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, 1999
[ ] 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 7, 1999, the number of shares outstanding of the issuer's
common stock, $.01 par value, was 9,840,610.
<PAGE>
BIG ENTERTAINMENT, INC.
TABLE OF CONTENTS
PAGE(S)
-------
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998........................... 3
Consolidated Statements of Operations for the Three
Months ended March 31, 1999 and 1998 (unaudited) ........... 4
Consolidated Statement of Shareholders' Equity for the
Three Months ended March 31, 1999 (unaudited)............... 5
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 1999 and 1998 (unaudited)............ 6
Notes to Consolidated Financial Statements (unaudited)...... 7-13
Item 2. Management's Discussion of Financial Condition and Results of
Operations ..................................................... 14-28
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................... 29
Item 6. Exhibits and Reports on Form 8-K................................ 29
Signature................................................................. 30
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<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 332,178 $ 729,334
Receivables, net 633,159 568,779
Merchandise inventories 875,753 1,176,356
Prepaid expenses 459,272 501,501
Other receivables 250,000 250,000
Other current assets 266,111 139,974
------------ ------------
Total current assets 2,816,473 3,365,944
PROPERTY AND EQUIPMENT, net 3,004,118 3,145,201
INVESTMENT IN NETCO PARTNERS 2,080,813 1,004,673
INTANGIBLE ASSETS, net 148,408 151,405
GOODWILL, net 301,517 306,377
OTHER ASSETS 430,783 596,221
------------ ------------
TOTAL ASSETS $ 8,782,112 $ 8,569,821
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 783,507 $ 1,496,376
Revolving line of credit 202,711 758,917
Accrued professional fees 174,794 192,151
Other accrued expenses 1,136,567 1,174,136
Deferred revenue 93,556 89,632
Loan from shareholder/officer -- 100,000
Current portion of capital lease obligations 763,713 882,185
------------ ------------
Total current liabilities 3,154,848 4,693,397
------------ ------------
CAPITAL LEASE OBLIGATIONS, less current portion 1,626,264 1,741,062
------------ ------------
DEFERRED REVENUE 376,860 376,860
------------ ------------
MINORITY INTEREST 250,905 235,067
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- --
Series A variable rate convertible preferred stock, $6.25 stated value,
217,600 shares authorized, issued and outstanding
Liquidation preference of $1,578,400 1,360,000 1,360,000
Series B variable rate convertible preferred stock, $5.21 stated value,
142,223 shares authorized;122,846 shares issued and outstanding
Liquidation preference of $645,300 640,000 640,000
Series C, 4% convertible preferred stock, $100 stated value,
100,000 shares authorized; 20,000 shares issued and outstanding at December 31,1998 -- 2,000,000
Series D, 7% convertible preferred stock, $10,000 stated value,
1,000 shares authorized; 250 shares issued and outstanding
Liquidation preference of $2,584,900 1,837,441 1,837,441
Series D-2, 7% convertible preferred stock, $10,000 stated value,
50 shares authorized, issued and outstanding
Liquidation preference of $513,000 314,820 314,820
Common stock, $.01 par value, 25,000,000 shares authorized; 8,998,165 and 8,161,329
shares issued at March 31,1999 and December 31,1998, respectively 89,981 81,613
Warrants outstanding 834,583 834,583
Deferred compensation (459,300) (510,333)
Additional paid-in capital 35,996,835 31,140,339
Accumulated deficit (37,241,125) (36,175,028)
------------ ------------
Total shareholders' equity 3,373,235 1,523,435
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,782,112 $ 8,569,821
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
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<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
NET REVENUES $ 1,315,774 $ 2,709,936
COST OF SALES 660,272 1,105,525
----------- -----------
Gross profit 655,502 1,604,411
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 1,544,178 1,946,406
Salaries and benefits 698,808 1,086,013
Amortization of goodwill and intangibles 7,857 7,853
----------- -----------
Total operating expenses 2,250,843 3,040,272
----------- -----------
Operating loss (1,595,341) (1,435,861)
EQUITY IN EARNINGS OF NETCO PARTNERS 1,094,190 169,182
OTHER INCOME (EXPENSE):
Interest, net (190,776) (234,588)
Other, net (129,903) 12,697
----------- -----------
Loss before minority interest (821,830) (1,488,570)
MINORITY INTEREST (152,808) (94,374)
----------- -----------
Net loss $ (974,638) $(1,582,944)
=========== ===========
Basic and diluted loss per common share $ (0.12) $ (0.24)
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
PREFERRED PREFERRED PREFERRED PREFERRED
COMMON STOCK STOCK STOCK STOCK
STOCK SERIES A SERIES B SERIES C SERIES D
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance - December 31,1998 $ 81,613 $ 1,360,000 $ 640,000 $ 2,000,000 $ 1,837,441
Non-cash dividend - preferred stock 35 -- -- -- --
Stock options and warrants exercised 770 -- -- -- --
Issuance of common stock in private
placements 2,563 -- -- -- --
Issuance of stock options and warrants for
services rendered -- -- -- -- --
Conversion of Series C Preferred Stock to
common stock 5,000 -- -- (2,000,000) --
Amortization of employee stock bonuses -- -- -- -- --
Net loss -- -- -- -- --
============ ============ ============ ============ ============
Balance - March 31,1999 $ 89,981 $ 1,360,000 $ 640,000 $ -- $ 1,837,441
============ ============ ============ ============ ============
<CAPTION>
PREFERRED ADDITIONAL
STOCK PAID-IN WARRANTS DEFERRED ACCUMULATED
SERIES D-2 CAPITAL OUTSTANDING COMPENSATION DEFICIT
------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance - December 31,1998 $ 314,820 $ 31,140,339 $ 834,583 $ (510,333) $(36,175,028)
Non-cash dividend - preferred stock -- 41,554 -- -- (91,459)
Stock options and warrants exercised -- 318,048 -- -- --
Issuance of common stock in private
placements -- 2,466,096 -- -- --
Issuance of stock options and warrants for
services rendered -- 35,798 -- -- --
Conversion of Series C Preferred Stock to
common stock -- 1,995,000 -- -- --
Amortization of employee stock bonuses -- -- -- 51,033 --
Net loss -- -- -- -- (974,638)
============ ============ ============ ============ ============
Balance - March 31,1999 $ 314,820 $ 35,996,835 $ 834,583 $ (459,300) $(37,241,125)
============ ============ ============ ============ ============
<CAPTION>
TOTAL
-------------
<S> <C>
Balance - December 31,1998 $ 1,523,435
Non-cash dividend - preferred stock (49,870)
Stock options and warrants exercised 318,818
Issuance of common stock in private
placements 2,468,659
Issuance of stock options and warrants for
services rendered 35,798
Conversion of Series C Preferred Stock to
common stock --
Amortization of employee stock bonuses 51,033
Net loss (974,638)
============
Balance - March 31,1999 $ 3,373,235
============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-5-
<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (974,638) $(1,582,944)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 288,683 218,446
Equity in earnings of Netco Partners, net of (invested)/return of capital (1,076,140) 162,281
Issuance of compensatory stock options and warrants 35,798 7,789
Amortization of deferred compensation costs 51,033 --
Recognition of deferred gain (10,097) (10,097)
Amortization of deferred financing costs 103,922 30,043
Amortization of discount on convertible debentures -- 80,812
Minority interest 152,808 94,374
Changes in assets and liabilities:
Receivables (64,380) 335,768
Prepaid expenses (79,614) 217,502
Merchandise inventories 300,603 355,443
Other current assets (173,056) 16,817
Other assets 108,435 (151,943)
Accounts payable (712,869) (685,732)
Accrued professional fees (17,357) (89,669)
Deferred revenue 14,021 (343,811)
Other accrued expenses (87,439) (185,102)
----------- -----------
Net cash used in operating activities (2,140,287) (1,530,023)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (83,675) (126,907)
Return of capital from Tekno Books to minority partner (136,970) (7,084)
----------- -----------
Net cash used in investing activities (220,645) (133,991)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments)/proceeds from revolving line of credit (556,206) 336,530
Proceeds from shareholder/officer loan 571,000 1,043,500
Repayments of shareholder/officer loan (671,000) (112,500)
Net proceeds from issuance of common stock 2,468,659 (540)
Proceeds from exercise of stock options and warrants 318,818 --
Dividends on preferred stock -- (20,000)
Repayments under capital lease obligations (167,495) (140,443)
----------- -----------
Net cash provided by financing activities 1,963,776 1,106,547
----------- -----------
Net decrease in cash and cash equivalents (397,156) (557,467)
CASH AND CASH EQUIVALENTS, beginning of period 729,334 887,153
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 332,178 $ 329,686
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 91,685 $ 108,429
=========== ===========
</TABLE>
Non-Cash Investing and Financing Activities:
In Q1-98 the Company entered into capital lease transactions
totaling $93,399.
