U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 November 11, 1997, the number of shares outstanding of the
issuer's Common Stock, $.01 par value, was 6,887,641.
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BIG ENTERTAINMENT, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE(S)
Item 1. Consolidated Financial Statements
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Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996.....................................3
Consolidated Statements of Operations for the three and
nine months ended September 30, 1997 and
1996 (unaudited).....................................................4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 (unaudited).................5
Condensed Notes to Unaudited Consolidated Financial Statements.......6-7
Item 2. Management's Discussion and Analysis or Plan of Operations...........8-21
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...........................22
Item 6. Exhibits and Reports on Form 8-K....................................22
Signature ....................................................................23
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BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,569,375 $ 1,675,852
Trade receivables, net 112,295 95,547
Merchandise inventories 2,011,860 1,410,603
Prepaid expenses 446,123 654,255
Franchise fee receivable 700,000 700,000
Other current assets 136,403 64,167
------------- ------------
Total current assets 4,976,056 4,600,424
PROPERTY AND EQUIPMENT, net 2,282,229 2,349,108
INVESTMENT - NETCO PARTNERS 805,848 201,311
INTANGIBLE ASSETS, net 166,727 491,265
GOODWILL, net 330,677 345,257
OTHER ASSETS 178,980 256,054
------------- ------------
TOTAL ASSETS $ 8,740,517 $ 8,243,419
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 939,305 $ 1,021,264
Accrued expenses 453,778 522,509
Deferred revenue 1,228,721 1,268,455
Current portion of capital lease obligations 501,466 503,103
------------- ------------
Total current liabilities 3,123,270 3,315,331
------------- ------------
CAPITAL LEASE OBLIGATIONS, less current portion 484,152 731,807
------------- ------------
CONVERTIBLE DEBENTURE 650,000 -
------------- ------------
MINORITY INTEREST 53,175 4,414
------------- ------------
SHAREHOLDERS' EQUITY:
Series A variable rate convertible preferred stock, $6.25 stated value,
217,600 shares authorized; 217,600 issued and outstanding at
September 30, 1997 and December 31, 1996. Liquidation preference of
$1,598,307 at September 30, 1997. 1,360,000 1,360,000
Series B variable rate convertible preferred stock, $5.24 stated and
liquidation value, 142,223 shares authorized; 121,393 and 29,767
issued and outstanding at September 30, 1997 and at December 31,
1996, respectively. 640,000 160,000
Series C variable rate convertible preferred stock, $100 stated
value, 100,000 shares authorized; 20,000 issued and outstanding
at September 30, 1997 and at December 31, 1996. Liquidation
preference of $2,000,000 at September 30, 1997. 2,000,000 2,000,000
Common stock, $.01 par value, 25,000,000 shares authorized;
6,887,641 and 5,870,601 shares issued and outstanding at
September 30, 1997 and at December 31, 1996, respectively. 68,877 58,706
Additional paid-in capital 25,190,782 22,039,194
Warrants outstanding 577,900 566,600
Accumulated deficit (25,407,639) (21,992,633)
------------- ------------
Total shareholders' equity 4,429,920 4,191,867
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,740,517 $ 8,243,419
============= ============
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The accompanying Condensed 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 AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
-------------- --------------- ------------- ---------------
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NET REVENUES $ 2,003,740 $ 1,669,438 $ 5,618,629 $ 5,093,336
COST OF SALES 1,011,224 1,092,489 2,991,326 3,315,698
-------------- --------------- ------------- ---------------
Gross profit 992,516 576,949 2,627,303 1,777,638
-------------- --------------- ------------- ---------------
OPERATING EXPENSES:
Selling, general and administrative 1,655,046 1,292,852 4,208,218 3,401,957
Salaries and benefits 1,040,887 866,266 2,828,466 2,404,709
Amortization of goodwill and intangibles 114,453 112,407 340,749 337,221
-------------- --------------- ------------- ---------------
Total operating expenses 2,810,386 2,271,525 7,377,433 6,143,887
-------------- --------------- ------------- ---------------
Operating loss (1,817,870) (1,694,576) (4,750,130) (4,366,249)
EQUITY IN EARNINGS OF NETCO PARTNERS 7,928 - 1,830,427 -
OTHER:
Interest, net (30,084) (8,247) (149,706) (127,658)
Other, net 10,603 10,025 30,797 28,300
-------------- --------------- ------------- ---------------
Loss before minority interest and income taxes (1,829,423) (1,692,798) (3,038,612) (4,465,607)
MINORITY INTEREST (76,972) (47,480) (210,711) (245,639)
-------------- --------------- ------------- ---------------
Net loss $ (1,906,395) $ (1,740,278) $ (3,249,323) $ (4,711,246)
============== =============== ============= ===============
Net loss per common and common
equivalent share $ (0.29) $ (0.30) $ (0.53) $ (0.88)
============== =============== ============= ===============
Weighted average number of common
and common equivalent shares outstanding 6,605,957 5,861,294 6,122,789 5,346,509
============== =============== ============= ===============
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The accompanying Condensed 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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
Nine Months Ended September 30,
1997 1996
------------- ---------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,249,323) $ (4,711,246)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 862,081 771,189
Equity in net earnings of Netco Partners (1,830,427) -
Issuance of compensatory stock options and warrants 17,662 -
Recognition of deferred gain (30,291) (20,194)
Amortization of deferred financing costs 13,772 8,314
Minority interest 210,711 245,639
Changes in assets and liabilities:
Trade receivables (16,748) (313,084)
Prepaid expenses 208,132 (107,081)
Merchandise inventories (601,257) (401,364)
Other current assets (72,237) 8,420
Other assets 63,302 20,798
Accounts payable (81,959) (1,206,295)
Accrued professional fees 8,250 (24,671)
Deferred revenue (9,443) 286,670
Other accrued expenses (108,562) 180,477
------------- ---------------
Net cash used in operating activities (4,616,337) (5,262,428)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Return of capital from (investment in) Netco Partners 1,225,890 (202,255)
Capital expenditures, net (371,445) (623,699)
Investment in patents and trademarks (329) (49,670)
Return of capital from Tekno Books to minority partner (161,950) (353,051)
------------- ---------------
Net cash provided by (used in) investing activities 692,166 (1,228,675)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred stock 480,000 560,000
Proceeds from issuance of convertible debenture 650,000 -
Net proceeds from issuance of common stock 3,069,996 4,873,465
Proceeds from sale of 8.5% convertible promissory note - 500,000
Proceeds from sale of assets - 803,372
Dividends on preferred stock (60,000) -
Repayments under capital lease obligations (333,602) (175,481)
Receipts of subscription receivable 11,300 184,600
------------- ---------------
Net cash provided by financing activities 3,817,694 6,745,956
------------- ---------------
Net (decrease) increase in cash and cash equivalents (106,477) 254,853
CASH AND CASH EQUIVALENTS, beginning of period 1,675,852 606,376
------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 1,569,375 $ 861,229
============= ===============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 156,425 $ 176,683
============= ===============
</TABLE>
The accompanying Condensed Notes to Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
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BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED 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 Big Entertainment, Inc. and Subsidiaries (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 for the three and nine months ended September 30,
1997, and cash flows for the nine months ended September 30, 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) DEBT:
The Company's Chairman of the Board and Chief Executive Officer and the
Company's Vice Chairman and President have extended a $1.1 million unsecured
line of credit facility to the Company. The line of credit bears interest at the
JP Morgan Bank prime rate of interest. The outstanding balance under this line
of credit of $912,000 at June 30, 1997 was repaid during the three months ended
September 30, 1997.
