U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
COMMISSION FILE NO. 0-22908
BIG ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0385686
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2255 GLADES ROAD, SUITE 237 WEST
BOCA RATON, FLORIDA 33431
(Address of principal executive offices) (zip code)
(407) 998-8000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
As of August 9, 1996, the number of shares outstanding of the
issuer's Common Stock, $.01 par value was 6,085,735.
<PAGE>
BIG ENTERTAINMENT, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE(S)
- ------ --------------------- -------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995.......................................... 3
Consolidated Statements of Operations for the
three and six months ended June 30, 1996 and 1995.......... 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1996 and 1995.................... 5
Notes to Unaudited Consolidated Financial Statements....... 6-7
Item 2. Management's Discussion and Analysis or Plan of Operations.... 8-14
PART II OTHER INFORMATION 15
- ------- -----------------
Signature .............................................................. 16
2
<PAGE>
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1996 and December 31, 1995
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,899,942 $ 606,376
Trade receivables, net 575,260 244,598
Merchandise inventories 834,040 579,218
Prepaid expenses 516,780 343,235
Franchise fee receivable 700,000 700,000
Other current assets 119,330 104,899
------------ ------------
Total current assets 5,645,352 2,578,326
PROPERTY AND EQUIPMENT, net 2,294,852 1,940,915
INTANGIBLE ASSETS, net 707,189 873,838
GOODWILL, net 354,977 364,697
OTHER ASSETS 367,115 40,000
------------ ------------
$ 9,369,485 $ 5,797,776
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 721,891 $ 1,633,063
Accrued professional fees 98,230 134,721
Other accrued expenses 298,180 284,353
Deferred revenue 1,410,664 959,840
Current portion of capital lease obligations 611,570 154,725
------------ ------------
Total current liabilities 3,140,535 3,166,702
------------ ------------
CAPITAL LEASE OBLIGATIONS,
less current portion 727,298 239,040
------------ ------------
MINORITY INTEREST - 23,557
------------ ------------
COMMON STOCK SUBJECT TO REDEMPTION,
$.01 par value, 50,000 shares - 300,000
------------ ------------
SHAREHOLDERS' EQUITY:
Series A variable rate convertible preferred
stock, $6.25 stated value, 320,000 shares
authorized; 217,600 issued and outstanding
at June 30, 1996 and 128,000 shares issued
and outstanding at December 31, 1995.
Liquidation preference of $1,386,319 at
June 30, 1996. 1,360,000 800,000
Common stock, $.01 par value, 11,000,000
shares authorized; 5,810,735 shares issued
and outstanding at June 30, 1996 and
4,723,876 issued and outstanding at and
December 31, 1995 58,608 47,239
Additional paid-in-capital 21,850,678 16,149,046
Warrants outstanding 486,600 302,000
Accumulated deficit (18,254,234) (15,229,808)
------------ ------------
Total shareholders' equity 5,501,652 2,068,477
------------ ------------
$ 9,369,485 $ 5,797,776
============ ============
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
3
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $ 1,888,275 $ 1,805,901 $ 3,423,898 $ 3,439,480
COST OF SALES 1,253,117 1,527,725 2,223,209 2,714,095
----------- ----------- ----------- -----------
Gross profit 635,158 278,176 1,200,689 725,385
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 880,970 1,196,723 2,109,105 2,951,148
Salaries and benefits 770,388 567,634 1,538,443 1,109,778
Amortization of goodwill and Intangibles 112,407 250,550 224,814 361,098
----------- ----------- ----------- -----------
Total operating expenses 1,763,765 2,014,907 3,872,362 4,422,024
----------- ----------- ----------- -----------
Operating loss (1,128,607) (1,736,731) (2,671,673) (3,696,639)
OTHER (INCOME) EXPENSE:
Interest (income) expense 61,683 69,854 119,411 75,249
Other, net (12,950) - (18,275) -
----------- ----------- ----------- -----------
Loss before minority interest (1,177,340) (1,806,585) (2,772,809) (3,771,888)
MINORITY INTEREST (145,943) (51,180) (198,159) (82,622)
----------- ----------- ----------- -----------
Net loss $(1,323,283) $(1,857,765) $(2,970,968) $(3,854,510)
=========== =========== =========== ===========
Net loss per common and common