In Q1-98 the Company issued 10,430 shares of restricted common
stock valued at $50,000 to an employee as a hiring incentive.
In Q1-98 the Company issued common stock to investors and recorded
a receivable from shareholders of $987,500, additional paid-in
capital of $861,396, common stock of $2,373, warrants of $86,231,
and accrued expenses of $37,500.
In Q1-98 the Company recorded dividends on Series A and B
Convertible Preferred Stock in the amount of $41,918, which were
paid through the issuance of 8,801 shares of common stock.
In Q1-98 the Company recorded the conversion of $290,000 of
convertible debentures, plus accrued interest, into 77,653
shares of common stock.
In Q1-99 the Company recorded the conversion of $2,000,000 of
Series C Preferred Stock into 500,000 shares of common stock.
In Q1-99 the Company recorded non-cash dividends on its Series
A,B,C, D and D-2 Convertible Preferred Stock in the amount of
$91,459, of which $41,589 was paid through the issuance of 3,506
shares of common stock.
In Q1-99 the Company entered into capital lease transactions
totaling $56,068.
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-6-
<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
In the opinion of management, the accompanying consolidated financial statements
have been prepared by Big Entertainment, Inc. (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,
1999 are not necessarily indicative of the results of operations or cash flows
which may be recorded for the remainder of 1999.
The accompanying 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, 1998.
(2) DEBT:
In December 1997, the Company established a $5 million credit facility with
BankBoston, which the Company used to finance the cost of inventories for its
entertainment retail division. The primary obligor on the credit facility is the
Company's wholly owned subsidiary that constitutes the mall-based component of
the Company's entertainment retail division, and the Company is guarantor. As a
result of the phasing out of the Company's traditional retail business, in the
first quarter of 1999 the Company and BankBoston agreed to modify the terms of
the credit facility. Under the modified agreement, availability is calculated as
a percentage of the cost of retail inventories less certain allowances and
reserves. This percentage, which was 39% at March 31, 1999, is being reduced by
one percentage point each week, with the outstanding balance to be paid in full
by June 30, 1999. Interest is payable monthly at the prime rate plus 1%. The
credit facility includes an annual commitment fee of 1% and a monthly facility
fee of $2,500. BankBoston received five-year warrants to buy 30,000 shares of
the Company's common stock at an exercise price of $9.68 per share. As of March
31, 1999, the Company's outstanding balance on the line of credit was $202,711,
essentially utilizing the then available borrowing base. The facility is secured
by cash, inventory and accounts receivable of the Company's entertainment retail
division. All of the financial performance covenants were eliminated from the
credit facility as part of the modification agreement.
-7-
<PAGE>
During the first quarter of 1999, the Company's Chairman of the Board and Chief
Executive Officer and the Company's Vice Chairman and President agreed to
increase their previously extended $1.1 million unsecured line of credit
facility to the Company to $5.5 million to enable the Company to meet its
working capital requirements for the balance of 1999; provided, however, that
this commitment will terminate in the event the Company raises no less than $5.5
million from other sources during the year for working capital purposes. There
were no borrowings by the Company under this facility as of March 31, 1999. The
line of credit bears interest at the JP Morgan Bank prime rate of interest.
(3) COMMON STOCK:
On June 30, 1998, the Company entered into a private equity line of credit
agreement with two accredited investors. Pursuant to this agreement, these
investors issued irrevocable commitments to purchase 433,334 shares of common
stock of the Company over a one-year period. These investors purchased an
aggregate of 177,042 shares of the Company's common stock in 1998 and the
remaining 256,292 shares of the Company's common stock during the three months
ended March 31, 1999. The gross proceeds received from these investors for
shares purchased during 1999 totaled $2,609,320. Offsetting this amount, costs
to issue the shares totaling $140,661 were charged to additional paid-in capital
during the three months ended March 31, 1999.
On February 17, 1999, the holder of the Company's Series C 4% Convertible
Preferred Stock ("Series C Preferred Stock") converted all of the outstanding
shares of Series C Preferred Stock into 500,000 shares of the Company's common
stock.
During the three months ended March 31, 1999, the Company issued 77,038 shares
of common stock upon the exercise of outstanding stock options and warrants, for
which the Company received $318,818 in exercise proceeds.
(4) NETCO PARTNERS:
The Company owns a 50% interest in a joint venture called NetCo Partners. NetCo
Partners is engaged in the publishing and licensing of entertainment properties.
NetCo Partners has entered into numerous licensing agreements, including book
publishing agreements with The Berkley Publishing Group, Books on Tape, Inc. and
various foreign publishers, an ABC television mini-series agreement, and a
product placement agreement with the Dodge division of Chrysler Corporation.
NetCo Partners recognizes revenues pursuant to these contracts when the earnings
process has been completed based on the terms of the various contracts and at
the point where ultimate collection of such revenue is no longer subject to
significant contingencies such that collection is substantially assured. The
revenues, gross profit and net income of NetCo Partners for the three months
ended March 31, 1999 and 1998 are presented below:
-8-
<PAGE>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ----------
Revenues $2,688,972 $ 457,944
Gross Profit 2,182,063 366,867
Net Income 2,188,380 338,365
The revenues, gross profit and net income of NetCo Partners for the three months
ended March 31, 1999 is principally attributable to delivery of the manuscript
for the third book in the TOM CLANCY'S NETFORCE adult series of books to the
publisher during the quarter. This milestone triggers the recognition of certain
revenues and corresponding expenses for the book under the various domestic and
foreign licensing agreements.
As of March 31, 1999, NetCo Partners has $5,420,500 in accounts receivable.
Management of NetCo Partners believes that these receivables will be collected
in full and no reserves have been established.
NetCo Partners' deferred revenues, consisting of cash advances received but not
yet recognized as income, amounted to $1,010,304 as of March 31, 1999.
As of March 31, 1999, the Company has received cumulative profit distributions
from NetCo Partners since its formation totaling $2,791,574, in addition to
reimbursement of substantially all amounts advanced by the Company to fund the
operations of NetCo Partners.
(5) LOSS PER COMMON SHARE:
Basic loss per common share is computed by dividing net loss, after deducting
dividends applicable to preferred stock, by the weighted average number of
common shares outstanding.
The following table sets forth the computation of basic and diluted loss per
share for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Loss $ (974,638) $(1,582,944)
Preferred Stock Dividends (91,459) (61,918)
----------- -----------
Net Loss Available to Common Shareholders $(1,066,097) $(1,644,862)
Weighted Average Shares Outstanding 8,565,528 6,908,942
=========== ===========
Basic and Diluted Loss per Share $ (0.12) $ (0.24)
=========== ===========
</TABLE>
-9-
<PAGE>
Inclusion of convertible preferred shares as dilutive securities would have an
antidilutive effect on the loss per share calculation. Accordingly, these shares
have been excluded from the calculation for the three months ended March 31,
1999 and 1998. The aggregate number of shares of common stock that are issuable
upon conversion of all outstanding shares of Preferred Stock (Series A, B, D and
D-2) at March 31, 1999 is 1,120,305 shares. Options and warrants to purchase
2,253,520 shares of common stock at exercise prices ranging from $0.01 to
$14.125 per share were also not included in the computation of loss per share
for the three months ended March 31, 1999 because the result would be
antidilutive. In addition, there are 394,466 shares of common stock held in
escrow as additional collateral under a sale/leaseback transaction. These
shares, which may be released by the escrow agent only in the event that the
Company is in default under the sale/leaseback agreement, have not been included
in the computation of loss per share.