In August 1997, the Company issued a $650,000 convertible debenture to a single
institutional investor. The debenture accrues interest at 4% per annum, which is
payable in arrears on August 31, 1999, the maturity date of the debenture. The
debenture is convertible by the holder to shares of the Company's common stock
at a conversion price equal to 80% of the average closing bid price for the ten
trading days immediately preceding the date of conversion. The conversion
features restrict the maximum principal amount of the debenture which can be
converted for a 120-day period following the effective date of registration for
resale of the underlying shares. The debenture is redeemable at 125% of the
principal amount plus accrued interest. The Company can require the holder of
the debenture to convert any portion of the debenture still outstanding on the
maturity date. In conjunction with issuance of the debenture, the buyer received
warrants to buy 32,500 shares of common stock at exercise prices ranging from
$6.00 to $6.53 per share. The warrants expire March 2, 2003.
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3) COMMON STOCK:
In July 1997, the Company sold 1,000,002 shares of its common stock through a
private placement for $3,500,000. The proceeds to the Company from the issuance
of these shares amounted to $3,069,996, net of expenses. The shares issued
through this private placement are restricted from resale for six months from
the date of issuance unless prior approval from the Company is granted;
accordingly the shares were sold at a 20% discount to the then current market
price of the common stock reflecting the restrictions on resale. In conjunction
with this offering, the placement agent received warrants to purchase 100,000
shares of common stock. The warrants expire five years from the date of issuance
and have an exercise price of $5.00 per share.
4) SUPPLEMENTAL NON-CASH DISCLOSURES:
For the nine months ended September 30, 1997, the Company accrued non-cash
dividends on its Series A Convertible Preferred Stock in the amount of 15,708
shares of Common Stock with an aggregate market value of $84,596, and non-cash
dividends on its Series B Convertible Preferred Stock in the amount of 3,664
shares of Common Stock with an aggregate market value of $20,662.
The Company entered into capital lease transactions totaling $84,310 during the
nine months ended September 30, 1997.
5) RECENTLY ISSUED ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
effective for fiscal years ending after December 15, 1997. SFAS No. 128
simplifies the calculation of earnings per share to measure the performance of
an entity over a reporting period for both basic and diluted earnings per share.
Basic and diluted earnings per share computed in accordance with SFAS No. 128
for the three and nine months ended September 30, 1997 and 1996 do not differ
from the primary earnings per share reported in the accompanying Consolidated
Statement of Operations.
6) RECLASSIFICATION:
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 classification.
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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. ("Big
Entertainment" or 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, the
Company's 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 involved in the
licensing of entertainment properties, the operation of entertainment-related
retail stores, and the publishing and packaging of books.
The Company, either directly or in some cases through its 50% ownership interest
in NetCo Partners ("NetCo Partners"), owns exclusive rights to certain original
characters and concepts created by best-selling authors, media celebrities, and
sports celebrities including, for example, Tom Clancy, Magic Johnson, Leonard
Nimoy, Gene Roddenberry, and Mickey Spillane. The Company frequently uses
illustrated novels to introduce and develop new characters and concepts
(collectively, its "intellectual properties") in the marketplace while 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 generally 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: LEONARD NIMOY'S
PRIMORTALS; GENE RODDENBERRY'S XANDER IN LOST UNIVERSE; ISAAC ASIMOV'S I-BOTS;
MICKEY SPILLANE'S MIKE DANGER; JOHN JAKES' MULLKON EMPIRE; ANNE MCCAFFREY'S
ACORNA: THE UNICORN GIRL; MARGARET WEIS' TESTAMENT OF THE DRAGON; NEIL GAIMAN'S
MR. HERO -- THE NEWMATIC MAN; NEIL GAIMAN'S TEKNOPHAGE; NEIL GAIMAN'S LADY
JUSTICE; AND NEIL GAIMAN'S WHEEL OF WORLDS.
Certain intellectual properties are owned by NetCo Partners, a joint venture
which is owned 50% by the Company and 50% by C.P. Group, Inc. ("C.P. Group").
Tom Clancy owns 50% of C.P. Group. NetCo Partners' properties include TOM
CLANCY'S NETFORCE; ARTHUR C. CLARKE'S CRIOSPHINX; TAD WILLIAMS' MIRROR WORLD;
CATHY CASH SPELLMAN'S MILLENNIUM; ANNE MCCAFFREY'S SARABAND;and NEIL GAIMAN'S
LIFERS. The Company is continually negotiating with other best-selling authors
and celebrities to create and develop
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additional intellectual properties for the Company and/or NetCo Partners to
license for use in various media and merchandise.
The Company, in conjunction with its majority-owned subsidiary Tekno Books, has
also entered into an agreement with June Bug Enterprises, Inc., an entity
controlled by pro basketball star Magic Johnson. Under the agreement, Magic
Johnson will work with the Company to develop textbooks, children's books,
novels, and action figure cartoon characters with special appeal to children.