equivalent share $ (0.24) $ (0.45) $ (0.58) $ (0.94)
=========== =========== =========== ===========
Weighted average number of common
and common equivalent shares outstanding 5,439,359 4,119,584 5,081,618 4,117,549
=========== =========== =========== ===========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
Six Months Ended June 30,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,970,968) $(3,854,510)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 513,870 361,098
Realized loss on sale of short-term investments 92,252
Services rendered as part of subscription agreement - 26,019
Issuance of stock options under consulting agreements - 37,500
Minority interest 198,159 82,622
Loss on sale of marketable securities
Changes in assets and liabilities:
Trade receivables (330,662) (234,416)
Prepaid expenses (62,760) (326,047)
Merchandise inventories (254,822) (98,276)
Other current assets (14,431) 21,931
Other assets 51,663 -
Accounts payable (911,172) 810,924
Accrued professional fees (36,491) 1,942
Deferred revenue 319,561 -
Other accrued expenses (95) 222,528
----------- -----------
Net cash used in operating activities (3,498,148) (2,856,433)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Netco Partners (106,398) -
Cash used in acquisition, net of cash acquired - (400,000)
Sale of short-term investments - 2,816,805
Capital expenditures, net (458,927) (271,809)
Other - (140,870)
Investment in Patents and Trademarks (48,445) -
Return of capital from Tekno Books to minority shareholder (328,253) -
----------- -----------
Net cash provided by (used in) investing activities (942,023) 2,004,126
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred stock 560,000 -
Proceeds from the issuance of common stock 4,873,465
Proceeds from sale of 8.5% convertible promissory note 500,000 -
Proceeds from sale of Assets 803,372 -
Repayments under capital lease obligations (187,700) (49,063)
Receipts of subscription receivable 184,600 160,000
----------- -----------
Net cash provided by financing activities 6,733,737 110,937
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,293,566 (741,370)
CASH AND CASH EQUIVALENTS, beginning of period 606,376 1,242,391
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,899,942 $ 501,021
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 109,525 $ 10,734
=========== ===========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
5
<PAGE>
BIG ENTERTAINMENT INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated financial
statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those rules and regulations. However, the Company
believes that the disclosures contained herein are adequate to make the
information presented not misleading.
The financial statements reflect, in the opinion of management, all material
adjustments (which include only normal recurring adjustments) necessary to
present fairly the Company's financial position and results of operations.
The results of operations and cash flows for the three and six months ended June
30, 1996 are not necessarily indicative of the results of operations or cash
flows which may be recorded for the remainder of 1996.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995.
(2) CAPITAL STOCK:
In January 1996, the Company sold an 8.5% Convertible Promissory Note (the
"Note") to an investor in a private transaction for $500,000. On May 15, 1996,
the principal amount of the Note and interest accrued thereon was converted into
82,947 shares of the Company's common stock at a conversion rate of $6.25 per
share.
In February 1996, the Company sold 64,000 shares of Series A Convertible
Preferred Stock to Tekno Simon, LLC for $400,000, and in April 1996, the Company
sold an additional 25,600 shares of Series A Convertible Preferred Stock to
Tekno Simon, LLC for $160,000, the proceeds of which are to fund the
construction and installation of seven additional Entertainment Super-Kiosks.
In April 1996, the Company completed a public offering of its common stock. The
Company sold 1,000,000 shares of common stock at $6.00 per share for a gross
amount of $6,000,000. After deducting expenses, including underwriting fees,
filing fees, legal fees, accounting and other expenses, the Company realized
proceeds of approximately $4,922,000.
In April 1996, the Company issued 3,912 shares of common stock as non-cash
dividends on the Series A Convertible Preferred Stock.
