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 March 31, 1997
[ ] 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)
(561) 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 May 13, 1997, the number of shares outstanding of the issuer's
Common Stock, $.01 par value was 5,870,601.
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BIG ENTERTAINMENT, INC.
Table of Contents
PART I FINANCIAL INFORMATION PAGE(S)
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996.................................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996 (unaudited)............................ 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (unaudited)............................ 5
Notes to Unaudited Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis or Plan of Operations.... 7 - 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signature .................................................................................19
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BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 1997 and December 31, 1996
March 31, December 31,
1997 1996
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ASSETS (Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 550,272 $ 1,675,852
Trade receivables, net 129,906 95,547
Merchandise inventories 1,503,601 1,410,603
Prepaid expenses 533,997 654,255
Franchise fee receivable 700,000 700,000
Other current assets 69,473 64,167
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Total current assets 3,487,249 4,600,424
PROPERTY AND EQUIPMENT, net 2,182,460 2,349,108
INTANGIBLE ASSETS, net 383,309 491,265
GOODWILL, net 340,397 345,257
OTHER ASSETS 439,390 457,365
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TOTAL ASSETS $ 6,832,805 $ 8,243,419
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 987,046 $ 1,021,264
Accrued professional fees 137,570 98,520
Other accrued expenses 480,223 423,989
Deferred revenue 1,250,846 1,268,455
Loan from shareholder/officer 200,000 0
Current portion of capital lease obligations 503,103 503,103
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Total current liabilities 3,558,788 3,315,331
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CAPITAL LEASE OBLIGATIONS, less current portion 638,756 731,807
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MINORITY INTEREST - 4,414
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SHAREHOLDERS' EQUITY:
Series A variable rate convertible preferred stock, $6.25 stated
value, 217,600 shares authorized; 217,600 issued and outstanding
at March 31, 1997 and 217,600 shares issued and outstanding
at December 31, 1995. Liquidation preference of $1,388,491 at
March 31, 1997. 1,360,000 1,360,000
Series B variable rate convertible preferred stock, $5.375 stated
value, 142,223 shares authorized; 29,767 issued and outstanding
at March 31, 1997 and at December 31, 1996. Liquidation preference
of $186,049 at March 31, 1997. 160,000 160,000
Series C variable rate convertible preferred stock, $100 stated
value, 100,000 shares authorized; 20,000 issued and outstanding
at March 31, 1997 and at December 31, 1996. Liquidation preference of
$2,000,000 at March 31, 1997. 2,000,000 2,000,000
Common stock, $.01 par value, 25,000,000 shares authorized;
5,870,601 shares issued and outstanding at March 31, 1997 and at
December 31, 1996 . 58,706 58,706
Additional paid-in-capital 22,056,856 22,039,194
Warrants outstanding 570,700 566,600
Accumulated deficit (23,571,001) (21,992,633)
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Total shareholders' equity 2,635,261 4,191,867
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,832,805 $ 8,243,419
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The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
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BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE ENDED MARCH 31, 1997 AND 1996
(Unaudited)
Three Months Ended March 31,
1997 1996
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NET REVENUES $ 1,707,322 $ 1,535,623
COST OF SALES 954,405 970,092
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Gross profit 752,917 565,531
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OPERATING EXPENSES:
Selling, general and administrative 1,146,580 1,228,135
Salaries and benefits 950,461 768,055
Amortization of goodwill and Intangibles 113,145 112,407
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Total operating expenses 2,210,186 2,108,597
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Operating loss (1,457,269) (1,543,066)
OTHER (INCOME) EXPENSE:
Interest (income) expense 49,108 57,728
Other, net (10,219) (5,325)
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Loss before minority interest (1,496,158) (1,595,469)
MINORITY INTEREST (31,980) (52,216)
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Net loss $ (1,528,138) $ (1,647,685)
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Net loss per common and common
equivalent share $ (0.26) $ (0.35)
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Weighted average number of common
and common equivalent shares outstanding 5,870,601 4,723,876
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The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
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BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
Three Months Ended March 31,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,528,138) $ (1,647,685)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 282,673 258,060
Issuance of compensatory stock options and warrants 17,662 -
Amortization of deferred sale leaseback charge 12,441 -
Minority interest 31,980 52,216
Changes in assets and liabilities:
Trade receivables (34,359) (294,937)
Prepaid expenses 120,258 (213,659)
Merchandise inventories (92,998) (83,443)
Other current assets (5,306) (70,964)
Other assets 145,927 (30,517)
Accounts payable (34,218) (88,306)
Accrued professional fees 39,050 49,351
Deferred revenue (17,609) 183,409
Other accrued expenses 26,004 (29,664)
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Net cash used in operating activities (1,036,633) (1,916,139)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Netco Partners (74,866) (33,500)
Loan from shareholders/officers 200,000 -
Capital expenditures, net - (96,348)
Investment in Patents and Trademarks (330) (23,377)
Return of capital from Tekno Books to minority shareholder (89,480) (131,644)
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Net cash provided by (used in) investing activities 35,324 (284,869)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred stock - 400,000
Proceeds from the issuance of warrants 4,100 -
Proceeds from sale of 8.5% convertible promissory note - 500,000
Proceeds from sale of Assets - 803,372
Dividends on preferred stock (20,000)
Repayments under capital lease obligations (108,371) (83,619)
Receipts of subscription receivable - 184,600
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Net cash provided by financing activities (124,271) 1,804,353
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Net decrease in cash and cash equivalents (1,125,580) (396,655)
CASH AND CASH EQUIVALENTS, beginning of period 1,675,852 606,376
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CASH AND CASH EQUIVALENTS, end of period $ 550,272 $ 209,721
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SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 49,178 $ 52,494
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Non-Cash Investing and Financing Activities:
In Q1-97 the Company entered into capital lease transactions totaling
$15,320.