(6) SEGMENT REPORTING:
The Company has two reportable segments: entertainment retail and intellectual
properties. The entertainment retail segment operates retail studio stores,
retail kiosks, and an Internet e-commerce studio store that sell
entertainment-related merchandise. The intellectual properties segment owns or
controls the exclusive rights to certain original characters and concepts
created by best-selling authors and media celebrities, which it licenses across
all media, including books, film and television, multimedia software, toys and
other products.
-10-
<PAGE>
The Company does not have intersegment sales or transfers. The following table
illustrates the financial information regarding the Company's reportable
segments.
THREE MONTHS ENDED MARCH 31,
---------------------------------
1999 1998
------------ ------------
REVENUES:
Entertainment Retail $ 774,808 $ 2,314,709
Intellectual Properties 540,966 395,227
------------ ------------
$ 1,315,774 $ 2,709,936
============ ============
GROSS PROFIT:
Entertainment Retail $ 259,692 $ 1,345,453
Intellectual Properties 395,810 258,958
------------ ------------
$ 655,502 $ 1,604,411
============ ============
DEPRECIATION AND AMORTIZATION EXPENSE:
Entertainment Retail $ 257,678 $ 192,029
Intellectual Properties 31,005 26,417
------------ ------------
$ 288,683 $ 218,446
============ ============
INTEREST, NET:
Entertainment Retail $ 176,622 $ 131,525
Intellectual Properties 14,154 103,063
------------ ------------
$ 190,776 $ 234,588
============ ============
OPERATING PROFIT (LOSS):
Entertainment Retail $ (1,258,936) $ (1,291,048)
Intellectual Properties (336,405) (144,813)
------------ ------------
$ (1,595,341) $ (1,435,861)
============ ============
CAPITAL EXPENDITURES:
Entertainment Retail $ 65,058 $ 119,315
Intellectual Properties 18,617 7,592
------------ ------------
$ 83,675 $ 126,907
============ ============
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<PAGE>
(7) USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Significant estimates include management's estimate that accounts receivable of
NetCo Partners as of March 31, 1999 will be collected in full, and that no
reserve for uncollectible accounts is necessary (see Note 4).
Significant estimates also include management's assessment that 23 entertainment
kiosks not currently used in operations could be sold for an amount, which, net
of selling costs, equals or exceeds the current carrying value of the kiosks.
There is no assurance that the ultimate net sales proceeds will equal or exceed
the carrying amount.
(8) PENDING ACQUISITIONS:
(a) Hollywood.com, Inc.:
On January 10, 1999, the Company entered into a definitive agreement to acquire
Hollywood.com, Inc. ("Hollywood.com"), formerly Hollywood Online Inc., from The
Times Mirror Company ("Times Mirror") for $31.0 million. Hollywood.com owns and
operates HOLLYWOOD.COM, an Internet website containing extensive content about
movies. Under the merger agreement, a newly formed wholly owned subsidiary of
the Company will merge with and into Hollywood.com, with Hollywood.com surviving
the merger as a wholly owned subsidiary of the Company. Pursuant to the merger,
the Company will issue to Times Mirror a number of shares of its common stock
that will represent up to 19.9% of the outstanding common stock of the Company,
based on a per share price of $12.63953, which represents the mean of the
average closing bid price for the Company's common stock for the 15 trading days
ended January 6, 1999 and the average closing bid price for the Company's common
stock for the 15 trading days beginning January 14, 1999. If the value of the
number of shares of common stock issued to Times Mirror is less than $31.0
million, the Company will pay the residual balance either in shares of a new
series of 6% convertible preferred stock and/or in cash not to exceed $1.0
million. The Company anticipates closing this merger during the second quarter
of 1999.
(b) CinemaSource:
On March 29, 1999, the Company entered into a definitive agreement to purchase
the assets of CinemaSource, Inc. ("CinemaSource"), a privately held company, for
$6.5 million in cash and 436,191 shares of the Company's common stock.
Alternatively, the Company has the option to pay all cash for CinemaSource in an
amount equal to $6.5 million, plus the product of 436,191 times the greater of
$12.50, or the average of $12.50 and the average closing price for the Company's
common stock for the ten trading days ending on the second day preceding
consummation of the CinemaSource acquisition. Management believes that
CinemaSource is the nation's largest distributor of movie showtimes to the
Internet industry. CinemaSource gathers movie data, including showtimes,
synopses, photos and trailers, from theaters across the country, and then sells
this data, in a compiled, organized manner, to both large and small media
companies. The growth in CinemaSource's business is in providing
-12-
<PAGE>
movie showtimes' data to Internet companies. The acquisition of CinemaSource is
expected to close during the second quarter of 1999. The acquisition is subject
to customary representations, warranties, and due diligence (including receipt
of audited financial statements for CinemaSource for 1998 and 1997 that are
satisfactory to the Company). In addition, the Company may, at its option,
condition the closing of the CinemaSource acquisition on the Company's closing
of the Hollywood.com acquisition. As part of the Asset Purchase Agreement, the
Company has agreed to make a loan to the seller to pay the taxes due on the
portion of the purchase price paid in the form of common stock (not to exceed
24% of the value of the shares at the time of closing), since the shares of the
Company's common stock to be issued in this acquisition are restricted from
resale for the first 12 months following the closing of the transaction, and are
subject to volume limitations regarding resale thereafter.
(9) COMMITMENTS AND CONTINGENCIES:
RESERVE FOR CLOSED STORES AND LEASE TERMINATION COSTS - The Company has
aggressively pursued closure of its mall-based retail stores and closed 29 kiosk
locations during 1998 and one in-line store in early 1999. Fifteen of the 29
mall leases were terminated at the expiration of the lease, or at the mutual
consent of the Company and lessor, at no additional cost to the Company. The
Company has reached agreement with certain of the other lessors to terminate the
leases based on a maximum rental payment stream to be paid out over time, in
most cases over a period of four months. The Company is currently negotiating
with the remaining lessors to obtain assignment of and/or release from certain
of its lease obligations, which are typically short term in duration. The
Company is presently in discussions with parties who have expressed an interest
in purchasing the remaining mall-based retail store operations, including the
kiosks which are currently in storage. An aggregate charge in the amount of
$1,121,028 was recorded in fiscal 1998 consisting of $653,474 for the write-off
of 10 kiosks which the Company earmarked for abandonment, plus the write down of
other property and equipment of the entertainment retail division, and $467,554
for the estimated cost of the early lease terminations. In addition, in light of
the phase out of its mall-based retail stores, during fiscal 1998, the Company
established an inventory reserve in the amount of $232,383. During the three
months ended March 31, 1999, the Company reduced this reserve by $6,403 for
payments made to a lessor under a lease termination agreement. No other
increases or reductions to the reserve were recorded during the first quarter of
1999. At March 31, 1999, the remaining carrying value of the inventory and fixed
assets of the entertainment retail division (some of which will be utilized by
the Internet e-commerce store) is approximately $4,142,000.
LITIGATION - The Company is a party to various legal proceedings arising in the
ordinary course of business, none of which are expected to have a material
adverse impact on the Company's financial condition or results of operations.
(10) SUBSEQUENT EVENTS:
On April 12, 1999, the Company and CBS Corporation ("CBS") announced that they
had signed an agreement in principle for CBS to receive a 35% ownership interest
in a new joint venture company. In exchange, the new joint venture, to be called
Hollywood.com, will receive $100 million of CBS promotion and content across the
full range of CBS properties over a 7-year period. The Company plans to
contribute all of its Internet assets, including the assets to be acquired in
the pending acquisitions of Hollywood.com and CinemaSource, to the new joint
venture and will own the remaining 65% interest in the joint venture.
On April 14, 1999, the holder of 200 shares of the Company's Series D 7%
Convertible Preferred Stock and the holder of 50 shares of the Company's Series
D-2 7% Convertible Preferred Stock converted their preferred stock holdings into
671,788 shares of the Company's common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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,
acquisition, and divestiture 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 availability of cash and working
capital; the Company's continued operating losses and accumulated deficit; its
relationships with Internet search engines, portal companies and other websites;
dependence on its relationships with authors; dependence on key management
personnel; dependence on licensees; its ability to compete in the
Internet/e-commerce, entertainment and licensing industries; the Company's
ability to realize the carrying value of its investment in the mall-based retail
business; and other factors discussed in the Company's filings with the
Securities and Exchange Commission.