A number of the Company's and/or NetCo Partners' intellectual properties have
already 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; The Berkley Publishing Group, a
division of Putnam Berkley, for hardcover and paperback publishing rights to TOM
CLANCY'S NETFORCE; Warner Books, a division of Time-Warner, Inc., for 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 advances have been earned. The Company
and NetCo Partners are actively negotiating additional licensing opportunities
for their intellectual properties.
The Company has two operating divisions: the intellectual property division and
the entertainment retail division. The intellectual property division is further
segmented into three subdivisions - publishing, licensing, and book licensing
and packaging. 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, 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 operates the Company's in-line studio stores and retail kiosks
known as "Entertainment SuperoKiosks."
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. The Company
discontinued comic book publishing in the first quarter of
1997 and shifted its focus to illustrated novels. 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 wider distribution potential, 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
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utilizing state-of-the-art graphics and publishing techniques.
Big Entertainment's illustrated novels are targeted primarily
to young adults and adult readers.
In November 1996, the Company entered into an agreement with
HarperCollins Publishers, Inc., a division of The News
Corporation ("HarperCollins"), licensing to HarperCollins
certain rights to publish, reproduce and distribute initially
four of the Company's entertainment properties as hardcover
and paperback novels as well as illustrated novels (the
"HarperCollins Agreement"). As of the date hereof,
HarperCollins has published one hardcover novel and two
illustrated novels and the Company has delivered several
additional manuscripts and completed books to HarperCollins,
which are proceeding toward the publication stage.
The HarperCollins Agreement changes the way this division does
business. Prior to 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. It is anticipated that much of
the Company's future publishing activities will be carried out
in a manner similar to the HarperCollins arrangement, which in
essence is a licensing activity, and that over time, the
publishing division will be phased out.
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 handled by the
Company's other 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 publishing
division, there are expected to be minimal incremental
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
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.
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The Company's 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 division of The News
Corporation, to publish hardcover books,
paperback books, and illustrated novels for
ANNE MCCAFFREY'S ACORNA: QUEEN OF
THE UNICORNS, ISAAC ASIMOV'S I-BOTS, and
MARGARET WEIS' TESTAMENT OF THE DRAGON.
/bullet/ An agreement with Alliance Television
Productions, a division of Alliance
Communications Corporation, to license one
of the Company's properties 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 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.
Generally, these licenses are expected to provide payment of
royalties to the Company based on specified
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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.
Other significant licensing activities are carried out by the
Company through its NetCo Partners joint venture. These
licensing activities are discussed on pages 14-16 herein.
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 over
940 books published to date (approximately 200 published since
the fourth quarter of 1994, when the Company acquired its
interest in Tekno Books) and approximately another 180 books
under contract that are forthcoming. In addition to providing
access for the Company to 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 Rukeyser and Willard Scott. These books have been
published with more than 60 publishers (including
HarperCollins, Doubleday, Random House, Simon & Schuster,
Viking Penguin and Warner Books), translated into 30
languages, and selected by 18 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 it 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.
In September 1997, the Company entered into an agreement with
June Bug Enterprises, Inc., which provides for pro basketball
star Magic Johnson to develop textbooks, children's books,
novels, and action figure cartoon characters with special
appeal to children. The textbook, children's book and novel
parts of this agreement will be handled by Tekno Books.
Current plans are for Magic Johnson to work with Tekno Books
to develop a series of educational textbooks with material
presented by Magic Johnson as well as a series of children's
books and novels. The textbooks are expected to use examples
from sports to illustrate important concepts and enliven
student interest and enthusiasm. The Company is currently in
discussions with various publishing houses to license these
works. To the extent not borne by the publishers, the Company
will advance all costs associated with the development of
these books and projects while the net proceeds (after agent's
fees and reimbursement of costs advanced by the Company) will
be divided equally between the Company and June Bug
Enterprises, Inc.
ENTERTAINMENT RETAIL. The Company operates retail stores which
sell entertainment-related merchandise including apparel,
jewelry, art, collectibles, novelty items, and books. The
merchandise is based on movies, television shows and comic
book characters such as Star WarsTM, Star TrekTM, X-FilesTM,
BatmanTM, and Looney ToonsTM. The Company operates two
different retail concepts - Entertainment SuperoKiosks and
in-line studio stores. As of September 30, 1997, the Company
operated 31 Entertainment SuperoKiosks and one in-line store.
During October 1997, the Company opened the first of its new
format prototype in-line studio stores at Willowbrook Mall in
Wayne, New Jersey and in November 1997 it closed one
Entertainment Super/bullet/Kiosk, which the Company plans to
relocate during 1998. The new format in-line studio store
prototype at
12
<PAGE>
approximately 3,000 square feet is significantly larger than
the Entertainment SuperoKiosks and enables the Company to
offer a broader array of merchandise that will be targeted at
a wider segment of the market. The Company currently plans to
open two additional in-line studio stores during the remainder
of 1997 at Woodbridge Mall in Woodbridge, New Jersey and
Garden State Plaza in Paramus, New Jersey. The Company's new
in-line studio store concept is expected to be its primary
retail concept going forward. Provided that the prototype
in-line studio stores are successful and that the Company can
raise the required capital or otherwise obtain financing, the
current plans are to roll-out as many as 20 more in-line
studio stores in 1998.
Big Entertainment's strategy for opening its retail stores is
to seek prime locations in regional and major shopping malls
in geographic areas determined by management as having
desirable demographic characteristics.
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, beginning May 1, 1997 the Company commenced running
two times each hour on the video monitors at each of its
Entertainment SuperoKiosks a 12-minute programming segment
provided by ABC and its local affiliate television stations.
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 is 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 markets
where the Company's Entertainment SuperoKiosks are located run
promotional and advertising spots on the ABC affiliate
stations featuring the Company's Entertainment SuperoKiosks
and in-line studio stores. The Company also agreed to sell at
the Entertainment SuperoKiosks, 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). The Company believes that this
arrangement with ABC provides its Entertainment SuperoKiosks
with a steady source of current programming that appeals to
the target customers of the Entertainment SuperoKiosks, at no
cost to the Company. Additionally and most importantly, the
promotional spots featuring the Company's Entertainment
SuperoKiosks 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 cash expense to the Company. Based on the current
and projected number of ABC affiliates running the ad spots,
the Company estimates that the value of the ad spots it will
be receiving on such ABC affiliate stations amounts to
approximately $2.5 million over the next 12 months. The ad
spots began to run on the ABC affiliate stations during the
third quarter of 1997.