In Q1-97 the Company accrued stock dividends on the Series A & B Convertible
Preferred Stock in the amount of $30,230.
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
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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 months ended March 31,
1997 are not necessarily indicative of the results of operations or cash flows
which may be recorded for the remainder of 1997.
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, 1996.
(2) WARRANTS:
During the first quarter of 1997, the Company received payments of $4,100 for
warrants previously subscribed.
(3) SUPPLEMENTAL NON-CASH DISCLOSURES:
In March 1997 the Company accrued non-cash dividends on the Series A Convertible
Preferred Stock, that were issued in the second quarter of 1997, in the amount
of $26,670. In March 1997 the Company accrued non-cash dividends on the Series B
Convertible Preferred Stock, that were issued in the second quarter of 1997, in
the amount of $3,560. The number of shares of common stock issued in connection
with such dividends is 4,991and 666 respectively.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board issued FASB No. 128,
"Earning Per Share" effective for fiscal years ending after December 15, 1997.
SAFS No. 128 simplifies the calculation of earnings per share to measure the
performance of an entity over a reporting period for both basic earnings per
share and diluted earnings per share. SAFS No. 128 does not currently have an
impact on the Company's earning per share as the Company is incurring net
losses.
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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") which represent the Company's expectations or beliefs, including, but
not limited to, statements concerning industry performance, the Company's
operations, performance, financial condition, growth and acquisition strategies,
margins, and growth in sales of the Company's products. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "estimate," or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the Company's control, and
actual results may differ materially depending on a variety of important
factors. Such factors 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
Big Entertainment is a diversified entertainment company, which owns
exclusive rights to certain original characters and concepts created by
best-selling authors and media celebrities, including, for example, Tom Clancy,
Leonard Nimoy, Gene Roddenberry, Mickey Spillane, Arthur C. Clarke, John Jakes,
Anne McCaffrey, Margaret Weis and Isaac Asimov. The Company uses illustrated
novels to introduce and develop new characters and concepts (collectively, its
"intellectual property") in the marketplace and then the Company seeks to
license these properties across all media, including films and television and in
books, multimedia software, toys and other merchandise. The Company acquires the
rights to its intellectual properties pursuant to agreements that grant it, on
an exclusive basis, all rights in the intellectual property itself (including,
but not limited to, the right to license the intellectual property for films,
television, books, multimedia software, toys and other merchandise) as well as
the right to use the creator's name in the title of the intellectual property.
The Company's intellectual properties include, among others: TOM
CLANCY'S NETFORCE; LEONARD NIMOY'S PRIMORTALS; ARTHUR C. CLARKE'S CRIOSPHINX;
GENE RODDENBERRY'S XANDER IN LOST UNIVERSE; ISSAC ASIMOV'S IOBOTS; MICKEY
SPILLANE'S MIKE DANGER; JOHN JAKES' MULLKON EMPIRE; ANNE MCCAFFREY'S ACORNA: THE
UNICORN GIRL; ANNE MCCAFFREY'S SARABAND; MARGARET WEIS' TESTAMENT OF THE DRAGON;
TAD WILLIAMS' MIRROR WORLD; NEIL GAIMAN'S MR. HERO -- THE NEWMATIC MAN; NEIL
GAIMAN'S TEKNOPHAGE; NEIL GAIMAN'S LADY JUSTICE; NEIL GAIMAN'S WHEEL OF WORLDS;
and CATHY CASH SPELLMAN'S MILLENNIUM. Certain of the Company's intellectual
properties are owned by a joint venture known as NetCo Partners ("NetCo
Partners"), owned 50% by the Company and 50% by C.P. Group, Inc. ("C.P. Group"),
in which Tom Clancy is a substantial shareholder. The Company is continually
negotiating with other best-selling authors to create and develop additional
intellectual properties for the Company and/or NetCo Partners to license for use
in various media and merchandise.