6
<PAGE>
In connection with the agreement entered into as part of the acquisition of
Tekno Books, a shareholder/director had the option to require the Company to
purchase, at $6.00 per share, 50,000 shares of the Company's common stock if the
Company entered into a financing transaction to raise capital in excess of
$1,000,000 through the sale of the Company's securities within nine months of
the date of the agreement. The aggregate total of these shares of $300,000 is
reflected as "Common Stock Subject to Redemption" in the accompanying
consolidated balance sheet as of December 31, 1995. The common stock redemption
option expired unexercised on June 13, 1996. Accordingly, the $300,000 was
reclassified to common stock and additional paid-in capital as reflected in the
consolidated balance sheet as of June 30, 1996.
(3) SALE-LEASEBACK:
In February 1996, the Company entered into a sale-leaseback transaction with a
lessor. Pursuant to the sale-leaseback transaction, the Company sold 18
Entertainment Super-Kiosks to the lessor for $1,080,000 and simultaneously
leased the Entertainment Super-Kiosks from the lessor for a term of 39 months
with aggregate rental payments of approximately $35,000 per month. The
sale-leaseback does not include the underlying mall leases for the sites of the
Company's Entertainment Super-Kiosks, with respect to which the Company remains
liable. Upon expiration of the lease, the Company will have the option to
repurchase the Entertainment Super-Kiosks for their fair market value, but in no
event more than $108,000 in the aggregate. As collateral security for the lease,
the Company issued 225,000 shares of its common stock (the "Escrow Shares")
which are held by an escrow agent. In the event that the Company defaults under
the agreements for the sale-leaseback, the Escrow Shares will be released to the
lessor. While held in escrow, the Escrow Shares will be voted by the lessor on
all matters in accordance with the recommendations of management and neither the
escrow agent nor the lessor will have any dispositive rights with respect
thereto. As additional consideration for the sale-leaseback, the Company also
issued to the lessor warrants to purchase 26,739 shares of common stock,
exerciseable for four years commencing on the first anniversary of the date of
grant, at an exercise price of $8.08 per share.
(4) SUPPLEMENTAL NON-CASH DISCLOSURES:
In connection with the sale-leaseback transaction referred to above, the Company
recorded property and equipment and capitalized lease obligations of $1,080,000,
prepaid expenses of $110,785, other assets of $165,843, and deferred gain of
$131,263.
In the second quarter of 1996, the Company entered into capital lease
transactions and recorded property and equipment and capitalized lease
obligations of $52,083.
The common stock redemption option referred to above expired on June 13, 1996,
and accordingly was reclassified from "Common Stock Subject to Redemption" to
$500 of Common Stock and $299,500 to Additional Paid-in Capital.
In April, 1996, the Company issued 3,912 shares of common stock as non-cash
dividends on the Series A Convertible Preferred Stock in the amount of $27,139.
In connection with the conversion of the 8.5% Convertible Promissory Note, the
principal amount plus accrued interest was converted into 82,947 shares of the
Company's common stock at a conversion rate of $6.25 per share or $518,419.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion contains, in addition to historical information,
forward-looking statements with respect to Big Entertainment, Inc. (the
"Company") that involve risks and uncertainties. The Company's actual results
could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, limited operating history;
operating losses and accumulated deficit; possible need for additional
financing; dependence on relationships with authors; risks related to retail
operations; competition; dependence on management; risks related to trademarks
and proprietary rights; dependence on distributors; and other factors discussed
in the Company's filings with the Securities and Exchange Commission.
GENERAL
The Company is a diversified entertainment company, which owns or
controls the exclusive rights to certain original characters and concepts
created by best-selling authors and media celebrities such as Tom Clancy,
Leonard Nimoy, Gene Roddenberry, Mickey Spillane, Arthur C. Clarke, Anne
McCaffrey, Isaac Asimov and L. Ron Hubbard. The Company uses illustrated novels
and comic books to introduce and develop its intellectual properties, including
characters and storylines, as a means of exploring the potential of these
intellectual properties for licensing them across all media, including films,
television, books, multimedia software, toys, and other merchandise. All costs
associated with development of intellectual properties are expensed in the
Company's comic book and illustrated novel publishing division. The Company has
the following divisions:
BOOK LICENSING AND PACKAGING. Operating under the name "Tekno
Books", this 51% owned division has more than 800 published books in
its history and agreements with more than 30 publishers to add an
additional 200 titles. These titles are expected to include 42 books
by 22 best-selling authors. Tekno Books enables the Company to take
ideas from its illustrated novels and comic books and transform them
into novels.