GENERAL
Big Entertainment is a diversified entertainment company engaged in the
operation of an e-commerce entertainment website, the development and licensing
of intellectual properties, and the operation of entertainment-related retail
stores. The Company presently has two operating divisions: the entertainment
retail division and the intellectual properties division. The entertainment
retail division conducts its operations through Big Online, Inc., a wholly owned
subsidiary of the Company engaged in Internet retailing, and through Tekno
Comix, Inc., a wholly owned subsidiary of the Company engaged in the mall-based
retail operations. The intellectual properties division conducts certain
activities directly through the Company and other activities through NetCo
Partners, a 50%-owned joint venture that develops and licenses entertainment
properties. The intellectual properties division also includes the operations of
two majority owned subsidiaries, Tekno Books and Fedora, Inc. Tekno Books is the
Company's 51%-owned book development and licensing business, and Fedora, Inc. is
the Company's 50.5%-owned subsidiary that publishes MYSTERY SCENE MAGAZINE. The
Company intends to expand its Internet operations with its pending acquisition
of Hollywood.com, Inc., which owns HOLLYWOOD.COM, a leading movie website, and
with its pending acquisition of substantially all the assets of CinemaSource,
which management believes to be the nation's largest distributor of movie
showtimes to the Internet industry.
ENTERTAINMENT RETAIL DIVISION
GENERAL. The Company operates mall-based retail stores and an Internet
e-commerce studio store (BIGE.COM) which sell entertainment-related, branded
merchandise including apparel, jewelry, art, collectibles, novelty items, and
books. The merchandise is based on movies and television shows, such as Star
Wars(TM), Star Trek(TM), X-Files(TM), and South Park(TM), and popular culture.
INTERNET BUSINESS.
INTERNET STUDIO STORE - BIGE.COM. The Company launched its Internet studio store
on November 26, 1998. This online store, BIGE.COM, offers an expansive line of
products including branded, licensed merchandise from Hollywood studios,
television networks, and popular culture (i.e., apparel such as shirts, caps and
backpacks with the logos or characters from popular movies).
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The Company's strategy for the Internet studio store is to make the site
accessible through major search engines, portal companies and other popular
entertainment-oriented websites to bring customers to the site. The Company has
entered into a number of agreements with popular websites in which the Company's
Internet studio store, BIGE.COM, is either the exclusive studio store on the
site or a preferred studio store on the site. The Company's Internet studio
store is currently accessible directly at BIGE.COM, and also at USATODAY.COM,
FILM.COM, and HOLLYWOOD.COM. In addition, the Company's merchandise is featured
in Excite's Star Wars(TM) shop. Similarly, the Company's merchandise is included
on the "Shop the Web" section on AMAZON.COM, in the "marketplace" at
PALACENET.COM, and at IMDB.COM, the Internet movie data base subsidiary of
Amazon.com, Inc. The Company's Internet store will also be accessible on Web TV
through an interactive TV pilot with Steeplechase Media Inc. The first
television show in this pilot to feature the bige.com link will be JUDGE JUDY.
The Company has also entered into an agreement with ICTV for the Company's
website to be added to ICTV's broadband Internet access service. The Company has
expanded the relationship it developed with Leonard Nimoy on the intellectual
properties side of the Company's business, as Nimoy, best known for his role as
"Spock" on Star Trek(TM), serves as the official spokesperson for the science
fiction section of BIGE.COM.
EXPANSION PLANS FOR INTERNET BUSINESS. The Company currently plans to expand its
Internet operations beyond e-commerce by developing and acquiring other movie
content related on-line businesses. The Company has two pending acquisitions,
which will increase the Company's Internet operations as detailed below.
HOLLYWOOD.COM - On January 10, 1999, the Company entered into a
definitive agreement to acquire Hollywood.com, Inc. ("Hollywood.com"),
formerly Hollywood Online, Inc., from the Times Mirror Company ("Times
Mirror") for $31.0 million. Pursuant to the merger, the Company will
issue to Times Mirror a number of shares of its common stock that will
represent 19.9% of the outstanding common stock of the Company, based
on a per share price of $12.63953. If the value of the number of shares
of common stock issued to Times Mirror is less than $31.0 million, the
Company will pay the residual balance either in shares of a new series
of 6% convertible preferred stock and/or in cash not to exceed $1
million. Hollywood.com owns and operates the HOLLYWOOD.COM website, a
leading movie website with over one million pages of movie-related
content, including movie information, local movie theater times where
users can input a zip code and view the movie choices in their local
area, movie reviews, trailers, and celebrity interviews and information
(plus links to the Company's Internet studio store) all in one
easy-to-use site. HOLLYWOOD.COM plans to offer on-line movie ticketing
to make the site a one-stop, comprehensive, on-line movie supersite.
Upon completion of the acquisition, the "HOLLYWOOD.COM" name will be
the brand name for the combined site, while the BIGE.COM URL will still
be utilized independently and as a component of HOLLYWOOD.COM. The
Company and Hollywood.com currently have numerous relationships with
various media companies, including some that already overlap. As a
combined force, the Company currently expects to be able to forge
stronger relationships with these media companies, including companies
such as the Washington Post, Gannett, and Times Mirror. The combined
site is being promoted under an exclusive agreement with the National
Association of Theater Owners ("NATO") by airing trailers on
approximately 70% of all movie screens in the U.S. As part of the
transaction, the combined site will become the studio store for
LATIMES.COM, the website of the Los Angeles Times, which is owned by
Times Mirror.
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Hollywood.com generated approximately $1.6 million in revenues for
1998, primarily through the sale of advertising and sponsorships.
Hollywood.com's full-time advertising staff consisted of one person
hired in the third quarter of 1998. The Company plans to increase the
advertising sales staff upon completion of the acquisition and through
utilization of advertising personnel at CBS, upon closing of the
transaction with CBS described below. CBS has agreed to incorporate
advertising for Hollywood.com with the CBS Television Network and CBS
Plus, CBS's cross-media sales organization. Advertisers and sponsors on
HOLLYWOOD.COM have included Visa, General Motors, Microsoft, Intel,
Panasonic, Sony, and many others. The acquisition of Hollywood.com is
expected to close during the second quarter of 1999.
CINEMASOURCE - On March 29, 1999, the Company entered into a definitive
agreement to acquire the assets of CinemaSource, Inc. ("CinemaSource"),
a privately held company, for $6.5 million in cash and 436,191 shares
of the Company's common stock. Alternatively, the Company has the
option to pay all cash for CinemaSource in an amount equal to $6.5
million, plus the product of 436,191 times the greater of $12.50 or the
average of $12.50 and the average closing price for the Company's
common stock for the ten trading days ending on the second day
preceding consummation of the CinemaSource acquisition. Management
believes that CinemaSource is the nation's largest distributor of movie
showtimes and related movie information to the Internet industry.
CinemaSource gathers movie data, including showtimes, synopses, photos
and trailers, from theaters across the country, and then sells this
data, in a compiled, organized manner, to both large and small media
companies. The growth of CinemaSource's business (revenues for 1998 of
approximately $1.3 million were up 72% over 1997) is in providing movie
showtime data to Internet companies, particularly the portals.
CinemaSource currently provides movie showtime data to Yahoo!, Excite,
MSN, Go Network, MovieFone, Inc., CitySearch, Zip 2, and others.
CinemaSource's customers also include newspapers such as The New York
Times and the Knight Ridder chain. The acquisition of CinemaSource is
expected to close during the second quarter of 1999. The acquisition is
subject to customary representations, warranties, and due diligence
(including receipt of audited financial statements for CinemaSource for
1998 and 1997 that are satisfactory to the Company). In addition, the
Company may, at its option, condition the closing of the CinemaSource
acquisition on the Company's closing of the Hollywood.com acquisition.
Both Hollywood.com and the Company have experienced significant increases in the
traffic on their websites. Hollywood.com is presently averaging 2.1 million
unique users per month, with over 21 million page views during February 1999.
