2000 compared to $1,725,632 for the quarter
ended March 31, 1999. Sales and marketing expenses consist primarily of the
costs of advertising, promotion and marketing programs, as well as personnel
costs. Advertising expenses were $2,838,498 and $993,853 for the quarters ended
March 31, 2000 and March 31, 1999, respectively. The increase in advertising
expenses for the quarter ended March 31, 2000 reflects additional advertising
purchases, including offline media. Promotion expenses include the costs of
promotional filmed entertainment products that are made available to customers
who agree to receive notification of future promotions. The cost of promotional
filmed entertainment products are based upon the price charged to BigStar by its
supplier, and are expensed upon the shipment of the related filmed entertainment
products to the customer. Shipping charges on promotional filmed entertainment
products are included in cost of sales and the related customer billings are
included in revenues. The cost of promotional filmed entertainment products and
coupons totaled $1,179,973 and $516,035 for the quarters ended March 31, 2000
and 1999, respectively.
WEB SITE AND SOFTWARE DEVELOPMENT EXPENSES. Web site and software
development expenses were $2,354,568 for the quarter ended March 31, 2000
compared to $782,398 for the quarter ended March 31, 1999. Web site and software
development expenses consist primarily of personnel costs and related expenses
for the design, development and management of our web sites, which totaled
$1,778,900 and $609,131 for the quarters ended March 31, 2000 and 1999,
respectively, reflecting the growth in personnel necessary to enhance and
support the company's web site. These expenses also include costs of systems and
telecommunications services, which totaled $444,636 and $104,651 for the
quarters ended March 31, 2000 and 1999, respectively due to the increased volume
of site activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1,568,435 for the quarter ended March 31, 2000 compared to $675,202 for
the quarter ended March 31, 1999. General and administrative expenses include
payroll and related expenses for executive, accounting and administrative
personnel, which were $492,529 and $252,476 for the quarters ended March 31,
2000 and 1999, respectively. The increase in these costs is attributable to the
hiring of additional staff during the last three quarters of 1999. General and
administrative expenses also include professional fees, which were $423,733 and
$59,216 for the quarters ended March 31, 2000 and 1999, respectively. The costs
of facilities also increased to $246,801 from $127,380 for the quarters ended
March 31, 2000 and 1999, respectively reflecting the increase in office space
rented and related supply costs to support the Company's additional personnel.
Transaction processing fees also increased to $247,127 from $82,650 for the
quarters ended March 31, 2000 and 1999, respectively reflecting the increase in
credit card fees as the volume of transactions processed increased with the
growth in orders noted above.
NET LOSS. BigSar's net loss was $7,031,958 for the quarter ended March 31,
2000 and $2,965,767 for the quarter ended March 31, 1999. Because of the
uncertainty regarding our future profitability, the future tax benefits of our
losses have been fully reserved for and, therefore, no benefit for the net
operating loss has been recorded. Under Section 382 of the Internal Revenue
Code, this operating loss may be limited due to ownership changes.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operating cash requirements primarily
through sales of our common stock. During the quarter ended March 31, 2000, we
issued 68,259 shares of common stock upon the exercise of employee stock
options, 48,500 shares of common stock upon the exercise of warrants and 3,692
shares of common stock under the Employee Stock Purchase Plan for net proceeds
of $277,993. During the quarter ended March 31, 2000, we also sold stock in our
subsidiary, Advaya, Inc. for net proceeds of $250,000.
Net cash used in operating activities for the quarter ended March 31, 2000
of $6,597,241 was primarily due to our net loss of $7,031,958 offset by an
increase in accounts payable and accrued expenses of $303,792, depreciation and
amortization of $242,653 and non-cash common stock option and warrant expenses,
of $295,978, net of the
<PAGE> 11
increase in accounts receivable of $150,333 and other current and noncurrent
assets of $246,053. Net cash used in operating activities for the quarter ended
March 31, 1999 of $2,187,922 was primarily due to our net loss of $2,965,767.