LICENSING AND NEW MEDIA. Management believes that this is the area
of greatest potential growth for the Company. Intellectual
properties are offered to movie studios, TV producers, multimedia
publishers and others under licensing agreements.
COMIC BOOK AND ILLUSTRATED NOVEL PUBLISHING. This is the Company's
research and development unit. Ideas from people like Mickey
Spillane, Tom Clancy and Leonard Nimoy are developed into detailed
story lines and full-bodied characters under their creator's
supervision. Substantially all of the costs in this division are
expensed as incurred.
ENTERTAINMENT RETAIL. This division is used to test the Company's
concepts. The Company operates a 540-square-foot retail store in
Minnesota's Mall of America and more than 20 "Entertainment
Super-Kiosks" at various shopping malls. These Entertainment
Super-Kiosks resemble high-tech semi-circular newsstands and
feature a bank of TV monitors that show movie trailers and
promotional spots. The Company has reached a critical mass in these
kiosks and is now starting to market advertising spots on its TV
monitors to third parties, a business that management expects to
generate substantial revenues with relatively small incremental
costs.
FRANCHISING. The Company, through its wholly owned subsidiary, Big
Entertainment Franchise Corp., is in the process of registering with
various states its intention to offer Entertainment Super-Kiosk
franchises to third parties for franchise fees and royalties. The
Big Entertainment Super-Kiosk will be a turn-key operation provided
to the franchisee.
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 ("Q2-96") AND SIX MONTHS ENDED JUNE
30, 1996 ("Y2-96") AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1995 ("Q2-95")
AND SIX MONTHS ENDED JUNE 30, 1995 ("Y2-95"), RESPECTIVELY.
The following tables summarize the revenues, cost of sales and gross
profit attributable to each of the Company's divisions for Q2-96 and Q2-95 and
Y2-96 and Y2-95, respectively:
<TABLE>
<CAPTION>
INTELLECTUAL PROPERTY RETAIL
-------------------------------------------------- -------------
COMIC BOOK
BOOK LICENSING LICENSING AND AND ILLUSTRATED ENTERTAINMENT
AND PACKAGING NEW MEDIA NOVEL PUBLISHING RETAIL TOTAL
-------------- ------------- ---------------- ------------- -----
<S> <C> <C> <C> <C> <C>
Q2-96
Net Revenues $ 608,845 $ 189,394 $ 359,317 $ 730,719 $1,888,275
Cost of sales 263,764 68,000 516,489 404,864 1,253,117
---------- --------- ---------- ---------- ----------
Gross profit (loss) $ 345,081 $ 121,394 $ (157,172) $ 325,855 $ 635,158
========== ========= ========== ========== ==========
Q2-95
Net Revenues $ 248,079 $ 289,791 $ 829,787 $ 438,244 $1,805,901
Cost of sales 119,121 - 1,185,982 222,622 1,527,725
---------- --------- ---------- ---------- ----------
Gross profit (loss) $ 128,958 $ 289,791 $ (356,195) $ 215,622 $ 278,176
========== ========= ========== ========== ==========
Y2-96
Net Revenues $ 949,191 $ 287,227 $ 802,487 $1,384,993 $3,423,898
Cost of sales 449,039 68,000 956,804 749,366 2,223,209
---------- --------- ---------- ---------- ----------
Gross profit (loss) $ 500,152 $ 219,227 $ (154,317) $ 635,627 $1,200,689
========== ========= ========== ========== ==========
Y2-95
Net Revenues $ 609,757 $ 311,291 $1,707,900 $ 810,532 $3,439,480
Cost of sales 380,295 - 1,845,641 488,159 2,714,095
---------- --------- ---------- ---------- ----------
Gross profit (loss) $ 229,462 $ 311,291 $ (137,741) $ 322,373 $ 725,385
========== ========= ========== ========== ==========
</TABLE>
NET REVENUES
Revenues are generated through the Company's intellectual property
activities, including publishing, book licensing and packaging, and licensing
and new media, and through its entertainment retail activities, which consist of
the operations of the Company's Entertainment Super-Kiosks. Net revenues for
Q2-96 increased by 5%, or $82,374, to $1,888,275 from $1,805,901 for Q2-95. The
increase noted in Q2-96 is primarily due to increases in book licensing and
packaging and entertainment retail revenues offset by decreases in comic book
and illustrated novel publishing and licensing and new media revenues. The
fluctuation noted in Y2-96, as compared to Y2-95, is attributable to the
Company's planned reduction in comic books combined with the continued growth in
the Company's entertainment retail and book licensing and packaging divisions.