All of the Big Entertainment retail stores are currently
operated by the Company. As part of its expansion strategy,
the Company has entered into two franchise agreements. The
first such agreement dated December 1995 is between the
Company and 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 SuperoKiosks
for $300,000. The Canadian franchise rights granted to Mr.
Ergas consist primarily of the right to open,
13
<PAGE>
operate and sub-franchise Entertainment SuperoKiosks under the
Company's name in the specified territory. The nonrefundable
franchise fee of $700,000 is expected to be received 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 signed its first U.S. franchise agreement on May
1, 1997, under which one Big Entertainment retail unit is
expected to be built by the franchisee in the Philadelphia
area. The agreement, with a private investor, also provides
for up to three more franchise stores in the Philadelphia
region.
NETCO PARTNERS. The Company also carries out substantial
licensing activities through its joint venture known as NetCo
Partners, in which the Company owns a 50% interest.
The most significant licensing agreements currently involve
TOM CLANCY'S NETFORCE, a property owned by NetCo Partners.
NetCo Partners 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 to be paid to NetCo Partners of
$8,000,000 for such mini-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, each of which is a 50% partner of
NetCo Partners. In the event that NetCo Partners and ABC do
not reach agreement regarding a teleplay for the mini-series,
the agreement nevertheless provides for the payment of $1.6
million to NetCo Partners. The mini-series
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<PAGE>
based on TOM CLANCY'S NETFORCE is currently scheduled to air
for four hours over two nights during the sweeps period in
November 1998. The executive producers for the NETFORCE
mini-series include Tom Clancy and Steve Pieczenik of C.P.
Group, and Gil Cates and Dennis Doty of Cates/Doty
Productions. Cates/Doty Productions is an experienced
production team best known for their work as producers of the
Academy Awards and other mini-series.
In April 1997, NetCo Partners entered into an agreement with
The Berkley Publishing Group ("Berkley"), a division of
Penguin Putnam Inc., which is part of the international media
group Pearson plc, to publish a series of up to six original
novels based on TOM CLANCY'S NETFORCE. The contract, with
total maximum advances of $22,000,000, calls for initial
publication of the first book to coincide with the airing of
the ABC mini-series referred to above. NetCo Partners received
gross advances totaling $2,437,500 on this contract during the
quarter ended September 30, 1997, which have been distributed
as part of NetCo Partners' normal distributions to the Company
and C.P. Group, its partners. Additional advances become
payable based on specific milestones such as commencement of
writing, delivery and acceptance of the manuscripts, and
actual publication of each of the six books. This contract
calls for royalties on paperback sales to be earned by NetCo
Partners at 15% of the publisher's suggested retail price.
In April 1997, NetCo Partners also entered into a second
agreement with Berkley to publish up to 18 young adult novels
based on TOM CLANCY'S NETFORCE. The contract, with total
maximum advances of $900,000, calls for initial publication of
the first book to coincide with the airing of the ABC
mini-series referred to above. An initial advance payment of
$450,000 was received by NetCo Partners and distributed during
the quarter ended September 30, 1997, as part of NetCo
Partners' normal distributions to the Company and C.P. Group,
its partners. Additional advances relating to delivery and
acceptance of the first and second manuscripts are currently
due under this contract. This contract calls for royalties on
paperback sales of the young adult novels to be earned at 10%
of the publisher's suggested retail price.
Both of the Berkley contracts grant to Berkley the North
American publishing rights to TOM CLANCY'S NETFORCE. NetCo
Partners is currently seeking to license the rights to TOM
CLANCY'S NETFORCE in numerous countries throughout the world
in all major languages. It is currently anticipated that the
aggregate of such foreign licenses will generate approximately
20% to 40% of the revenue being generated by the North
American book licenses referenced above. For example, NetCo
Partners, through its agent, has received verbal offers (which
have been verbally accepted) for U.K. rights of 1.2 million
U.K. pounds for the first four adult novels and for German
rights of 1,260,000 marks for all six adult and 18 young adult
TOM CLANCY'S NETFORCE books. NetCo Partners is also finalizing
the terms of an agreement to license the audio book rights for
the first four TOM CLANCY'S NETFORCE novels for an aggregate
consideration of approximately $1 million. The aforementioned
offers and acceptances regarding foreign and audio rights
licenses are not binding until the contracts have been signed
by all parties, and there can be no assurances that such
contracts will be executed in accordance with the terms
outlined above.
In April 1997, NetCo Partners entered into an agreement with
the Dodge division of Chrysler Corporation regarding placement
of Chrysler and Dodge products in TOM CLANCY'S NETFORCE
illustrated novels. An initial advance payment of $100,000 was
received
15
<PAGE>
by NetCo Partners and distributed during the quarter ended
September 30, 1997 as part of NetCo Partners' normal
distributions to the Company and C.P. Group, its partners.
NetCo Partners previously entered into an agreement with
Playmates Toys, Inc. ("Playmates Toys") to develop,
manufacture and market a line of toys based on 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 payment to NetCo Partners of a
maximum advance of $1,000,000. Of this advance, $250,000 was
received prior to September 30, 1997, $250,000 is contingent
upon the broadcast of TOM CLANCY'S NETFORCE mini-series and
$500,000 is contingent upon the broadcast of TOM CLANCY'S
NETFORCE as a prime time television series or a kids'
television series scheduled for after school, or Saturday or
Sunday morning. While an agreement has been reached with ABC
for a four-hour mini-series for TOM CLANCY'S NETFORCE, there
is currently no contractual agreement licensing production of
a TOM CLANCY'S NETFORCE prime time or kids' television series
nor are there any assurances that such a series will be
produced. Royalties, which will be offset by any advances so
paid, are based on a percentage of Playmates Toys' receipts on
worldwide sales.
NetCo Partners has also entered into an agreement to license
TAD WILLIAMS' MIRRORWORLD to HarperCollins to publish as an
illustrated novel.
16
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 ("Q3-97") AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 ("Q3-96"), AND NINE MONTHS ENDED SEPTEMBER
30, 1997 ("Y3-97") AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
("Y3-96").