The cash requirements associated with the loss were reduced by an increase in
accounts payable and accrued expenses of $715,180, and the availability of
$453,000 held in escrow, net of the increase in accounts receivable of $302,248
and other current and noncurrent assets of $172,262. In addition, during the
quarter ended March 31, 1999, we issued options and warrants to purchase 247,381
shares to consultants for investment advisory, marketing, web site design and
technical services and warrants to purchase 19,400 shares in exchange for
occupancy services. These options and warrants become exercisable upon dates
ranging from the date of grant to five years after the date of grant, at
exercise prices from $3.73 to $5.15, and have expiration dates from 1 to 10
years after the date of grant.
At March 31, 2000 the Company had working capital of $13,711,809 compared
to $20,271,050 at December 31, 1999. The decrease in working capital is
primarily attributable to the cash used to fund the net loss discussed above. At
March 31, 2000 and March 31, 1999, the increases in accounts payable and accrued
expenses results primarily from the increase in purchases of filmed
entertainment products and advertising and promotional expenditures over the
preceding quarter. The increases in accounts receivable are due to the lag
between the shipment of filmed entertainment products and the resulting
settlement with the credit card processor, and the related lag between the
acceptance by the processor of the charges and the remittance of funds to the
Company's bank account.
Net cash provided by investing activities for the quarter ended March 31,
2000 of $2,652,546 was primarily provided by the redemption of investments.
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. We are currently negotiating the extension of an agreement, due to expire
in August 2000, which provides us with $2,000,000 of available credit and 60 day
terms.
At March 31, 2000, BigStar's principal commitments consisted of
obligations for advertising under cancelable agreements, which were
approximately $700,000 and guaranteed lease obligations of approximately
$600,000.
We have no material commitments for capital expenditures but anticipate
future purchases of approximately $600,000 for hardware and related software
enhancements of our web sites during the next 12 months. These expenditures
would expand the capabilities of our web sites to allow access by more customers
and to enhance customers' experiences on our web sites. 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 section entitled "Risk Factors That May Affect Our Results
Of Operations And Financial Condition". In addition, we will, from time to time,
consider the acquisition of or investment in complementary businesses, services
and technologies, which might increase our liquidity requirements or cause us to
issue additional equity or debt securities. We cannot assure you that we will
not require additional financing within this time frame or that such additional
funding, if needed, will be available on terms acceptable to us or at all. We do
not currently use derivative financial instruments.
SEASONALITY AND REVENUE FLUCTUATIONS
BigStar's limited operating history and rapid growth make it difficult to
ascertain the effects of seasonality on its business. Seasonal fluctuations in
sales of filmed entertainment products may affect our sales. Fluctuations in
revenue also may result from the timing of hit releases on videocassettes and
DVD.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In addition to the other information in this Form 10-Q report, the
following factors should be considered carefully in evaluating BigStar's
business and prospects:
WE HAVE A LIMITED OPERATING HISTORY AND MAY FACE DIFFICULTIES TYPICALLY
ENCOUNTERED BY DEVELOPMENT STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS.
We commenced operations in March 1998 and face the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, such as online commerce. These risks include our ability to:
- continue to expand our customer base;
- generate repeat business from existing customers;
- respond to changes in a rapidly evolving and unpredictable business
environment;
- successfully compete against other companies that sell our products;
- maintain current and develop new strategic relationships;
- manage growth;
- continue to develop and upgrade our technology; and
<PAGE> 12
- attract, retain and motivate qualified personnel.
WE LACK SIGNIFICANT REVENUES AND EXPECT SIGNIFICANT CONTINUING LOSSES. We
have not achieved profitability and expect to continue to incur significant
operating losses and net losses. As of March 31, 2000, our accumulated deficit
was approximately $31 million. SEE "ITEM 2. 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 also
require additional financing. We may not be able to obtain the financing or
obtain it on terms acceptable to us. If revenues grow slower than we anticipate,
or if operating expenses exceed our expectations or cannot be reduced
accordingly, or if we cannot obtain additional financing, our business,
operating results and financial condition may be materially harmed.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF ONLINE COMMERCE. If online
commerce does not continue to grow or grows more slowly than expected, our
business will be materially harmed. A number of factors could slow the growth of
online commerce, including the following:
- the network infrastructure required to support a substantially
larger volume of transactions may not be developed;
- government regulation may increase;
- telecommunications capacity problems may result in slower response
times; and
- consumers may have concerns about the security of online commerce
transactions.