9
<PAGE>
GROSS PROFIT
Overall Company gross profit increased by 128%, or $356,982, to
$635,158 for Q2-96 from $278,176 in Q2-95. As a percentage of net revenues,
gross profit increased to 34% in Q2-96 from 15% in Q2-95. The Company's overall
gross profit increased 66%, or $475,304, to $1,200,689 for Y2-96 from $725,385
in Y2-95. As a percentage of net revenues, gross profit increased to 35% in
Y2-96 from 21% in Y2-95. The increase in gross profit is primarily due to
increases in gross profit in the book licensing and packaging division, comic
book and illustrated novel publishing division, and entertainment retail
division.
INTELLECTUAL PROPERTY
* BOOK LICENSING AND PACKAGING
NET REVENUES. Tekno Books' net revenues consist of cash advances
recognized as revenues upon the acceptance by publishers of books, and royalties
on books licensed to and published by third-party publishers. Tekno Books
generates significant cash flow from cash advances received upon the execution
of publishing agreements with publishers for books to be published in the
future. Such cash advances are only recognized as revenue when the books to
which they relate are accepted by the publisher, resulting in a deferral of
revenue recognition following receipt of the cash advance. Historically,
virtually all books delivered by Tekno Books have been accepted. Total net
revenues from Tekno Books, which is 51% owned by the Company, increased 145%, or
$360,766, to $608,845 for Q2-96 from $248,079 for Q2-95. In addition, net
revenues increased 56%, or $339,434, to $949,191 for Y2-96 from $609,757 for
Y2-95. Deferred revenues increased 739%, or $470,485, to $534,151 in Q2-96 from
$63,666 in Q2-95. At June 30, 1996 and 1995, respectively, Tekno Books deferred
revenues represent cash advances, which are expected to be recognized as revenue
at a future date.
GROSS PROFIT. Gross profit for Tekno Books increased by 168%, or
$216,123, to $345,081 for Q2-96 from $128,958 for Q2-95 and by 118%, or
$270,690, to $500,152 in Y2-96 from $229,462 for Y2-95. As a percentage of
revenues from book licensing and packaging, gross profit increased to 57% in
Q2-96 from 52% in Q2-95 and 53% in Y2-96 from 38% in Y2-95. The increase in
gross profit was the result of an increase in the number of higher margin book
projects completed.
* LICENSING AND NEW MEDIA
NET REVENUES. Net revenues from the licensing and new media
divisions amounted to $287,227 for Y2-96 and $189,394 for Q2-96 as compared to
$311,291 for Y2-95 and $289,791 for Q2-95, for a decrease of 8% and 35%,
respectively. The decrease primarily resulted from changes in the nature and
timing of the licensing agreements entered into by the Company in Y2-96
(HarperCollins Publishing and Alliance Productions) as compared to the licensing
agreements entered into by the Company in Y2-95 (Miramax Films and Warner
Books). The Miramax Films 1995 Agreement called for an up-front payment of
$250,000, which was paid and recognized equally over the last three quarters of
1995; the Warner Books 1995 agreement called for an advance of $200,000, with
$100,000 paid upon signing of the agreement, of this amount $40,000 was
recognized in the first quarter of 1996, and $20,000 was recognized in Y2-95; an
additional $40,000 was paid and recognized in Q2-96 when the manuscript for one
of the books was accepted. The HarperCollins 1996 agreement called for an
advance of $500,000 with $125,000 due and recognized upon signing. The Alliance
Productions 1996 agreement called for an up-front payment of $25,000 which was
paid and recognized in the first quarter of 1996. All of these licensing
agreements call for additional royalties to be payable as earned at later dates.