The following table summarizes the revenues, cost of sales and gross
profit attributable to each of the Company's divisions for Q3-97, Q3-96, Y3-97,
and Y3-96:
<TABLE>
INTELLECTUAL PROPERTY RETAIL
--------------------------------------------------------- -------------------
BOOK
LICENSING LICENSING PUBLISHING ENTERTAINMENT TOTAL
AND RETAIL
PACKAGING
------------------- ----------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
Q3-97
Net Revenues $ 308,613 $ 17,268 $ 17,776 $ 1,660,083 $ 2,003,740
Cost of sales 89,111 - 8,847 913,266 1,011,224
------------------- ----------------- ---------------- ------------------- --------------
Gross profit $ 219,502 $ 17,268 $ 8,929 $ 746,817 $ 992,516
=================== ================= ================ =================== ==============
Q3-96
Net Revenues $ 435,651 $ 16,466 $ 229,861 $ 987,460 $ 1,669,438
Cost of sales 264,620 - 291,240 536,629 1,092,489
------------------- ----------------- ---------------- ------------------- --------------
Gross profit (loss) $ 171,031 $ 16,466 $ (61,379) $ 450,831 $ 576,949
=================== ================= ================ =================== ==============
Y3-97
Net Revenues $ 1,284,205 $ 141,414 $ 51,717 $ 4,141,293 $ 5,618,629
Cost of sales 656,942 - 81,020 2,253,364 2,991,326
------------------- ----------------- ---------------- ------------------- --------------
Gross profit (loss) $ 627,263 $ 141,414 $ (29,303) $ 1,887,929 $ 2,627,303
=================== ================= ================ =================== ==============
Y3-96
Net Revenues $ 1,384,842 $ 303,693 $ 1,032,348 $ 2,372,453 $ 5,093,336
Cost of sales 713,659 68,000 1,248,044 1,285,995 3,315,698
------------------- ----------------- ---------------- ------------------- --------------
Gross profit (loss) $ 671,183 $ 235,693 $ (215,696) $ 1,086,458 $ 1,777,638
=================== ================= ================ =================== ==============
</TABLE>
NET REVENUES
Revenues are generated through the Company's intellectual property
activities, including publishing, book licensing and packaging, and through
licensing of rights to its licensees (i.e. book rights, television rights, toy
rights, etc.), and through its entertainment retail business. Net revenues for
Q3-97 increased by 20%, to $2,003,740, an increase of $334,302 from $1,669,438
for Q3-96. The increase noted in Q3-97 over Q3-96 is primarily due to the
increased revenues for additional retail outlets opened after September 30,
1996. Net revenues for Y3-97 increased by 10%, to $5,618,629, an increase of
$525,293 from $5,093,336 for Y3-96. The year-to-date increase over the prior
year is attributable to
17
<PAGE>
increased revenues from the entertainment retail stores, partially offset by
decreases in revenues attributable to the intellectual property operations.
GROSS PROFIT
Overall Company gross profit increased by 72%, or $415,567, to
$992,516 in Q3-97 from $576,949 in Q3-96. As a percentage of net revenues, gross
profit increased to 50% in Q3-97 from 35% in Q3-96. On a year-to-date basis, the
Company's overall gross profit increased 48%, or $849,665, to $2,627,303 in
Y3-97 from $1,777,638 for Y3-96. As a percentage of net revenues, gross profit
increased to 47% in Y3-97 from 35% in Y3-96. The increase in gross profit is
primarily due to the additional revenues generated by the Company's
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, decreased 29%, or $127,038, to $308,613 for Q3-97 from
$435,651 for Q3-96. Net revenues decreased 7%, or $100,637, to $1,284,205 for
Y3-97 from $1,384,842 for Y3-96. Tekno Books' deferred revenues decreased by
28%, or $140,584, to $368,041 at September 30, 1997 from $508,625 at September
30, 1996. 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 sold 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 work to
which they relate is 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 over 940 titles which generate
royalty payments to Tekno Books. The decrease in revenues and deferred revenues
reflect the completion of larger than average projects which were in process in
Q3-96. Management believes that this change 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.
GROSS PROFIT. Gross profit as a percent of net revenues for Tekno
Books in Q3-97 was 71% as compared to 39% in Q3-96. For Y3-97, gross profit as a
percent of net revenues was 49%, which was essentially the same as in Y3-96. The
increase in gross profit percentage in Q3-97 is due to revenues in Q3-97 being
primarily attributable to works that have already been published, which
therefore have minimal incremental costs.
/bullet/ LICENSING
NET REVENUES. Net revenues from the licensing division for Q3-97
totaled $17,268 versus net revenues of $16,466 for Q3-96, an increase of $802,
or 5%. Year-to-date licensing revenues for Y3-97 amount to $141,414 as compared
to $303,693 for Y3-96, a decrease of $162,279, or 53%. The decrease in licensing
revenues for Y3-97 is principally attributable to lower revenues from Harper
Collins, Warner Books, and Alliance Television Productions, partially offset by
higher revenues from Sierra On-Line, reflecting the timing of advances and
royalty payments under the respective licensing agreements. In addition,
revenues from licensing TOM CLANCY'S NETFORCE and other NetCo Partners'
properties are reported on the equity method for investments and are reflected
in the $1,830,427 equity in earnings of NetCo Partners for Y3-97 more fully
discussed on page 20.
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<PAGE>
GROSS PROFIT. The licensing gross profit percentage in Q3-97 and
Y3-97 is 100%, as compared to 100% in Q3-96 and 78% in Y3-96. The 100% margin in
Q3-97, Y3-97 and Q3-96 is possible because the costs related to the development
of the entertainment properties licensed directly by the Company were expensed
by the publishing division, where the Company's intellectual properties were
created and developed.
/bullet/ PUBLISHING
NET REVENUES. The Company's publishing division net revenues
decreased by 92%, or $212,085, to $17,776 for Q3-97 from $229,861 for Q3-96 and
by 95%, or $980,631, to $51,717 for Y3-97 from $1,032,348 for Y3-96. These
decreases reflect the Company's decision to discontinue its comic book
publishing operations due to the sustained losses incurred in the publication of
comic books. The Company began to reduce the number of comic book titles it
published during 1996 and completely ceased publication of all titles during the
first quarter of 1997. Publishing revenues during Q3-97 reflect residual
payments for comic books and other works published in prior quarters. The
Company continues to use illustrated novels to introduce and develop its
intellectual properties. The illustrated novels are published under the
Company's contract with HarperCollins and revenues under this contract are
reflected as licensing revenues.