WE COMPETE WITH OTHER ONLINE RETAILERS AND TRADITIONAL FILMED
ENTERTAINMENT RETAILERS WHO MAY BE MORE SUCCESSFUL THAN WE ARE IN ATTRACTING AND
RETAINING CUSTOMERS. The retail filmed entertainment industry is intensely
competitive. In addition, the online commerce market for retail filmed
entertainment sales is new, rapidly evolving and competitive. If we are unable
to successfully compete against other retailers of filmed entertainment
products, our business, operating results and financial condition would be
materially harmed.
Price competition in our industry is also intense, and price is one of the
principal factors on which consumers base their purchasing decisions. Price
competition may reduce our gross margins, which could materially harm our
business, operating results and financial condition.
Some of our competitors use aggressive pricing policies to build market
share. Some also have adopted business models that include selling filmed
entertainment products for less than their product cost and not charging
customers for shipping and handling. Software applications are also available
that can determine which online site has the lowest price for a particular title
which could direct customers to our competitors' sites.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we have. In addition, we believe some of our
competitors devote substantially more resources to web site and systems
development than we do.
WE DEPEND UPON STRATEGIC MARKETING RELATIONSHIPS TO GENERATE SALES. We use
strategic marketing relationships to attract new customers, and this is an
important part of our growth strategy. We may not be able to enter into
additional relationships or these relationships may not generate significant
numbers of new customers. Alternatively, these relationships may be successful
at generating new customers, but we may not be able to maintain these customer
relationships. If any of these events were to occur, it could materially harm
our business, operating results and financial condition.
OUR RELIANCE ON E-MAIL MARKETING COULD LEAVE US VULNERABLE IF CONSUMERS
REJECT THIS MARKETING TECHNIQUE OR ADDITIONAL GOVERNMENTAL REGULATION ARISES.
E-mail marketing is a significant part of our growth strategy. If the acceptance
or use of e-mail marketing is limited by consumer fear of e-mail computer
viruses or additional government regulation, it could harm our business.
To date, Congress has not enacted any legislation regulating commercial
e-mail, but a number of bills are pending. One proposed law would prohibit
online operators from sending most unsolicited commercial e-mail where the
operators have no existing or personal relationship with the recipient and the
e-mail is not sent at the request of or with the express consent of the
recipient. Another proposed law would require operators of web sites and online
services to disclose to users the personal information the operators have
collected and the personal information that it may share with other firms. It
would further require operators to provide simple processes for users to provide
or withhold consent to the operators' dissemination of the information.
In the absence of federal legislation, many states, including California,
Connecticut, Delaware, Iowa, Nevada, North Carolina, Oklahoma, Rhode Island,
Tennessee, Virginia, Washington and West Virginia, have passed laws limiting the
use of e-mail marketing. Because these laws have focused primarily on
unsolicited e-mail marketing, BigStar's business has yet to be affected by
current legislation. Other states have begun to consider placing restrictions on
e-mail marketing. If Congress or additional states pass legislation restricting
commercial uses of e-mail, it could harm our ability to communicate with
existing customers and attract new customers. Our sales growth could be
affected, which could materially harm our business, operating results and
financial condition.
<PAGE> 13
OUR RAPID GROWTH IS PLACING A SIGNIFICANT STRAIN ON OUR RESOURCES. We
anticipate continued rapid expansion of our operations. If we are unable to
manage our growth effectively, our business could be materially harmed. Our
rapid expansion has placed a significant strain on our ability to manage our
growth, including our ability to monitor operations and control costs. Our
anticipated continued expansion will increase this strain.