The payments called for under the licensing agreements (before royalties are
taken into account) entered into during Y2-96 exceed such payments from all
licensing agreements entered into during 1995.
Revenue recognition for financial statement purposes for licensing
agreements takes place as each of the Company's obligations under the various
agreements are fulfilled, primarily in reference to the Company's delivery of
manuscripts to Warner Books and to HarperCollins. Management does not anticipate
any difficulty in making such deliveries.
10
<PAGE>
GROSS PROFIT. Gross profit represents divisional revenues net of
costs related to manuscript preparations to be submitted to licensees. Costs
related to the development of intellectual properties originally published in
other media are expensed by the comic book and illustrated novel publishing
division where the Company's intellectual properties are created and developed.
* COMIC BOOK AND ILLUSTRATED NOVEL PUBLISHING
The Company uses illustrated novels and comic books to introduce and
develop its intellectual properties, including characters and storylines as a
means to explore the potential of its intellectual properties for licensing them
across all media, including film, television, books, multimedia software, toys,
apparel and other merchandise. Cost of sales for the comic book and illustrated
novel publishing division represents direct costs in intellectual property
development, including character and storyline development, design, writing and
illustration of publications, plus printing, shipping and distribution costs.
The Company does not assign its intellectual properties any value for financial
accounting purposes, and does not therefore reflect them as assets on its
financial statements. Notwithstanding these accounting conventions, the Company
believes that these intellectual properties carry substantial value, which,
although not readily quantifiable, may be realized in potential future revenue
streams through licensing and new media with no further development cost.
NET REVENUES. Net publishing revenues from the sale of comic books
and illustrated novels published by the Company decreased by 57%, or $470,470,
to $359,317 for Q2-96 from $829,787 for Q2-95 and by 53%, or $905,413, to
$802,487 for Y2-96 from $1,707,900 for Y2-95. The decrease in net publishing
revenues from Q2-95 to Q2-96 and from Y2-95 to Y2-96 resulted primarily from a
shift in the Company's strategy in two areas, as follows:
1) In preparation for expanding the Company's publishing business
through the introduction of illustrated novels, which are
longer in page length than comics and have a higher cover price
(generally ranging from $9.95 - $19.95) than comics (generally
$1.95 - $2.25), the Company began reducing the number of comic
book titles in January of 1996. The Company believes that
illustrated novels have a wider distribution potential to the
bookstore market for the Company's titles than do comics since
most of the Company's titles in development feature
best-selling authors' names as part of the titles.
2) In January of 1996, the Company began reducing the level of
shipments of comic book titles to the newsstand market, which
is a market that permits retailers to return unsold product, as
compared to the same period in 1995. This was done to seek to
enhance the sell-through percentage of comics shipped.
While revenues in this division have declined due to the impact of the Company's
shift in strategy as described above, the Company anticipates that the long-term
results of these actions will be favorable once additional titles are published
as illustrated novels and the full effects of its illustrated novel program are
recognized, although there can be no assurance that revenues will increase over
current levels in this division. The Company expects that the illustrated novel
titles will begin to be released in the last quarter of 1996 with additional
titles to be released during the first quarter of 1997 and continuing thereafter
during 1997.
GROSS PROFIT. The comic book and illustrated novel publishing
division gross loss decreased to $157,172 for Q2-96 from $356,195 in Q2-95, a
decrease of 56%, and increased to $154,317 for Y2-96 from $137,741 for Y2-95.
The decrease in gross loss during Q2-96 was due to the Company's efforts to
control costs, including the reduction of shipments to the newsstand market as
described above.
RETAIL
* ENTERTAINMENT RETAIL
NET REVENUES. The Company's entertainment retail division net
revenues increased by 67%, or $292,475, to $730,719 for Q2-96 from $438,244 for
Q2-95 and by 71%, or $574,461, to $1,384,993 for Y2-96 from $810,532 for Y2-95.