For the week ended March 7, 1999, Hollywood.com reported that traffic at
HOLLYWOOD.COM had reached a new high with more than 5.6 million page impressions
for the week, reflecting the popularity of HOLLYWOOD.COM's coverage of the
Academy Awards(R). Hollywood.com's traffic is measured by I/PRO. Page views on
the Company's Internet studio store totaled 569,000 for the month of March 1999,
which is the first month that the Company was able to capture these statistics
using WebTrends. Page views for April 1999 reached 643,000. The trend for early
May shows an increase of 26% over the number of page views for April 1999,
reflecting the heightened interest that the Company is seeing in the 1,000 Star
Wars(TM) items that are currently available for sale on the Company's Internet
studio store.
CBS TRANSACTION. The Company plans to further expand its Internet business
(conducted through its wholly-owned subsidiary, Big Online, Inc.) through
strategic alliances with other websites, media companies, and
media/entertainment celebrities, as well as through potential additional
acquisitions or joint ventures. Along these lines, on April 12, 1999, the
Company and CBS Corporation ("CBS") announced that they had signed an agreement
in principle for CBS to receive a 35% ownership interest in a new joint venture
company. In exchange, the new joint venture, to be called Hollywood.com, will
receive $100 million of CBS promotion and content across the full range of CBS
properties over a 7-year period. The Company plans to contribute all of its
Internet assets, including the assets to be acquired in the pending acquisitions
of Hollywood.com and CinemaSource, to the new joint venture and the Company will
own the remaining 65% interest in the joint venture.
MALL-BASED STORES. The Company currently operates six mall-based retail stores.
This represents a significant reduction from the 34 mall-based stores that were
in operation at the beginning of
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1998, as the Company has determined to exit from the mall-based retail business
and focus exclusively on its Internet operations. During 1998, the Company
closed 29 kiosk locations. One in-line store has been closed to date in 1999.
The Company intends to sell the remaining six mall-based retail store locations.
Two separate groups have expressed interest in a purchase of the remaining
mall-based retail stores, which represent some of the Company's better
locations. The Company currently intends to pursue further negotiations with the
potential buyers, with the ultimate goal being a complete exit from the
mall-based retail operations. There can be no assurances, however, that the
Company will be able to consummate such a sale.
ABC PROGRAMMING AGREEMENT. During March 1997, the Company entered into a
programming agreement with ABC, a division of The Walt Disney Company. Under
this agreement, the Company runs ABC video clips on the television monitors in
its retail stores. In exchange for the Company's agreement to run the ABC
programming and to promote ABC on its website, ABC affiliate stations in markets
where the Company's retail stores are located run promotional and advertising
spots featuring the Company's mall-based and Internet studio stores. The
promotional spots provide the Company with substantial television advertising in
the markets where the retail units are located at no cash expense to the
Company. Management is currently in discussions with ABC regarding modification
of this agreement, given the Company's expanding Internet operations and the
phase-out of its mall-based retail operations.
INTELLECTUAL PROPERTIES DIVISION
GENERAL. The Company, through its intellectual properties division, owns the
exclusive rights to certain original characters and concepts, created by
best-selling authors and media celebrities, which it licenses across all media,
including books, films and television, multi-media software, toys and other
products. The Company and NetCo Partners acquire the rights to these
intellectual properties pursuant to agreements that generally grant them the
exclusive rights to the intellectual properties and the right to use the
creator's name in the titles of the intellectual properties (I.E., MICKEY
SPILLANE'S MIKE DANGER, LEONARD NIMOY'S PRIMORTALS). The intellectual properties
division also includes a book licensing and packaging operation, which focuses
on developing and executing book projects, typically with best-selling authors.
These books are then licensed for publication to book publishers such as
HarperCollins, Bantam Doubleday Dell, Random House, Simon & Schuster, Viking
Press and Warner Books.
INTELLECTUAL PROPERTIES AND LICENSING ACTIVITIES. The Company's current
intellectual properties, and the licensing activities related thereto, are
discussed below. Those properties which are owned through NetCo Partners (in
which the Company has a 50% interest) are so indicated. It is important to note
that the Company (or NetCo Partners, if applicable) has the right to include the
author's or celebrity's name as part of the title of the intellectual property
for all licensed products, including books, television series and films based on
such intellectual properties. The Company is generally obligated to pay the
authors or celebrities fees based on amounts received by the Company from the
licensing to third parties of the rights to produce other products featuring the
intellectual properties. The Company seeks when possible to license its
intellectual properties on terms that provide to the Company advance payments
against royalties to be earned and that minimize or eliminate the Company's
additional development costs going forward.
o TOM CLANCY'S NETFORCE ("NETFORCE") (a NetCo Partners'
property)
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was licensed for production as a four-hour television
mini-series which aired on ABC in February 1999; for
publication of six adult and 18 young adult novels to be
published in North America by Berkley Publishing Group (a
division of Pearson, plc.); for publication of the first two
adult books as audio books by Random House Audio Publishing;
and for book publication and distribution rights in foreign
countries and languages throughout the world with eight
different foreign publishers. The first adult novel and the
first three young adult novels were published domestically
during the first quarter of 1999. NetCo Partners has also
entered into a product placement agreement with Dodge, a
division of Chrysler Corporation, pursuant to which NetCo
Partners has agreed to feature Dodge vehicles in the first
four NETFORCE novels.
o LEONARD NIMOY'S PRIMORTALS was published as a hardcover novel
in North America under a licensing agreement with Warner Books
during 1997. A paperback version was released in March 1998
under the same licensing agreement. It was also published as
an interactive CD-ROM in 1997 under a licensing agreement with
Sierra On-Line, Inc. The Company has also entered into an
agreement for publication and distribution of this book in
certain countries outside the United States and Canada. Under
a separate agreement, Leonard Nimoy, best known for his role
as "Spock" on STAR TREK(TM), also serves as the official
spokesperson for the science fiction section of the Company's
website, BIGE.COM.
o GENE RODDENBERRY'S XANDER IN LOST UNIVERSE has been licensed
to DAW Books, Inc. (partner of Penguin Putnam) for publication
of two novels based on this space adventure concept created by
the late creator of STAR TREK(TM).
o ISAAC ASIMOV'S I-BOTS was licensed to HarperCollins for
publication of an illustrated novel published in 1997 and as a
hardcover novel released in 1998.
o MICKEY SPILLANE'S MIKE DANGER: During 1998, the Company
entered into an agreement with Pressman Films, granting
Pressman Films the option to produce a feature film or
television series based on MICKEY SPILLANE'S MIKE DANGER.
There is no guarantee that Pressman Films will exercise its
option. Pressman Films produced OLIVER STONE'S WALL STREET,
THE CROW, REVERSAL OF FORTUNE, and DAS BOOT. Pursuant to an
agreement with the Company, a novel based on this property is
expected to be published in the next 12 months jointly by
Hyperion Books and Miramax Books, both divisions of the Walt
Disney Co.
o TAD WILLIAMS' MIRRORWORLD (a NetCo Partners' property) was
published as an illustrated novel in 1998 under a licensing
agreement with HarperCollins.
o ANNE MCCAFFREY'S ACORNA: UNICORN GIRL has been licensed to
HarperCollins for the North American publication and
distribution of four prose novels and one illustrated novel.
The original contract with HarperCollins included only the
first two prose novels and the illustrated novel, which were
published in 1997 and 1998. Based on the popularity of the
initial books, HarperCollins continued this book series by
entering into a licensing agreement with the Company for two
additional books. This intellectual property has also been
licensed to Books on Tape, Inc. for production of
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unabridged audio recordings of the first three prose novels,
two of which were released in early 1999, and to various other
parties for licensing rights in certain countries outside the
United States and Canada.
o MARGARET WEIS' TESTAMENT OF THE DRAGON has been licensed to
HarperCollins for publication of an illustrated novel, which
was published in 1997, and for publication of a prose novel,
which was released by HarperCollins in 1998.
o ARTHUR C. CLARKE'S WORLDS OF ALEXANDER (a NetCo Partners'
property) was developed by Arthur C. Clarke, the author of
2001: A SPACE ODYSSEY.
o In addition, there are various other intellectual properties
owned by the Company and NetCo Partners, for which there
currently are no licensing agreements.