WE MUST MAINTAIN SATISFACTORY VENDOR RELATIONSHIPS TO COMPETE
SUCCESSFULLY. We rely on wholesalers to fill our customers' orders. We are
dependent upon maintaining these relationships for filling our customers' orders
because there are only a limited number of wholesalers who sell filmed
entertainment products. If we are unable to maintain suitable relationships with
vendors, we will be materially harmed.
As we continue to grow, our wholesalers will need to satisfy our
increasing product requirements on a timely basis. They also must continue to
provide adequate selections of filmed entertainment titles at competitive
prices. If our wholesalers are unable or unwilling to do so, it would materially
harm our ability to compete, which would in turn materially harm our business,
operating results and financial condition.
WE COULD EXPERIENCE SYSTEM FAILURES THAT INTERFERE WITH CUSTOMERS' ACCESS
TO OUR ONLINE SUPERSTORE. Our business depends on the efficient and
uninterrupted operation of our computer and communications hardware and software
systems. Systems interruptions that cause our web sites to be unavailable or
that reduce our ability to process transactions could materially harm our
business, operating results and financial condition. Interruptions could result
from natural disasters as well as power loss, telecommunications failure and
similar events. We have fully redundant systems but have not yet established a
formal disaster recovery plan.
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS. To protect confidential
information, we rely on encryption technology, which transforms information into
a code designed to be unreadable by third parties. We also use authentication
technology that utilizes passwords and other information to prevent unauthorized
persons from accessing a customer's information. If a person circumvents our
security measures, he or she could misappropriate confidential information about
us, or our customers, or cause interruptions in our operations. Security
breaches that result in access to confidential information also could damage our
reputation and expose us to a risk of loss or liability. In addition, we may be
required to make significant expenditures and expend considerable effort to try
and protect against security breaches or remedy problems caused by these
breaches.
IF WE FAIL TO KEEP PACE WITH RAPID CHANGES INVOLVING THE INTERNET, IT
COULD MATERIALLY HARM OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS. Internet
technology, commercial applications and online uses are all rapidly evolving. If
we do not successfully respond to rapid changes involving the Internet, our
business will be materially harmed. For example, we must respond to marketplace
developments in a timely and cost-effective manner. In this regard, we must
continue to develop, enhance and improve the responsiveness and features of our
web sites and develop new features to meet customer needs. We also must respond
to technological advances and emerging industry standards and practices on a
cost-effective and timely basis, including the development of technology to sell
digitized filmed entertainment to consumers through online systems.
WE DO NOT PUBLISH OUR OWN EDITORIAL CONTENT, WHICH MEANS WE MUST RELY ON
LICENSED THIRD-PARTY CONTENT ON OUR WEB SITES. We license third-party content,
including filmed entertainment reviews, news reports and features, in order to
attract and retain web site visitors. If we are unable to obtain desirable
content from existing licensors or from new licensors, it could reduce visits to
our web sites, which could materially harm our business. In addition, if we are
unable to obtain content at an acceptable cost, it could materially harm our
ability to compete and our operating results and financial condition.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. We regard
our trademarks, trade secrets and similar intellectual property as important to
our success. We have applied for the registration of some of our trademarks and
service marks in the United States. However, our efforts to establish and
protect our intellectual property rights may be inadequate to prevent
misappropriation or infringement of our intellectual property rights. If we are
unable to safeguard our intellectual property rights, it could materially harm
our business, operating results and financial condition.
WE MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. We have
established a network of links with numerous small online sites. Many of the
sites may not have licenses for the use of the intellectual property that they
display. The copyright holders of this intellectual property or their licensees
may assert infringement claims against our affiliate partner sites and us
because of our relationships with these sites.