Net revenues are derived from sales of entertainment products and merchandise,
such as illustrated novels, comic books, T-shirts, and entertainment
collectibles, at the Company's Entertainment Super-Kiosks located in major malls
in
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<PAGE>
various parts of the U.S. The Company had 19 Entertainment Super-Kiosks in
operation at June 30, 1996 as compared to 7 Entertainment Super-Kiosks at June
30, 1995. As a result, the increase in revenues was due in substantial part to
an increase in the number of Entertainment Super-Kiosks in operation.
GROSS PROFIT. Gross profit for the entertainment retail division
increased by 51%, or $110,233, to $325,855 for Q2-96 from $215,622 for Q2-95 and
by 97%, or $313,254 to $635,627 for Y2-96 from $322,373 for Y2-95. As a
percentage of entertainment retail division revenues, gross profit increased to
46% for Y2-96, from 40% for Y2-95. A decrease in gross profit as a percentage of
retail division revenues to 45%, in Q2-96 from 49%, in Q2-95 was the result of a
change in the methods used to estimate the valuation of inventories at the end
of each quarter. Cost of sales for the entertainment retail division includes
direct costs of goods purchased for resale net of existing inventories valued
at the lower of cost using the first-in, first-out method or market.
OPERATING EXPENSES
Total operating expenses consist of selling, general and
administrative expenses, salaries and benefits and amortization. Total operating
expenses decreased by 10% or $201,142 to $1,813,765 for Q2-96 from $2,014,907
for Q2-95. As a percentage of net revenues, total operating expenses decreased
to 96% in Q2-96 from 112% in Q2-95. Total operating expenses decreased by 11%,
or $499,662, to $3,922,362 for Y2-96 from $4,422,024 for Y2-95. As a percentage
of net revenues, total operating expenses decreased to 115% in Y2-96 from 129%
in Y2-95. The decreased expenses reflect reductions in operating expenses in the
comic book and illustrated novel publication division and corporate overhead
offset by increases in salaries and benefits related to increases in the
entertainment retail division due to the need to add overhead to support
additional Entertainment Super-Kiosks.
OTHER (INCOME) EXPENSE
Other (income) expense for Q2-96 was $48,733 as compared to $69,854
for Q2-95 and $101,136 for Y2-96 as compared to $75,249 for Y2-95, representing
increased interest expense due to the interest portion of increased capitalized
leases and interest accrued on the $500,000, 8.5% convertible promissory note,
which, as noted above, was converted to equity.
NET LOSS
Net loss decreased by 29%, or $534,482, to $1,323,283 for Q2-96 from
$1,857,765 for Q2-95 and year-to-date net loss decreased by 23% or $883,542 to
$2,970,968 for Y2-96 as compared to a net loss of $3,854,510 for Y2-95. The
decreased net loss resulted from increased gross profit of the Company and
decreased operating expenses as described above. Net loss per share for Q2-96
was $0.24 compared to $0.45 per share in Q2-95, for a decrease in net loss per
share of 47% and net loss per share for Y2-96 was $0.58 compared to $0.94 per
share in Y2-95, for a decrease in net loss per share of 38%.
NET WORTH
Net worth increased by 166% or $3,433,175, to $5,501,652 at June 30,
1996 as compared to a net worth of $2,068,477 as of December 31, 1995. The
increase in net worth is primarily due to the public offering of the Company's
stock (completed April 29, 1996) offset by the current year-to-date loss.
LIQUIDITY AND CAPITAL RESOURCES
On April 29, 1996, the Company completed a public offering of its
common stock, raising approximately $4,922,000 in net proceeds as described
below. At June 30, 1996, the Company had cash and cash equivalents of $2,899,942
and working capital of $2,504,817 compared to cash and cash equivalents of
$603,376 and a working capital deficit of $588,376 at December 31, 1995. Net
cash used in operating activities during Y2-96 was $3,498,148 primarily
representing cash used to fund the Company's operations. Net cash used in
investing activities was $942,023 and
12
<PAGE>
$6,733,737 in cash was provided by financing activities for a total increase in
cash of $2,293,566. Net cash used in operating activities during Y2-95 was
$2,856,433 and net cash provided by financing and investing activities was
$110,937 and $2,004,126, respectively. Cash provided from investing activities
consisted of proceeds from the sale of short-term investments.