A number of the Company's and/or NetCo Partners' intellectual
properties have been licensed for use in books, feature films, television series
and merchandise by various licensees, including The ABC Television Network
("ABC"), a division of The Walt Disney Company, for development of a television
mini-series based on TOM CLANCY'S NETFORCE; Warner Books (a division of
Time-Warner, Inc.) for
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hardcover and paperback book publishing rights; Playmates Toys, Inc. for a line
of toys; HarperCollins (a division of Rupert Murdoch's News Corporation) for
hardcover and paperback book publishing rights; Alliance Productions, Ltd., a
division of Alliance Communications Corporation, the largest Canadian
entertainment company, for television rights; Sierra On-Line, a publisher of
interactive entertainment, productivity and educational software, for CD-ROM
rights; and Miramax Films (a division of The Walt Disney Company) for feature
film and television rights. The licensing agreements generally provide for the
payment by the licensee of advances to the Company or NetCo Partners, as the
case may be, as well as royalty payments based on sales after the advance has
been earned out. The Company and NetCo Partners are actively negotiating
additional licensing opportunities for their intellectual properties.
In June 1995, the Company and C.P. Group, a company in which Tom Clancy
is a substantial shareholder, entered into an agreement to form NetCo Partners
(the "NetCo Joint Venture Agreement"). NetCo Partners which is engaged in the
publishing and licensing of entertainment properties, including TOM CLANCY'S
NETFORCE, has entered into various licensing agreements.
The Company has four operating divisions: the publishing division, the
licensing division, the book licensing and packaging division and the
entertainment retail division. The publishing and licensing divisions are the
primary means by which the Company utilizes its intellectual properties, the
publishing division by focusing on development of the Company's intellectual
properties through the publication of illustrated novels, and the licensing
division, by focusing on licensing the Company's intellectual properties for
books, feature films, television series, toys and merchandise, and interactive
multimedia products. The Company's book licensing and packaging division focuses
on developing and executing book projects, typically with bestselling authors.
The entertainment retail division focuses on developing, operating and
franchising the Company's in-line retail stores and retail kiosks known as
"Entertainment SuperoKiosks." The Company has recently entered into an agreement
with ABC for the use of ABC programming in the Entertainment SuperoKiosks in
exchange for promotional and advertising spots for the Entertainment
SuperoKiosks on ABC affiliate television stations.
The Company's divisions are described as follows:
PUBLISHING. Big Entertainment's publishing division focuses on
introducing and developing the Company's intellectual
properties to explore their potential for licensing, through
the publication and distribution of illustrated novels. During
1996, the Company began reducing its comic book titles, which
had previously been a format also utilized by the Company to
introduce and develop its intellectual properties, and exited
comic book publishing in the first quarter of 1997. The
Company's illustrated novels generally tell a story in one
issue, are targeted at a more sophisticated audience than
typical comic book readers and are generally sold by
traditional book retailers. The Company believes that its
illustrated novels have a wider distribution potential for its
titles, longer shelf lives and higher initial retail prices as
compared to comic books. Retail cover prices of the Company's
illustrated novels generally range from $9.95 to $19.95.
The Company's philosophy is to produce high-quality
publications utilizing state-of-the-art graphics and
publishing techniques. Big Entertainment's illustrated novels
are targeted primarily to young adults and adult readers of
all ages.
In November 1996, the Company entered into an agreement with
HarperCollins Publishers, Inc., a division of Rupert Murdoch's
News Corporation ("HarperCollins"), granting to HarperCollins
certain rights to publish, reproduce and distribute initially
four of the
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Company's entertainment properties as hardcover and paperback
novels as well as illustrated novels (the "HarperCollins
Agreement"). Under the HarperCollins Agreement, HarperCollins
has assumed all responsibility for the printing and
distribution of the covered titles. HarperCollins has agreed
to pay to the Company advances against royalties to be earned,
which advances the Company currently believes will cover its
development costs for the related title. Further, the
HarperCollins Agreement will enable the Company to
significantly reduce its expenses after initial development of
the titles and will eliminate the Company's risk of return of
unsold illustrated novels or books. As of the date hereof, the
Company has delivered several manuscripts or completed books
to HarperCollins, which are proceeding toward publication
stage.
The HarperCollins agreement fundamentally changes the way this
division does business. Before the effect of the HarperCollins
agreement, the Company advanced one hundred percent of all
costs associated with the development of its titles.
Furthermore, the Company paid for the printing of all books,
and was responsible for returns, which are a normal part of
book publishing. HarperCollins' advance payments to the
Company are a source of funds for the Company to use for
development costs; HarperCollins will be paying the costs of
printing; and HarperCollins will be solely responsible for all
returns.