The Company is continually in discussions with publishers, television networks,
movie studios and other licensees to contract for additional licensing
opportunities based on the Company's library of intellectual properties. The
Company believes that successful feature films and/or television series will
significantly enhance the value of the intellectual property upon which such
feature film and/or television series is based, resulting in increased
opportunities for additional licensing and merchandising revenues. The Company
is represented in its efforts to secure book licenses with publishers by the
William Morris Agency.
NETCO PARTNERS. In June 1995, the Company and C.P. Group Inc. ("C.P. Group"),
entered into an agreement to form NetCo Partners (the "NetCo Joint Venture
Agreement"). NetCo Partners is engaged in the publishing and licensing of
entertainment properties and has entered into various licensing agreements
described above.
The Company and C.P. Group are each 50% partners in NetCo Partners. Tom Clancy
owns 50% of C.P. Group. C.P. Group contributed to NetCo Partners all rights to
NETFORCE, and the Company contributed to NetCo Partners all rights to TAD
WILLIAMS' MIRRORWORLD, ARTHUR C. CLARKE'S WORLDS OF ALEXANDER (formerly called
CRIOSPHINX), NEIL GAIMAN'S LIFERS, and ANNE MCCAFFREY'S SARABAND.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement, the Company
is responsible for developing, producing, manufacturing, advertising, promoting,
marketing and distributing NetCo Partners' illustrated novels and related
products and for advancing all costs incurred in connection therewith. All
amounts advanced by the Company to fund NetCo Partners' operations are treated
as capital contributions of the Company and the Company is entitled to a return
of such capital contributions before distributions of cash flow are split
equally between the Company and C.P. Group. The NetCo Joint Venture Agreement
provides for an initial term (the "Development Term") of five years, during
which the partners will jointly develop the contributed properties. The
Development Term may be extended by the mutual consent of the partners and shall
terminate upon 30 days notice to the Company by C.P. Group should Mitchell
Rubenstein cease to be the Chief Executive Officer of the Company and Laurie S.
Silvers cease to be the President of the Company. At the end of the Development
Term, any undeveloped properties (other than NETFORCE, which will continue to be
owned 50% by the Company and 50% owned by C.P. Group even after dissolution of
NetCo Partners) are to be returned to their respective contributing partners and
any properties in development or already developed will remain properties of the
joint venture,
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which will continue until its bankruptcy, dissolution, or the sale of all or
substantially all of its assets.
BOOK DEVELOPMENT AND LICENSING. Big Entertainment conducts its book development
and licensing activities through its 51%-owned subsidiary, Tekno Books. Tekno
Books is a leading book packager of fiction and non-fiction, with approximately
1,045 books published since its inception (approximately 335 published since the
fourth quarter of 1994, when the Company acquired its interest in Tekno Books)
and approximately 180 additional books under contract that are forthcoming. In
addition to providing the Company with access 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, 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, Bantam
Doubleday Dell, Random House, Simon & Schuster, Viking Penguin and Warner
Books), translated into 30 languages, and selected by 22 different book clubs.
Tekno Books is also a leading producer of novels and anthologies in the science
fiction, fantasy, mystery, horror and Western genres.
Tekno Books has several agreements through which it plans to expand the scope of
its projects. The first is an agreement with MGM Consumer Products granting
Tekno Books the right to publish books based on the past, present and future
properties from the film and television show libraries of Metro-Goldwyn-Mayer
Studios, United Artists Corporation, Orion Pictures Corporation, and Goldwyn
Entertainment, Inc. As part of this contract, Tekno Books acquired the right to
use the MGM name and trademark in connection with the books published. The
initial contract, which expired in February of this year, was automatically
extended through February 2000. Tekno Books will pay MGM a royalty based on the
net profits generated from the books. Pursuant to this agreement, three novels
based on the MGM television series POLTERGEIST: THE LEGACY, have been sold to
Berkley Books.
Tekno Books, through its wholly owned subsidiary, Tekno Books International,
LLC, also has entered into an agreement with The Classica Foundation, a Russian
charitable organization ("Classica"). Classica holds the only catalogue of
archived documents contained in the Russian archives, consisting of millions of
documents that were captured by the Soviets from the German archives at the end
of World War II. This includes a substantial portion of the German Archives up
to 1945 as well as voluminous documents from archives of countries occupied by
Germany during World War II. Classica has advised the Company that until this
time, the bulk of these files have not been seen outside of Russia. This
agreement with Classica grants Tekno Books the exclusive use of this catalogue
to the Russian archives, and the right to copy the materials contained therein
for use in licensing rights for books, CD-ROMs, on-line, documentaries,
television specials and feature films based on these materials. Tekno Books has
developed an extensive list of major book projects that may be developed from
these archives, including books on topics such as the German military, German
intelligence activities before and during World War II, the Nazi party, certain
of Hitler's personal papers and correspondence, Germany's plan for the
occupation of England, and German-Vatican relations. Many of these topics also
have the potential to be developed as CD-ROMs, television specials and feature
films. Work has already begun on several book projects based on the archived
materials. The Company and Tekno Books intend to donate copies of any documents
related to the Holocaust or any profit derived therefrom to appropriate
Holocaust-related charitable organizations. Tekno
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Books paid $100,000 in 1997 and another $100,000 during 1998 to secure these
rights. Tekno Books has agreed to pay $25,000 to extend this agreement for
another six months ending September 12, 1999. Further six-month extensions will
be available to Tekno Books for additional payments of $25,000 each.
Tekno Books owns a 50% interest in MYSTERY SCENE MAGAZINE, a trade journal of
the mystery genre. The Company also directly owns a 25% interest in the
magazine.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 ("Q1-99") AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1998 ("Q1-98").
The following table summarizes the Company's revenues, cost of sales and gross
profit by division for Q1-99 and Q1-98, respectively:
INTELLECTUAL ENTERTAINMENT
PROPERTIES RETAIL TOTAL
------------ ------------- ----------
Q1-99
- -----
Net Revenues $ 540,966 $ 774,808 $1,315,774
Cost of Sales 145,156 515,116 660,272
---------- ---------- ----------
Gross Profit $ 395,810 $ 259,692 $ 655,502
========== ========== ==========
Q1-98
- -----
Net Revenues $ 395,227 $2,314,709 $2,709,936
Cost of Sales 136,269 969,256 1,105,525
---------- ---------- ----------
Gross Profit $ 258,958 $1,345,453 $1,604,411
========== ========== ==========
NET REVENUES
Net revenues (not taking into account the Company's 50% interest in NetCo
Partners) decreased by 51%, or $1,394,162, to $1,315,774 for Q1-99 from
$2,709,936 for Q1-98. The decrease in net revenues was attributable to a
substantial decrease in net revenues for the entertainment retail division due
to the phase-out of the Company's mall-based retail operations being only
slightly offset by an increase in net revenues for the intellectual properties
division. For Q1-99, revenues generated by the entertainment retail division
amounted to 59% of the Company's total revenues while revenues from the
intellectual properties division amounted to 41% of the total. By comparison for
Q1-98, entertainment retail revenues amounted to 85% of the total and
intellectual properties revenues amounted to 15% of the total.
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GROSS PROFIT
Overall Company gross profit decreased by 59%, or $948,909, to $655,502 for
Q1-99 from $1,604,411 in Q1-98, also reflecting the decline in revenues in the
entertainment retail division attributable to the phase-out of the Company's
mall-based retail operations. As a percentage of net revenues, gross profit
decreased to 50% in Q1-99 from 59% in Q1-98.
INTELLECTUAL PROPERTIES DIVISION
The intellectual properties division generates revenues from several different
activities including book development and licensing, intellectual property
licensing, and publishing MYSTERY SCENE MAGAZINE. The revenue breakdown from
these activities is as follows:
<TABLE>
<CAPTION>
Q1-99 Q1-98
------------------------ ------------------------
$ % $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Book Development & Licensing $517,728 96 $367,611 93
Other 23,238 4 27,616 7
-------- -------- -------- --------
Totals $540,966 100 $395,227 100
======== ======== ======== ========
</TABLE>
Book development and licensing represented 96% of the revenues generated by the
intellectual properties division for Q1-99 and 93% for Q1-98. The Company's book
development and licensing activities are conducted through its 51%-owned
subsidiary, Tekno Books, which focuses on developing and executing book
projects, frequently with best-selling authors, and then licensing the books for
publication with various publishers. Book development and licensing revenues
increased by $150,117, or 41%, to $517,728 for Q1-99 from $367,611 for Q1-98.