In January 1996, the Company sold an 8.5% Convertible Note to an
investor in a private transaction for $500,000. On May 15, 1996, the principal
amount of the Note and interest accrued thereon was converted into 82,947 shares
of the Company's common stock at a conversion rate of $6.25 per share.
In February 1996, the Company sold 64,000 shares of Series A
Preferred Stock to Tekno Simon, LLC for $400,000 and in April 1996, the Company
sold an additional 25,600 shares of Series A Preferred Stock to Tekno Simon, LLC
for $160,000, the proceeds which are to fund the construction and installation
of seven additional Entertainment Super-Kiosks. The Company anticipates that it
will enter into ten additional leases and close the sale of the remaining
102,400 shares of Series A Preferred Stock in fiscal 1996, in which case the
Company will receive additional proceeds of $640,000. No shares of Series A
Preferred Stock will be sold pursuant to the Tekno Simon Stock Purchase
Agreement for leases entered into after December 31, 1996.
In February 1996, the Company entered into a sale-leaseback
transaction with a lessor. Pursuant to the sale-leaseback transaction, the
Company sold 18 Entertainment Super-Kiosks to the lessor for $1,080,000 and
simultaneously leased the Entertainment Super-Kiosks from the lessor for a term
of 39 months with rental payments of approximately $35,000 per month. The
sale-leaseback transaction does not include the underlying mall leases for the
sites of the Company's Entertainment Super-Kiosks, with respect to which the
Company remains liable. Upon expiration of the lease, the Company will have the
option to repurchase the Entertainment Super-Kiosks for their fair market
value, but in no event more than $108,000 in the aggregate.
On April 29, 1996, the Company completed a public offering of its
common stock. The Company sold 1,000,000 shares of common stock at $6.00 per
shares for a gross amount of $6,000,000. After deducting expenses, including
underwriting fees, filing fees, legal fees, accounting and other expenses, the
Company realized net proceeds of approximately $4,922,000.
In connection with the agreement entered into as part of the
acquisition of Tekno Books, a shareholder/director had the option to require the
Company to purchase, at $6.00 per share, 50,000 shares of the Company's common
stock if the Company entered into a financing transaction to raise capital in
excess of $1,000,000 through the sale of the Company's securities within nine
months of the date of the agreement. The aggregate total of these shares of
$300,000 is reflected as "Common stock Subject to Redemption" in the
accompanying consolidated balance sheet as of December 31, 1995. The common
stock redemption option expired on June 13, 1996. Accordingly, the $300,000 was
reclassified to common stock and additional paid-in capital as reflected in the
consolidated balance sheet as of June 30, 1996.
Based on currently proposed plans and assumptions relating to its
operations, the Company anticipates that its current capital resources, when
combined with anticipated cash flows from operations, will be sufficient to
satisfy the Company's contemplated working capital requirements for
approximately the next 12 months. If the Company's plans change or its
assumptions change or prove to be inaccurate, the Company may be required to
seek additional funds or curtail its operations. There can be no assurance that
additional financing, if required, will be available to the Company, or if
available, on terms favorable to the Company.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects
of inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal and expects net revenues to be generally higher during the second and
fourth quarters of each fiscal year for its Tekno Books book licensing and
packaging division as a result of the general publishing industry practice of
paying royalties semi-annually and during the summer (when schools and colleges
are not in session) and holiday seasons for its
13
<PAGE>
entertainment retail division. Accordingly, as the Company expands its chain of
Entertainment Super-Kiosks, it anticipates that its results of operations will
be increasingly affected by seasonality.
14
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1. - 5.
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (SEC use only).
(b) Reports on Form 8-K.
None.
15
<PAGE>
SIGNATURE
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.
BIG ENTERTAINMENT, INC.
Date: August 16, 1996 By: /s/ Mitchell Rubenstein
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
16
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,899,942
<SECURITIES> 0
<RECEIVABLES> 575,260
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<INVENTORY> 834,040
<CURRENT-ASSETS> 5,645,352
<PP&E> 2,820,087
<DEPRECIATION> 525,235
<TOTAL-ASSETS> 9,369,485
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<OTHER-SE> 4,083,044
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