In addition to the Company's agreement with HarperCollins,
U.S. and international distribution of the Company's
illustrated novels, books and other products is also handled
by the Company's licensees or joint venturers, such as Warner
Books and Sierra On-Line (see "Licensing Division," below).
Substantially all of the costs in this division are expensed
as incurred. Since most development costs of the Company's
entertainment properties are expensed in the illustrated novel
division, there are expected to be minimal incremental
additional expenses associated with licensing revenue
anticipated to be generated from the Company's entertainment
properties.
LICENSING DIVISION. Big Entertainment's licensing division
seeks to exploit the Company's intellectual properties by
licensing them for feature films, television series, books and
other merchandise such as apparel, toys, trading cards,
posters and similar items. The Company is represented in its
efforts to secure book licenses with publishers by the William
Morris Agency.
In particular, the Company believes that successful feature
films and/or television series will significantly enhance the
value of its intellectual property that is the basis for such
feature film and/or television series, resulting in increased
licensing and merchandising revenues.
NetCo Partners (see "NetCo Partners," below), reached an
agreement with ABC, a division of The Walt Disney Company, to
develop and license a television mini-series based on TOM
CLANCY'S NETFORCE. The agreement provides for a license fee
paid to NetCo Partners of $8,000,000 for such mini-
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series, plus other specified rights fees and profit
participation for NetCo Partners. All of such fees and profit
participation are to be split equally between the Company and
C.P. Group, both of which are 50% partners of NetCo Partners.
In the event that NetCo Partners and ABC do not reach
agreement as to a teleplay for the mini-series, the agreement
provides for the payment of $1.6 million to NetCo Partners.
The mini-series based on TOM CLANCY'S NETFORCE is currently
scheduled to air for four hours over two nights during the
sweeps period in May 1998.
NetCo Partners has received proposals from three major book
publishers to license TOM CLANCY'S NETFORCE for publication as
a series of young adult and adult novels. NetCo Partners is
considering such proposals, which provide for the payment of
license fees to NetCo Partners.
NetCo Partners entered into an agreement with Playmates Toys,
Inc. ("Playmates Toys") to develop, manufacture and market a
line of toys based on the TOM CLANCY'S NETFORCE. Playmates
Toys, which specializes in boys' action figures, is currently
the master toy licensee of STAR TREKTM and TEENAGE MUTANT
NINJA TURTLESTM. The agreement with Playmates Toys provides
for the payment to NetCo Partners of a $1,000,000 advance
against royalties to be earned by NetCo Partners under the
agreement.
Other licensing agreements include:
/bullet/ A joint CD-ROM publishing venture with Sierra
On-Line, one of the largest worldwide publishers of
interactive entertainment, productivity and educational
software, for LEONARD NIMOY'S PRIMORTALS.
/bullet/ A joint publishing agreement with HarperCollins,
one of the largest publishers in the world and a
wholly-owned subsidiary of Rupert Murdoch's The News
Corporation, to publish hardcover books, paperback books,
and illustrated novels for ANNE MCCAFFREY'S ACORNA:QUEEN
OF THEUNICORNS, ISAAC ASIMOV'S I-BOTS, and MARGARET WEIS'
TESTAMENT OF THE DRAGON.
/bullet/ An agreement by NetCo Partners to license TAD
WILLIAMS' MIRRORWORLD to HarperCollins for HarperCollins
to publish as an illustrated novel.
/bullet/ An agreement with Alliance Television
Productions, a division of Alliance Communications
Corporation, to license JOHN JAKES' MULKON EMPIRE for
television.
/bullet/ A publishing agreement with Warner Books, a
division of Time Warner, Inc.
/bullet/ A film licensing agreement with Miramax Films, a
subsidiary of the Walt Disney Company.
Merchandising of character-related products such as the
Playmates Toys line of toys is conducted principally through
the grant of licenses to independent third parties who would
manufacture their own products incorporating the Company's or
NetCo Partners' characters and distribute such products
through their normal distribution channels as well as in
specialty stores. Generally, these licenses are expected to
provide payment of royalties to
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the Company based on specified percentages of the sales of
licensed products. To date, products featuring the Company's
intellectual properties have included T-shirts, caps, trading
cards, posters, buttons and telephone calling cards. These
products have been sold through independent distributors and
by the Company at its retail outlets.