GROSS PROFIT/LOSS. While the publishing division generated gross
profit of $8,929 for Q3-97, this division incurred gross losses amounting to
$61,379 for Q3-96, $29,303 for Y3-97 and $215,696 for Y3-96. The historical
losses stemmed from the Company's unprofitable comic book operations, which have
been discontinued.
RETAIL
/bullet/ ENTERTAINMENT RETAIL
NET REVENUES. The Company's entertainment retail division net
revenues increased by 68%, or $672,623, to $1,660,083 for Q3-97 from $987,460
for Q3-96 and by 75%, or $1,768,840, to $4,141,293 for Y3-97 from $2,372,453 for
Y3-96. 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 32 retail units in
operation at September 30, 1997, as compared to 24 retail units in operation at
September 30, 1996. The increase in revenues was due to three factors: (1) an
increase in the number of retail units in operation, (2) an increase in same
store sales comparisons, and (3) advertising revenues imputed from the barter
advertising transaction with ABC during Q3-97. In Q3-97 same store sales
increased by 5.6% as compared to Q3-96. For Y3-97 same store sales increased by
10.0% as compared to Y3-96. Same store sales statistics include only those units
that have been open at least 12 months from the beginning of the period being
compared.
GROSS PROFIT. Gross profit for the entertainment retail division
increased by 66%, or $295,986, to $746,817 for Q3-97 from $450,831 for Q3-96,
and by 74%, or $801,471, to $1,887,929 for Y3-97 from $1,086,458 for Y3-96. As a
percentage of entertainment retail division revenues, gross profit was 45% for
Q3-97 as compared to 46% in Q3-96, while for Y3-97 and Y3-96, the gross profit
margin remained unchanged at 46%. The decline in the gross margin percentage in
Q3-97 was largely attributable to increased sales during the quarter of selected
prerecorded video tapes with special appeal to the Company's target customer,
which are a lower margin item. 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. The cost of promotional items are included in selling, general and
administrative expenses.
19
<PAGE>
OPERATING EXPENSES
Total operating expenses consist of selling, general and
administrative expenses, salaries and benefits and amortization of goodwill and
intangible assets. Total operating expenses increased by 24%, or $538,861, to
$2,810,386 for Q3-97 from $2,271,525 for Q3-96. As a percentage of net revenues,
total operating expenses increased to 140% in Q3-97 from 136% in Q3-96. Total
operating expenses increased by 20%, or $1,233,546, to $7,377,433 for Y3-97 from
$6,143,887 for Y3-96. As a percentage of the Company's net revenues, total
operating expenses increased to 131% in Y3-97 from 121% in Y3-96. The increased
expenses primarily reflect the costs associated with the operation of eight
additional Entertainment SuperoKiosks at September 30, 1997 compared to
September 30, 1996 and the need to add overhead to support these additional
retail units and the new prototype in-line studio stores opening in the fourth
quarter of 1997 ("Q4-97"). These increases were partly offset by reductions in
operating expenses in the publishing division.
EQUITY IN EARNINGS OF NETCO PARTNERS
The Company's 50% share in the earnings of NetCo Partners amounted
to $7,928 for Q3-97 and $1,830,427 for Y3-97. No income or expense attributable
to its investment in NetCo Partners was recorded in prior years. NetCo Partners
began to recognize income from its contracts with Berkley, Playmates Toys, the
Dodge Division of Chrysler Corporation and ABC related to TOM CLANCY'S NETFORCE
beginning in the second quarter of 1997 as work on these projects had progressed
to the stage where revenues had been earned. It is anticipated that NetCo
Partners will continue to earn revenues from TOM CLANCY'S NETFORCE throughout
the remainder of 1997 and in future years based on the terms of the
above-mentioned licensing contracts, which are described in detail on pages
14-16 herein.
INTEREST EXPENSE
Net interest expense amounted to $30,084 for Q3-97 as compared to
$8,247 for Q3-96, an increase of $21,837. For Y3-97 net interest expense
amounted to $149,706 as compared to $127,658 for Y3-96. The increase in net
interest expense is attributable to capital leases that were entered into for
equipment utilized in the retail stores, the distribution center and the
corporate offices, as well as interest accrued on the convertible debenture
issued during Q3-97.
OTHER INCOME
Other income for Q3-97 of $10,603 was essentially unchanged from
Q3-96 when other income equaled $10,025. Other income increased by 9%, or
$2,497, to $30,797 for Y3-97 from $28,300 for Y3-96.
SHAREHOLDER'S EQUITY
Shareholder's equity increased 35% or $1,140,129 to $4,429,920 at
September 30, 1997, as compared to shareholder's equity of $3,289,791 as of June
30, 1997, and increased 6% or $238,053 as compared to shareholder's equity of
$4,191,867 as of December 31, 1996. The changes are primarily due to the
issuance of common stock through a private placement during Q3-97, the issuance
of Series B preferred stock during Q2-97, and the results of operations for the
quarter and nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of
$1,569,375 and working capital of $1,852,786, 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 Y3-97 was $4,616,337,
primarily representing cash used to fund the Company's year-to-date net loss and
for build-up of seasonal merchandise inventories as well as inventories to stock
the additional kiosks opened during Y3-97 and the three new in-line studio
stores opening in Q4-97. Net cash provided by investing activities was $692,166
reflecting distributions received from NetCo Partners, partially offset by
capital expenditures and other investment activity. Net cash provided by
financing activities during Y3-97 was $3,817,694 primarily reflecting the
proceeds from the issuance of shares of common stock in Q3-97, the issuance of
preferred stock in Q2-97, and the issuance of a $650,000 convertible debenture
in Q3-97, all of which resulted in a net decrease in cash and cash equivalents
of $106,477 during Y3-97. Net cash used in operating activities during Y3-96 was
$5,262,428, primarily representing cash used to fund the Company's operations.
Net cash used in investing activities
20
<PAGE>
was $1,228,675 and $6,745,956 in cash was provided by financing activities, for
a total increase in cash of $254,853 during Y3-96.