This increase was largely due to contractual advances payable under several
significant book contracts based on performance benchmarks that were met under
the contracts during Q1-99.
Other revenues generated by the intellectual properties division (excluding
revenues generated by NetCo Partners) consist of licensing revenues derived from
the intellectual properties owned directly by the Company and publishing
revenues generated from publication of MYSTERY SCENE MAGAZINE, a mystery-genre
trade journal published by the Company's 51%-owned subsidiary, Fedora, Inc.
Other revenues generated by the intellectual properties division decreased by
16%, or $4,378, to $23,238 for Q1-99 from $27,616 for Q1-98. Note that licensing
revenues generated by NetCo Partners (in which the Company has a 50% interest)
are not included in the above revenue figures, but rather are included in equity
in earnings of NetCo Partners discussed in more detail on page 24.
Gross profit for the intellectual properties division (not including the
Company's 50% equity in the earnings of NetCo Partners) increased by 53%, or
$136,852, to $395,810 in Q1-99 from $258,958 in Q1-98, reflecting the increased
gross profits from Tekno Books.
ENTERTAINMENT RETAIL DIVISION
Net revenues for the Company's entertainment retail division decreased by 67%,
or $1,539,901, to $774,808 for Q1-99 from $2,314,709 for Q1-98. The decline in
net revenues for Q1-99 resulted from the Company's decision to exit the
mall-based retail business, as discussed below. Net revenues are derived from
sales of entertainment-related merchandise on the Company's
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Internet studio store and at the remaining mall-based retail stores, imputed
income from the ABC programming agreement, and, in Q1-98, franchise fee income.
The composition of net revenues is as follows:
<TABLE>
<CAPTION>
Q1-99 Q1-98
---------------------------- ----------------------------
$ % $ %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Retail Sales $ 554,808 72 $1,514,709 65
ABC Advertising Income 220,000 28 450,000 20
Franchise Fee Income 0 0 350,000 15
---------- ---------- ---------- ----------
Total $ 774,808 100 $2,314,709 100
========== ========== ========== ==========
</TABLE>
The Company began closing its marginal kiosk units during Q1-98 and closed a
total of 29 kiosks during 1998. An additional in-line store was closed in Q1-99,
leaving the Company with six mall-based retail stores plus BIGE.COM, its
Internet studio store, at March 31, 1999. The decline in retail sales of 63%, or
$959,901, to $554,808 for Q1-99 as compared to $1,514,709 for Q1-98 is
principally due to the closure of the mall-based stores noted above.
Net revenues include imputed income from running ABC video clips on the in-store
television monitors in exchange for advertising air time on local ABC affiliate
television stations. This imputed income amounted to $220,000 for Q1-99 as
compared to $450,000 for Q1-98. The decline in the ABC advertising income of
51%, or $230,000, from Q1-98 to Q1-99 also relates to the fewer number of
mall-based stores in operation during Q1-99. The Company records the estimated
fair value of the air time received from the ABC affiliates as the value of the
revenues earned by playing the ABC video clips in its retail units.
Revenues for the entertainment retail division for Q1-98 also include $350,000
of franchise fee income. This income represents the territorial exclusivity fee
which the Company received during the first quarter of 1998 from the franchisee
for the Phoenix, Arizona territory. Under the Company's agreement with this
franchisee, the franchisee must open at least one store by December 1999 and one
store each year thereafter in order to preserve its exclusivity. No stores have
been opened by the franchisee to date. The agreement also provides for a
continuing royalty based upon sales of the franchised units. The Company is not
obligated to provide any additional support to the franchisee under this
agreement.
Gross profit for the entertainment retail division decreased by 81%, or
$1,085,761, to $259,692 for Q1-99 from $1,345,453 for Q1-98 as a result of the
decline in sales due to the closed retail units and the decrease in ABC
advertising revenues and franchise fee income, which were pure gross profit
revenues. As a percentage of entertainment retail division revenues, gross
profit decreased to 34% for Q1-99 from 58% for Q1-98. The decrease in gross
profit margin for Q1-99 stemmed primarily from the decrease in ABC advertising
revenues and franchise fee income previously mentioned, and from the mark-downs
that were taken in order to liquidate the merchandise in the in-line studio
store that closed during Q1-99.
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<PAGE>
EQUITY IN EARNINGS OF NETCO PARTNERS
The Company's 50% share in the earnings of NetCo Partners increased by 546%, or
$925,008, to $1,094,190 for Q1-99 from $169,182 for Q1-98. This increase
reflects additional revenues being generated from NetCo Partners' intellectual
property NETFORCE. NETFORCE was licensed for production as a four-hour
television mini-series which aired on ABC in February 1999; for publication of
six adult and 18 young adult novels to be published in North America by Berkley
Publishing Group (a division of Pearson, plc.); for publication of the first two
adult books as audio books by Random House Audio Publishing; and for book
publication and distribution rights in foreign countries and languages
throughout the world with eight different foreign publishers. The first adult
novel and the first three young adult novels were published in the U.S. during
Q1-99. NetCo Partners has also entered into a product placement agreement with
Dodge, a division of Chrysler Corporation, pursuant to which NetCo Partners has
agreed to feature Dodge vehicles in the first four NETFORCE novels.
The revenues and net income generated by NetCo Partners for Q1-99 are primarily
from the third book in the adult series of novels and from the seventh book in
the young adult series of novels. The manuscript for both of these novels were
delivered to the publisher during Q1-99. NetCo Partners also received its first
royalty payment from the NETFORCE series of novels during Q1-99 based on sales
during 1998 of the first and second young adult novels pursuant to a foreign
licensing agreement in the United Kingdom, where the books are being released
earlier than in the U.S.
The revenues and net income of NetCo Partners for Q1-98 resulted from delivery
of the manuscripts for several earlier novels in the young adult series of
NETFORCE books, and from additional foreign licensing agreements that were
entered into for NETFORCE books that had previously been delivered to the
publisher.
NetCo Partners recognizes revenues when the earnings process has been completed
based on the terms of the various agreements and when ultimate collection of
such revenues is no longer subject to significant contingencies such that
collection is substantially assured. When advances are received prior to
completion of the earnings process, NetCo Partners defers recognition of revenue
until the earnings process has been completed. Costs related to acquisition,
development and sales of intellectual properties and their licensed products are
expensed in proportion to the revenues that have been recognized.
OPERATING EXPENSES
Operating expenses consist of selling, general and administrative expenses,
salaries and benefits, and amortization of goodwill and intangibles. Operating
expenses decreased by 26%, or $789,429, to $2,250,843 for Q1-99 from $3,040,272
for Q1-98 as a result of the phase out of the Company's mall-based retail
operations over the past year. The decrease in total operating expenses in Q1-99
as compared to total operating expenses in Q1-98 reflects decreases in selling,
general and administrative expenses of $402,228, or 21%, and in salaries and
benefits of $387,205, or 36%. Of the $402,228 decrease in selling, general and
administrative expenses, $230,000 consists of imputed advertising expense under
the ABC barter arrangement. The
-24-
<PAGE>
Company estimates the value of the advertising air spots that it receives from
the ABC affiliate television stations and records this amount as advertising
expense, although the Company does not actually expend any funds for this
advertising. Excluding the non-cash ABC advertising expense, operating expenses
decreased by $559,429, or 22%, in Q1-99. The decrease in operating expenses
resulting from the phase-out of the Company's mall-based retail stores was
partially offset, however, by the incremental costs attributable to the start-up
operation of the Internet studio store.
INTEREST EXPENSE, NET
Net interest expense decreased by 19%, or $43,812, to $190,776 for Q1-99 as
compared to $234,588 for Q1-98, as a result of reduced borrowings under the
inventory line of credit and elimination of interest expense on the convertible
debenture which was converted during 1998.