BOOK LICENSING AND PACKAGING. Big Entertainment's 51%-owned
book licensing and packaging division, Tekno Books, is a
leading book packager of fiction and non-fiction, with 900
books published to date (approximately 177 published since the
fourth quarter of 1994, when the Company acquired its interest
in Tekno Books) and approximately another 165 books under
contract that are forthcoming. In addition to providing access
to the Company of a number of best-selling authors, Tekno
Books creates book projects by developing concepts,
negotiating publishing agreements and executing substantially
all aspects of the book projects. Tekno Books has worked with
approximately 50 New York Times best-selling authors,
including Tom Clancy, Jonathan Kellerman, Mary Higgins Clark,
Dean Koontz, Tony Hillerman, Robert Ludlum and Scott Turow,
and numerous media celebrities, including David Copperfield,
Louis Ruykeyser and Willard Scott. These books have been
published with more than 30 publishers (including
HarperCollins, Doubleday, Random House, Simon & Schuster,
Viking Penguin and Warner Books), translated into 28
languages, and selected by 17 different book clubs. Tekno
Books is also a leading producer of novels and anthologies in
the science fiction, fantasy, mystery, horror and Western
genres. This division is an excellent source of referring
authors to the Company for the development of licensable
entertainment properties. This division has two streams of
revenue, one being advances paid to this division by
publishers in return for granting certain publication rights
to such publishers, and the other being royalties from the
division's expanding library of titles.
ENTERTAINMENT RETAIL. The Company currently operates 27
Entertainment Super/Register Mark/Kiosks and one in-line store
in the Mall of America. The Company currently plans to open
approximately 10 additional Entertainment Super/Register
Mark/Kiosks and approximately five in-line retail stores
during 1997.
Big Entertainment's strategy for opening its Entertainment
Super/Register Mark/Kiosks is to seek prime locations in
regional and major shopping malls in geographic areas
determined by management as having desirable demographic
characteristics. Development of the Company's retail outlets
has been and is expected to continue to be accomplished
through relationships established with major mall developers,
including the Simon-DeBartolo Group, the largest U.S. mall
manager/developer.
In March 1997, the Company entered into an exclusive
programming agreement with the ABC Television Network ("ABC"),
a division of The Walt Disney Company. Under this programming
agreement, on May 1, 1997, the Company commenced running two
times each hour on the video monitors at each of its
Entertainment Super/Register Mark/Kiosks, a 12-minute
programming segment provided by ABC and its local affiliate
television stations, on an exclusive basis. The programming is
devoted to upcoming television programs to appear on ABC
(including ABC Entertainment, ABC News, ABC Daytime and ABC
Sports) and its affiliate stations and new, non-repetitive
programming will be provided to the Company each month. The
Company also agreed to display ABC's logo and other
promotional materials complementing the then-current video
monitor campaigns. In exchange for its agreement to run the
ABC programming exclusively, ABC affiliate stations in each
market
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where the Company's Entertainment Super/Register Mark/Kiosks
are located are expected to run promotional and advertising
spots on the ABC affiliate stations featuring the Company's
Entertainment Super/Register Mark/Kiosks. The Company has
also agreed to sell at the Entertainment Super/Register
Mark/Kiosks, as part of its product mix, mutually selected ABC
products featuring the ABC logo or its programs (such as "Home
Improvement" T-shirts and "Monday Night Football" caps), on
terms to be agreed upon. The Company believes that this
arrangement with ABC will provide its Entertainment
Super/Register Mark/Kiosks with a steady source of current
programming for the Entertainment Super/Register Mark/Kiosks
that will appeal to the target customers of the Entertainment
Super/Register Mark/Kiosks, at no cost to the Company.
Additionally and most importantly, the promotional spots
featuring the Company's Entertainment Super/Register
Mark/Kiosks run by the ABC affiliate stations are expected to
provide the Company with substantial television advertising in
the markets where the retail units are located at no
additional expense to the Company.
As part of its expansion strategy, the Company is in the
process of implementing a franchise program and has engaged
the services of an experienced franchise sales firm to handle
these sales. In the franchise program, the Company is offering
through its wholly-owned subsidiary, Big Entertainment
Franchise Corp., franchises in the United States and
internationally to qualified and experienced area developers
and franchisees who are committed to the development of
multiple Entertainment Super/Register Mark/Kiosks in such
areas. It is expected that area developers will either develop
Entertainment Super/Register Mark/Kiosks on their own or in
conjunction with sub-franchisees.
In December 1995, the Company entered into an agreement with
Martin Ergas, a non-affiliate of the Company, granting to Mr.
Ergas certain exclusive territorial franchise rights for
Canada (excluding the Province of Alberta) for a term of 10
years in exchange for a non-refundable franchise fee of
$700,000 and providing for the purchase by Mr. Ergas of two
fully outfitted and installed Entertainment Super/Register
Mark/Kiosks for $300,000. The Canadian franchise rights
granted to Mr. Ergas consist primarily of the right to open,
operate and sub-franchise Entertainment Super/Register
Mark/Kiosks under the Company's name in the specified
territory. The nonrefundable franchise fee of $700,000 is
expected to be received during 1997 prior to the opening of
the first two units and upon the completion of certain
training by the Company of employees of the franchisee.