Although we believe that our use of third-party material on our web sites
is permitted under current provisions of copyright law, some aspects of Internet
content and commerce law are not clearly settled. We may therefore be the
subject of alleged infringement claims of the trademarks and other intellectual
property rights of third parties. If we become subject to these types of claims,
our business could be materially harmed even if we successfully defend
<PAGE> 14
against the claims. It also is possible that future legal developments would
prohibit us from having rights to downloadable information, sound or video.
THE PROTECTION OF OUR DOMAIN NAMES IS UNCERTAIN BECAUSE THE REGULATION OF
DOMAIN NAMES IS SUBJECT TO CHANGE. We currently hold various web domain names
relating to our brand, including bigstar.com, abcBigStar.com, bigstardvd.com,
astrophile.com, bigstardrivein.com, bigstartheater, cinemagram.com,
digitalfirstlook.com and mpeq4.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.
WE COULD STILL FACE PROBLEMS RELATED TO THE YEAR 2000 ISSUE. To date, our
customers have not reported any problems with our web sites and we have not
experienced any impairment in our internal operations with the year 2000 issue.
Nevertheless, computer experts have warned that there may still be residual
consequences stemming from the change in centuries and, if these consequences
become widespread, they could result in claims against us, a decrease in sales
of our products, increased operating expenses and other business interruptions.
We have not developed any specific contingency plan for the year 2000 issues.
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. We may
from time to time become a party to various legal proceedings arising in the
ordinary course of our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In August 1999, BigStar completed an initial public offering of shares of
common stock, $.001 par value, at a price per share of $10.00. The managing
underwriters were Prudential Securities Incorporated, Wasserstein Perella
Securities, Inc. and First Security Van Kasper. The effective date of BigStar's
registration statement, on Form S-1 was August 2, 1999. The commission file
number for that filing is 333-77963. Between the effective data and March 31,
2000, the expenses incurred in connection with the issuance and distribution of
the securities registered were as follows:
DIRECT OR INDIRECT PAYMENTS TO OTHERS
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
==========
Between the effective date and March 31, 2000, the net offering proceeds of
approximately $14,000,000 were used as follows:
DIRECT OR INDIRECT PAYMENTS TO OTHERS
Increase marketing, advertising and promotional spending......... $ 7,500,000
Upgrade computer systems and develop additional software programs. 2,200,000
Hire additional marketing, technical and production personnel..... 1,100,000
Fund operating losses and general corporate purposes.............. 3,200,000
-----------
Total use of proceeds............................................ $14,000,000
===========
The amounts listed above represent a reasonable estimate of the application of
net proceeds from the offering. The use of proceeds does not represent a
material change in the use of proceeds described in the prospectus. There were
no direct of indirect payments from the net proceeds to directors or officers of
BigStar or to affiliates or persons owning ten percent or more of the common
stock of BigStar.
ITEM 3. DEFAULTS UPON SENIOR SECUITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
first quarter of 2000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1999:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIGSTAR ENTERTAINMENT, INC.
Dated: May 15, 2000 By:/s/ David Friedensohn
----------------------------------
David Friedensohn, Chief Executive Officer
Dated: May 15, 2000 By:/s/ Robert S. Yingling
----------------------------------
Robert S. Yingling, Chief Financial Officer
EXHIBIT INDEX
Exhibits
27 Financial Data Schedule.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,986,186
<SECURITIES> 3,943,554
<RECEIVABLES> 1,299,787
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 20,642,889
<PP&E> 3,072,711
<DEPRECIATION> 638,871
<TOTAL-ASSETS> 23,828,875
<CURRENT-LIABILITIES> 6,931,080
<BONDS> 0
0
0
<COMMON> 10,152
<OTHER-SE> 16,637,643
<TOTAL-LIABILITY-AND-EQUITY> 23,828,875
<SALES> 4,473,363
<TOTAL-REVENUES> 5,230,591
<CGS> 3,855,789
<TOTAL-COSTS> 8,688,591
<OTHER-EXPENSES> 8,888,591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (281,831)
<INCOME-PRETAX> (7,031,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,031,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,031,958)
<EPS-BASIC> 0.70
<EPS-DILUTED> 0.70
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