BankBoston has extended a proposal to the Company, subject to due
diligence, which has commenced, and further bank approval, to establish a $5
million, 48-month, revolving line of credit with a subsidiary of BankBoston for
the purpose of financing the Company's retail inventory. It is currently
expected that 50% to 60% of inventory costs for both present and future retail
operations during such 48-month period will be financed through this facility.
The terms call for interest computed at BankBoston Prime plus 1% per annum,
payable monthly. The rate is reduced to 1/2% over prime for years three and
four. There is a commitment fee that will be due BankBoston of 1% of the loan
amount, payable annually throughout the loan's term. This loan facility would be
secured by a security interest in the Company's retail inventory. There can be
no assurance or guarantee that this loan facility will be finalized.
Phoenix Leasing, Inc. has agreed to extend $1 million credit to the
Company to finance furniture, fixtures and equipment for its retail stores. It
is anticipated that the terms of this facility will provide for amortization
over 60 months at a fixed rate of interest of 13.25% per annum and that it will
be secured by the fixed assets in the retail locations so financed. A broker's
commission payable upon funding of this loan may also be funded as part of this
financing transaction. The Company plans to utilize the proceeds to finance the
leasehold improvements and fixtures and equipment for the first two new in-line
studio stores opening in Q4-97. The Company is currently evaluating other
proposals and commitments received for additional lease or loan financing to
fund the third in-line studio store scheduled to open in Q4-97 as well as funds
for the in-line studio store expansion planned for 1998. Such expansion will be
contingent on the success of the first three stores as well as the Company's
ability to raise the capital required to open the new stores.
Pursuant to a promissory note, the Company's Chairman of the Board
and Chief Executive Officer and the Company's Vice Chairman and President
extended to the Company a $1.1 million unsecured line of credit facility
providing for interest only payments calculated at the JP Morgan Bank prime rate
of interest; prepayable at any time without penalty by the Company; and payable
on demand of the holders. The outstanding balance under this line of credit of
$912,000 at June 30, 1997 was repaid by the Company in July 1997. Although the
Company's Chairman and Chief Executive Officer and the Company's Vice-Chairman
and President have represented that they will make the above funds available,
there is no binding agreement requiring them to do so.
Based on currently proposed plans and assumptions relating to its
operations, absent the plans to expand the new in-line studio stores, 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
twelve months. Management expects to require additional financing for the
expansion of its business, and in particular the planned growth of the Company's
new in-line studio stores, 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.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects
of inflation, it does not believe inflation has a material effect on the
Company's 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
21
<PAGE>
as a result of the general publishing industry practice of paying royalties
semi-annually. The Company's entertainment retail business is seasonal with the
holiday season accounting for the largest percentage of annual net sales.
Accordingly, as the Company expands its entertainment retail division, it
anticipates that its results of operations will be increasingly affected by
seasonality. In addition, although not seasonal, the Company's publishing and
licensing divisions both experience significant fluctuations in their respective
revenue streams, earnings and cash flow as a result of the significant amount of
time that is expended in the creation and development of the intellectual
properties and their respective licensing agreements. While certain of the
development costs are incurred as a normal recurring operating expense, the
recognition of publishing and licensing revenue is typically triggered by
specific contractual events which occur at different points in time rather than
on a regular periodic basis.
22
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 3 of the Condensed Notes to Consolidated Financial
Statements with respect to the sale by the Company in July 1997 of an aggregate
of 1,000,002 shares of Common Stock to investors in a private offering for a
total purchase price of $3,500,000.
See Note 2 of the Condensed Notes to Consolidated Financial
Statements with respect to the sale by the Company in August 1997 to an
institutional investor of a 4% Convertible Debenture (the "Convertible
Debenture") in the principal amount of $650,000. The Convertible Debenture is
convertible into shares of Common Stock at a rate based on 80% of the average
market price of the Common Stock for the ten trading days prior to the date of
conversion. The conversion features restrict the maximum principal amount of the
debenture which can be converted for a 120-day period following the effective
date of registration for resale of the underlying shares.
The shares of Common Stock and the Convertible Debenture were
all issued without registration under the Securities Act of 1933, as amended, by
reason of the exemption from registration afforded by the provisions of Section
4(2) thereof, as transactions by an issuer not involving a public offering, each
recipient of shares of Common Stock having delivered appropriate investment
representations to the Company with respect thereto and having consented to the
imposition of restrictive legends upon the certificates evidencing such shares.
Total advisory fees of $350,000 were paid to the placement agent who managed the
private placement. In connection with the private placement, such placement
agent also received warrants to purchase 100,000 shares of Common Stock with an
exercise price of $5.00 per share. Total advisory fees of $31,250 were paid to
an investment banker in connection with the issuance of the Convertible
Debenture. The purchaser of the Convertible Debenture also received warrants to
purchase 32,500 shares of Common Stock with exercise prices ranging from $6.00
to $6.53 per share.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
--------------- -----------
10.1 Promissory Note dated
March 18, 1997 between
the Company as borrower
and Mitchell Rubenstein
and Laurie S. Silvers as
lenders
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1997.
23
<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: January 14, 1998 By: /s/ Mitchell Rubenstein
-----------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: January 14, 1998 By: /s/ Marci L. Yunes
------------------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Promissory Note dated March 18, 1997 between the Company
as borrower and Mitchell Rubenstein and Laurie S. Silvers
as lenders
27.1 Financial Data Schedule
EXHIBIT 10.1
PROMISSORY NOTE
$1,100,000.00 Effective March 18, 1997
For value received, the undersigned, BIG ENTERTAINMENT, INC., a Florida
corporation ("Borrower"), promises to pay to the order of MITCHELL RUBENSTEIN
and LAURIE S. SILVERS (collectively, "Lender"), the principal sum of One
Million, One Hundred Thousand and 00/100 Dollars ($1,100,000.00), or such
portion thereof as is advanced pursuant to the terms hereof, in lawful money of
the United States of America, together with interest accruing thereon from the
date hereof at the rates hereinafter provided, calculated on the daily
outstanding principal balances from time to time based on a 360-day year.
All payments shall be paid to Lender in immediately available funds by
wire transfer to the account as Lender may designate in writing from time to
time.