The Company has filed its Uniform Franchise Offering Circular
and the terms of its standard area development and franchise
agreements. The agreements provide for an initial term with
renewal options and payment of an initial franchise fee upon
execution, with additional fees paid upon the opening of each
retail unit. In addition, franchisees will be required to pay
a continuing royalty based upon sales. The Company will also
retain a substantial portion of the revenues from advertising
displayed on the video monitors of each Entertainment
Super/Register Mark/Kiosk. The terms and conditions of the
area development and franchise agreements will vary depending
upon a number of factors, including the experience and
resources of the franchisee, the size and density of the
covered territory, the number of retail units to be developed,
the development schedule, capital requirements and other
matters. In connection with the Company's planned sale of
franchises, the Company will be subject to Federal Trade
Commission regulation, as well as certain state laws
regulating the offer and sale (and in some cases, the
negotiation) of franchises and certain rights of the
continuing relationship between the franchisor and
franchisees.
12
<PAGE>
On May 1, 1997, the Company signed its first U.S. franchise
agreement, under which one Big Entertainment retail unit is
expected to be built by the franchisee in the Philadelphia
area by the end of 1997. The agreement, with a private
investor, also provides for up to three more franchise stores
in the Philadelphia region.
13
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 1997 ("Q1-97") AS COMPARED TO THE THREE
MONTHS ENDED MARCH 30, 1996 ("Q1-96").
The following table summarizes the revenues, cost of sales and gross
profit attributable to each of the Company's divisions for Q1-97 and Q1-96:
<TABLE>
<CAPTION>
INTELLECTUAL PROPERTY RETAIL
--------------------------------------------------- -------------------
BOOK
LICENSING AND LICENSING PUBLISHING ENTERTAINMENT TOTAL
PACKAGING RETAIL
--------------- ---------------- ------------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Q1-97
Net Revenues $ 373,490 $ 71,221 $ 25,458 $ 1, 237,153 $1,707,322
Cost of sales 244,535 - 32,336 677,534 954,405
---------- -------- -------- ---------- ----------
Gross profit (loss) $ 128,955 $ 71,221 $ (6,878) $ 559,619 $ 752,917
========== ======== ======== ========== ==========
Q1-96
Net Revenues $ 340,346 $ 97,833 $443,170 $ 654,274 $1,535,623
Cost of sales 185,275 - 440,315 344,502 970,092
---------- -------- -------- ------- ----------
Gross profit(loss) $ 155,071 $ 97,833 $ 2,855 $ 309,772 $ 565,531
========== ======== ======== ========== ==========
</TABLE>
NET REVENUES
Revenues are generated through the Company's intellectual
property activities, including publishing, book licensing and packaging, and
licensing, and through its retail chain. Net revenues for Q1-97 increased by
11%, or $171,699, to $1,707,322 from $1,535,623 for Q1-96. The increase noted in
Q1-97 over Q1-96 is primarily due to increases in book licensing and packaging
and entertainment retail revenues offset by a decrease in publishing revenue due
to Company's elimination of comic books.
GROSS PROFIT
Overall Company gross profit increased by 33% or $187,386, to $752,917
for Q1-97 from $565,531 in Q1-96. As a percentage of net revenues, gross profit
increased to 44% in Q1-97 from 37% in Q1-96. The increase in gross profit is
primarily due to an increase in sales in the entertainment retail division.
INTELLECTUAL PROPERTY
/Bullet/ BOOK LICENSING AND PACKAGING
NET REVENUES. Total net revenues from Tekno Books, which is 51%
owned by the Company, increased 10%, or $33,144, to $373,490 for Q1-97 from
$340,346 for Q1-96. Tekno Books deferred revenues increased by 14%, or $50,310,
to $417,902 at March 31, 1997 from $367,592 at March 31, 1996.
14
<PAGE>
Tekno Books' net revenues consist of two sources of revenue (1) cash advances
recognized as revenues upon the acceptance by publishers of books, and (2)
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. Additionally,
Tekno Books has a library of books totaling 900 titles which generate royalty
payments to Tekno Books.
GROSS PROFIT. Gross profit for Tekno Books in Q1-97 was 35% as compared
to 46% in Q1-96. The decrease in gross profit percentage in Q1-97 is due to
revenue recognition in Q1-96 related to several high margin works which reached
publication. This is not an indication of any change in performance of this
division. This division continues to grow with several significant works
currently in Tekno Books' product pipeline.
/Bullet/ LICENSING
NET REVENUES. Net revenues from the licensing division amounted to
$71,221 for Q1-97 as compared to $97,833 for Q1-96, for a decrease of 27%. The
decrease in recorded net revenues primarily resulted from changes in the timing
of manuscript deliveries pursuant to licensing agreements entered into by the
Company. While the amount of licensing net revenues decreased from Q1-96 to
Q1-97, the number and potential dollar value of licensing agreements has
increased significantly since Q1-96.