This Note shall bear interest ("Applicable Interest Rate") at a
variable rate per annum equal to the JP Morgan Prime Rate as published from time
to time in THE WALL STREET JOURNAL ("JP Morgan Prime Rate"). The Applicable
Interest Rate will change each time and as of the date that the JP Morgan Prime
Rate changes. In the event that the JP Morgan Prime Rate is discontinued, Lender
shall substitute an index determined by Lender to be comparable, in its sole
discretion.
Payments of accrued interest on the principal balance outstanding from
time to time on this Note shall commence on the 18th day of April, 1997, and on
the same day of each month thereafter. The outstanding principal balance of this
Note, and all accrued but unpaid interest thereon, shall be payable on demand.
So long as no default exists under this Note, (a) Borrower shall have
the right to prepay the unpaid principal evidenced by this Note in whole or in
part without premium or penalty but with accrued interest to the date of such
prepayment on any amount prepaid, and (b) Borrower may borrow, repay and, with
the consent of Lender in its sole discretion, reborrow hereunder at any time, up
to a maximum aggregate amount outstanding at any one time equal to the principal
amount of this Note. Lender's records of the amounts borrowed from time to time
shall be conclusive proof thereof.
All payments received hereunder shall be applied first to the payment
of any expenses or charges payable hereunder, then to interest due and payable,
with the balance applied to principal, or in such other order as Lender shall
determine at its option.
Notwithstanding any provision of this Note to the contrary, the parties
intend that no provision of this Note be interpreted, construed, applied or
enforced so as to permit or require the payment or collection of interest in
excess of the highest rate of interest permitted to be paid or collected by the
laws of the State of Florida (or federal law, in the event federal law preempts
Florida law or is otherwise applicable), with respect to this transaction
("Maximum Permitted Rate"). If the rate of interest charged by Lender under the
provisions of this Note exceeds the Maximum Permitted Rate, then Lender and any
holders of this Note, and Borrower and any
<PAGE>
endorsers and guarantors, do hereby agree that the provisions of this Note
automatically shall be deemed reformed NUNC PRO TUNC so as to require payment
only of interest at the Maximum Permitted Rate; and if interest payments in
excess of such Maximum Permitted Rate have been received, the amount of such
excess shall be deemed credited NUNC PRO TUNC in reduction of the
then-outstanding principal amount of this obligation, together with interest at
such Maximum Permitted Rate. In connection with all calculations to determine
the Maximum Permitted Rate, the parties intend: first, that all charges be
excluded to the extent they are properly excludable under the usury laws of the
State of Florida, as they from time to time are determined to apply to this
obligation; and, second, that all charges that may be "spread" in the manner
provided by Section 687.03(3), Florida Statutes, or any similar successor law.
Any payment not made when due shall constitute a default. If default be
made in the payment of any installment under this Note, the entire principal sum
and accrued interest shall become due and payable without notice at the option
of the Lender. Failure to exercise this option shall not constitute a waiver of
the right to exercise the same at any other time. Upon such default, the unpaid
principal balance of this Note, and accrued and unpaid interest, if any, shall
bear interest at 18% from the date of default under the default is corrected.
Lender's failure to exercise this right with respect to any default shall not
constitute a waiver of this right as to any subsequent default. All parties
liable for the payment of this Note agree to pay the Lender hereof reasonable
attorneys' fees for the services and expenses of counsel employed after default
to collect this Note (including any appeals relating to such enforcement
proceedings), whether or not suit be brought.
The remedies of Lender as provided herein shall be cumulative and
concurrent, and may be pursued singly, successively or together, at the sole
discretion of Lender, and may be exercised as often as occasion therefor shall
arise. No act of omission or commission of Lender, including specifically any
failure to exercise any right, remedy or recourse, shall be effective as a
waiver thereof unless it is set forth in a written document executed by Lender
and then only to the extent specifically recited therein. A waiver or release
with reference to one event shall not be construed as continuing, as a bar to,
or as a waiver or release of, any subsequent right, remedy or recourse as to any
subsequent event.
Borrower and all sureties, endorsers and guarantors of this Note
hereby: (a) waive demand, presentment for payment, notice of nonpayment,
protest, notice of protest and all other notice, filing of suit and diligence in
collecting this Note, in enforcing any of its rights; (b) agree to any addition
or release of any party or person primarily or secondarily liable hereon; (c)
agree that Lender shall not be required first to institute any suit, or to
exhaust his, their or its remedies against Borrower or any other person or party
to become liable hereunder in order to enforce payment of this Note; (d) consent
to any extension, rearrangement, renewal or postponement of time of payment of
this Note and to any other indulgency with respect hereto without notice,
consent or consideration to any of the foregoing; (e) agree to the right to set
off against any deposits, funds or monies owing; and (f) agree that,
notwithstanding the occurrence of any of the foregoing (except the express
written release of Lender of any such person), they shall be and remain jointly
and severally, directly and primarily, liable for all sums due under this Note.
2
<PAGE>
BORROWER KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVES ANY RIGHT
BORROWER HAS TO A TRIAL BY JURY IN CONNECTION WITH ANY MATTER DIRECTLY OR
INDIRECTLY RELATING TO THIS NOTE. BORROWER ACKNOWLEDGES THAT NEITHER LENDER NOR
ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO
INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.
As used herein, the words "Borrower" and "Lender" shall be deemed to
include Borrower and Lender as defined herein and their respective heirs,
personal representatives, successors and assigns.
BIG ENTERTAINMENT, INC.
a Florida corporation
By:/S/ MITCHELL RUBENSTEIN
--------------------------------
Name: Mitchell Rubenstein
Title: Chief Executive Officer
3
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,569,375
<SECURITIES> 0
<RECEIVABLES> 152,277
<ALLOWANCES> 39,982
<INVENTORY> 2,011,860
<CURRENT-ASSETS> 4,976,056
<PP&E> 3,644,332
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<CURRENT-LIABILITIES> 3,123,270
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0
4,000,000
<COMMON> 68,877
<OTHER-SE> 361,043
<TOTAL-LIABILITY-AND-EQUITY> 8,740,517
<SALES> 5,618,629
<TOTAL-REVENUES> 5,618,629
<CGS> 2,991,326
<TOTAL-COSTS> 7,377,433
<OTHER-EXPENSES> (30,797)
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<INCOME-TAX> 0
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