Revenue recognition 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. The first book under the Warner Books agreement was published in
April 1997. The Company received an advance for the publication of the first
book under the Warner Books agreement and will receive additional royalties as
earned.
GROSS PROFIT. Licensing gross profit percentage in Q1-97 is 100%, which
is unchanged as compared to Q1-96. This margin is possible because all costs
related to the development of the entertainment properties licensed are expensed
by the publishing division, where the Company's intellectual properties are
created and developed.
/Bullet/ PUBLISHING
The Company uses illustrated novels 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 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 or minimal further development cost on the part
of the Company.
15
<PAGE>
NET REVENUES. Net publishing revenues from the sale of illustrated
novels and comic books published by the Company decreased by 94%, or $417,712,
to $25,458 for Q1-97 from $443,170 for Q1-96, reflecting the results primarily
of a shift in the Company's strategy. The Company exited the comic book
publishing business in Q1-97 to focus on its expansion through the introduction
of illustrated novels, which are longer in page length than comic books and have
a higher cover price (generally ranging from $9.95 - $19.95) than comic books
(generally $1.95 - $2.25). The Company believes that illustrated novels have a
wider distribution potential to the bookstore market for the Company's titles
than do comic books. Since most of the Company's titles in development feature
best-selling authors' names as part of the titles, the Company believes that the
vast number of their readers are more likely to look for their titles in
traditional book stores and where books are generally sold than in comic book
stores.
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. The Company's agreement with
HarperCollins Publishing, a division of Rupert Murdoch's News Corporation, for a
joint publishing program for hardcover books, paperback books, and illustrated
novels, eliminates the Company's risk for returns in the newsstand and bookstore
markets for entertainment properties covered by this agreement. HarperCollins,
with its expertise in the bookstore and newsstand market, is handling all
shipments of the illustrated novels covered under the agreement and thus carries
all the risk of returns. In addition, all printing and distribution costs are
borne by HarperCollins. The agreement also calls for advances to be paid by
HarperCollins to the Company, which are expected to cover all or most of the
Company's costs in producing the illustrated novels covered by the HarperCollins
agreement, and the Company will receive royalties on sales if and when the
royalties on sales exceed the advance payments. Two of the illustrated novels
covered by the HarperCollins program are due to be published in June 1997.
GROSS PROFIT/LOSS. The gross loss in the publishing division in
Q1-97 was ($6,878) as compared to a gross profit of $2,855 for Q1-96.
RETAIL
/Bullet/ ENTERTAINMENT RETAIL
NET REVENUES. The Company's entertainment retail division net revenues
increased by 89%, or $582,879, to $1,237,153 for Q1-97 from $654,274 for Q1-96.
Net revenues are derived from sales of entertainment products and merchandise,
including T-shirts (such as STAR WARSTM T-shirts), hats (such as X-FILESTM hats
), action figures (such as BATMANTM action figures) and related items, CD-ROMS,
trading cards, videos, comic books, collectible art, and other entertainment
merchandise, at the Company's retail units located in major malls in various
parts of the United States. The Company had 28 retail units in operation at
March 31, 1997 as compared to 15 retail units in operation at March 31, 1996.
The increase in revenues was due to two factors: (1) an increase in the number
of retail units in operation, and (2) an increase in same store sales
comparisons. In Q1-97 same store sales increased by 18.6% as compared to Q1-96.
GROSS PROFIT. Gross profit for the entertainment retail division
increased by 81%, or $249,847, to $559,619 for Q1-97 from $309,772 for Q1-96.
The increase in gross profit was due in part to the procurement of preferred
pricing of merchandise which was obtained by the Company's enhanced bargaining
power in purchasing merchandise for resale due to the increased number of
Company retail
16
<PAGE>
units, and the resulting greater volume of purchases, as well as
a gradual evolution in the product mix to higher margin merchandise.
OPERATING EXPENSES
Total operating expenses consist of selling, general and
administrative expenses, salaries and benefits and amortization of Goodwill and
Intangibles. Total operating expenses increased by 5% or $101,589 to $2,210,186
for Q1-97 from $2,108,597 for Q1-96. This increase from Q1-97 to Q1-96 is due to
increases in rents and salaries related to the increased number of Entertainment
Super-Kiosks. As a percentage of net revenues, total operating expenses
decreased to 129% in Q1-97 from 137% in Q1-96. The decrease in operating
expenses as a percentage of net revenues in Q1-97 from Q1-96 is a result of
reductions in operating expenses in the publishing division as well as
reductions in corporate overhead.
OTHER (INCOME) EXPENSE
Other (income) expense for Q1-97 decreased by 26%, or $13,514, to
$38,889 from $52,403 for Q1-96. This decrease represents an increase in the
equity earnings of a subsidiary as well as a decrease in interest expense.
NET LOSS
Net loss decreased by 7% or $119,547 to $1,528,138 for Q1-97 as
compared to a net loss of $1,647,685 for Q1-96. The decreased net loss resulted
from increased gross profit of the Company. Net loss per share for Q1-97 was
$0.26 compared to $.35 per share in Q1-96, for a decrease in net loss per share
of 26%. The decrease in net loss per share in Q1-97 from Q1-96 is attributable
to both a decrease in net loss and an increase in the number of shares
outstanding.
SHAREHOLDER'S EQUITY
Shareholder's equity decreased 37% or $1,556,606, to $2,635,261 at
March 31, 1997 as compared to a shareholder's equity of $4,191,867 as of
December 31, 1996. The decrease in shareholder's equity is primarily due to
recurring net losses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash and cash equivalents of
$550,272 and working deficit of $71,539 compared to cash and cash equivalents of
$1,675,852 and working capital of $1,285,093 at December 31, 1996. Net cash used
in operating activities during Q1-97 was $1,036,633 primarily representing cash
used to fund the Company's net loss. Net cash provided by investing activities
was $35,324, and $124,271 in cash was used by financing activities for a total
decrease in cash and cash equivalents of $1,125,580. Net cash used in operating
activities during Q1-96 was $1,916,139, net cash used in investing activities
was $284,869, and $1,804,353 in cash was provided by financing activities.
To facilitate the expansion of its entertainment retail division the
Company established a long-term relationship with the largest U.S. shopping mall
developer, the Simon DeBartolo Group and its Co-Chairman, Melvin Simon. Tekno
Simon, LLC ("Tekno Simon"), an affiliate of Mr. Simon, initially invested
$1,000,000 in shares of the Company's common stock in the Company's 1995 private
placement, and pursuant to the Simon Stock Purchase Agreement entered into in
November 1995, also invested an additional $1,360,000 in shares of the Company's
preferred stock to fund the cost of developing 17
17
<PAGE>
Entertainment SuperoKiosks (at $80,000 per kiosk). Pursuant to this agreement,
Tekno Simon has acquired 217,600 shares of the Company's Series A Variable Rate
Convertible Stock (the "Series A Preferred Stock"). The Company's agreement with
Tekno Simon was amended in October 1996 to extend the funding arrangement,
pursuant to which the Company may fund the development of eight additional
Entertainment SuperoKiosks. As of March 31, 1997, $240,000 in additional funding
has been provided to the Company for the development of three additional
Entertainment SuperoKiosks. An additional $240,000 in funding has been provided
to the Company by Tekno Simon to fund three more Entertainment SuperoKiosks
since March 31, 1997. This amendment also provided that the stock purchases made
after October 1996 will be of shares of the Company's Series B Variable Rate
Convertible Preferred Stock in lieu of shares of the Company's Series A
Preferred Stock.
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 six months. The Company's management expects to require
additional financing for the expansion of its business, and in particular the
growth of the Company's Entertainment SuperoKiosks, and to support working
capital requirements in future years. The Company currently is exploring
financing alternatives to allow the Company to finance such expansion. However,
there can be no assurance that such financing alternatives will be available to
the Company or will be implemented on terms favorable to the Company. In the
event such financing is not secured, the Company's Chairman of the Board and
Chief Executive Officer and the Company's Vice Chairman and President, have
indicated their intention to provide the Company, if required, with an amount
not to exceed $2,500,000 in order to enable the Company to meet its working
capital requirements for the balance of 1997; provided, however, that the
commitment will terminate in the event the Company raises no less than
$2,500,000 from other sources. In the event that the Company raises less than
$2,500,000, the dollar amount of the commitment will be reduced on a "dollar for
dollar" basis to the extent of such funds raised by the Company. The exact terms
of any working capital provided to the Company will be subject to negotiation
with the Board of Directors.
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 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.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
--------------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1997.
19
<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: May 15, 1997 By: /s/ Mitchell Rubenstein
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 550,272
<SECURITIES> 0
<RECEIVABLES> 129,906
<ALLOWANCES> 0
<INVENTORY> 1,503,601
<CURRENT-ASSETS> 3,487,249
<PP&E> 3,184,762
<DEPRECIATION> 1,002,302
<TOTAL-ASSETS> 6,832,805
<CURRENT-LIABILITIES> 3,558,788
<BONDS> 0
0
3,520,000
<COMMON> 58,706
<OTHER-SE> (943,445)
<TOTAL-LIABILITY-AND-EQUITY> 6,832,805
<SALES> 1,707,322
<TOTAL-REVENUES> 1,707,322
<CGS> 954,405
<TOTAL-COSTS> 2,210,186
<OTHER-EXPENSES> 10,219
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,108
<INCOME-PRETAX> 1,528,138
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,528,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,528,138
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