OTHER INCOME (EXPENSE)
Other expense for Q1-99 includes an accrual of $140,000 for a potential payment
that may be due in conjunction with registration of shares underlying the
Company's convertible preferred stock.
NET LOSS
The Company generated a net loss of $974,638 for Q1-99, which was a $608,306, or
38%, reduction in the $1,582,944 loss for Q1-98. The decreased loss in Q1-99 is
primarily attributable to the increase in the equity in earnings of NetCo
Partners resulting from the licensing revenues generated by NETFORCE, and from
curbing the operating losses generated by the mall-based retail stores. On a per
share basis, the Company's loss for Q1-99 of ($0.12) was half of the ($0.24)
loss per share generated in Q1-98. The reduced loss per share for Q1-99 reflects
both the reduced net loss discussed above, and a greater number of shares
outstanding during Q1-99.
The Company has made several modifications to its initial business plan in an
effort to reverse its losses. During 1997, the Company stopped publishing comic
books and during 1998, the Company began to phase out its mall-based retail
operations. The Company is currently attempting to sell its remaining mall-based
retail stores, and is transitioning into more of an Internet company.
The Company is presently focusing its efforts on development of its Internet
business, both through acquisitions and strategic alliances, and through
development of its e-commerce operations. The Company utilized its existing
distribution center, certain existing personnel, and information systems for the
launch of its Internet studio store, BIGE.COM, thereby realizing considerable
cost savings in comparison to a traditional e-commerce launch. Upon completion
of the Company's pending acquisitions of Hollywood.com and substantially all the
assets of CinemaSource, and upon formation of the proposed Internet joint
venture company with CBS, the Company believes that it will be well-positioned
as a leading movie website with revenues derived from advertising sales,
e-commerce merchandising, and, based on present strategies, online movie
ticketing.
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<PAGE>
SHAREHOLDERS' EQUITY
Shareholders' equity increased 121%, or $1,849,800, to $3,373,235 at March 31,
1999 as compared to shareholders' equity of $1,523,435 as of December 31, 1998.
The increase in shareholders' equity is attributable to the net proceeds
received from the issuance of additional shares of common stock under the
Company's equity line of credit and upon exercise of stock options and warrants
during Q1-99, which more than offset the Company's net loss for Q1-99 of
$974,638.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of $332,178 and a
working capital deficit of $338,375, compared to cash and cash equivalents of
$729,334 and a working capital deficit of $1,327,453 at December 31, 1998. Net
cash used in operating activities during Q1-99 was $2,140,287, primarily
representing cash used to fund the Company's net loss and a decrease in accounts
payable. Net cash used in investing activities was $220,645, while $1,963,776 in
cash was provided by financing activities. As a result of all of the above, cash
and cash equivalents decreased by $397,156 for Q1-99. During Q1-98, net cash
used in operating activities was $1,530,023, net cash used in investing
activities was $133,991, and $1,106,547 in cash was provided by financing
activities.
In December 1997, the Company established a $5 million credit facility with
BankBoston, which the Company used to finance the cost of inventories for its
entertainment retail division. The primary obligor on the credit facility is the
Company's wholly owned subsidiary that constitutes the mall-based component of
the Company's entertainment retail division, and the Company is guarantor. As a
result of the phasing out of the Company's traditional retail business, in
Q1-99, the Company and BankBoston agreed to modify the terms of the credit
facility. Under the modified agreement, availability is calculated as a
percentage of the cost of retail inventories less certain allowances and
reserves. This percentage, which was 39% at March 31, 1999, is being reduced by
one percentage point each week, with the outstanding balance to be paid in full
by June 30, 1999. Interest is payable monthly at the prime rate plus 1%. The
credit facility includes an annual commitment fee of 1% and a monthly facility
fee of $2,500. BankBoston received five-year warrants to buy 30,000 shares of
the Company's common stock at an exercise price of $9.68 per share. As of March
31, 1999, the Company's outstanding balance on the line of credit was $202,711,
essentially utilizing the then available borrowing base, and by May 7, 1999, the
outstanding balance had been reduced to $96,453. The facility is secured by
cash, inventory and accounts receivable of the Company's entertainment retail
division. All of the financial performance covenants were eliminated from the
credit facility as part of the modification agreement.
On June 30, 1998, the Company entered into a private equity line of credit
agreement with two accredited investors. Pursuant to this agreement, these
investors issued irrevocable commitments to purchase 433,334 shares of common
stock of the Company over a one-year period. These investors purchased an
aggregate of 177,042 shares of the Company's common stock during 1998 and the
remaining 256,292 shares of the Company's common stock during the three months
ended March 31, 1999. The gross proceeds received from these investors for
shares
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<PAGE>
purchased during 1999 totaled $2,609,320, less costs to issue the shares
totaling $140,661 which were charged to additional paid-in capital.
During the three months ended March 31, 1999, the Company issued 77,038 shares
of common stock upon the exercise of outstanding stock options and warrants, for
which the Company received $318,818 in exercise proceeds. As a result of the
rise in the market price of the Company's common stock in late 1998, the Company
has experienced a fairly steady stream of stock option and warrant exercises. As
of March 31, 1999, there were 2,253,520 options and warrants outstanding at
exercise prices ranging from $0.01 to $14.125 per share. Provided that the
market price of the Company's common stock remains above the exercise prices,
the Company anticipates that additional option and warrant holders may exercise
their options and warrants, particularly as the securities vest or the
underlying securities become eligible for resale, which would provide a source
of additional capital to the Company, although there can be no assurances that
any or all of the remaining outstanding options and warrants will be exercised.
The Company anticipates needing additional capital, both to finance the $6.5
million cash component of the CinemaSource acquisition price, and for working
capital purposes, including working capital to support the Company's new and
soon-to-be expanded Internet operations. The Company has retained the investment
banking firm of Wasserstein Perella & Co., Inc. to assist in the raising of this
capital. There can be no assurances, however, that the Company will be
successful in raising this capital on terms that will be acceptable to the
Company.
In Q1-99, the Company's Chairman of the Board and Chief Executive Officer and
the Company's Vice Chairman and President agreed to increase their previously
extended $1.1 million unsecured line of credit facility to the Company to $5.5
million to enable the Company to meet its working capital requirements for the
balance of 1999; provided, however, that this commitment will terminate in the
event the Company raises no less than $5.5 million from other sources during the
year for working capital purposes. There were no borrowings by the Company under
this facility as of March 31, 1999. The line of credit bears interest at the JP
Morgan Bank prime rate of interest.
The success of the Company's future operations is dependent on its ability to
generate adequate revenue to offset operating expenses. Unless otherwise noted,
the proceeds from the financing transactions described above are for general
corporate purposes. There can be no assurance that additional financing will be
available to the Company or will be obtained on terms favorable to the Company.
YEAR 2000 ISSUES
The Company believes that due to the newness of the Company's Internet
operations, all Internet systems are currently year 2000 compliant and any new
systems acquired or developed to support expansion of the Company's Internet
operations will be year 2000 compliant. Management believes that the Company's
major operating systems, including the Company's financial systems and the
systems used by Tekno Books, the Company's book development and licensing
operation, are currently year 2000 compliant.
As the Company currently intends to phase out its mall-based retail operations,
preferably through a sale of the business, it is unlikely that the existing
retail systems will still be utilized by the Company at the turn of the century.
Nevertheless, efforts have been made to
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<PAGE>
ensure that the systems used by the retail operations will also be year 2000
compliant. With regard to the retail systems, the Company's primary concern is
with remediation of the software for the point-of-sale registers in the stores.
As the Company presently only operates six stores, if it needed to replace all
of its point-of-sale software and registers, the cost would not be expected to
exceed $100,000.
Other than the potential cost to upgrade or replace the store point-of-sale
software and hardware, the Company is not presently aware of any significant
expenditures which will be necessitated in order to be ready for year 2000,
beyond those already being incurred. There can be no assurances, however, that
significant expenditures may not be required in the future. Significant vendors
have been contacted to ensure that their year 2000 issues will be resolved in a
timely manner and will not be disruptive to the Company's operations. As
indicated above, the Company has initiated, but not completed, its assessment of
the impact of year 2000 on its business; however, the year 2000 issue is not
currently expected to have a material impact on the Company's current or future
business operations or financial condition.
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 does, however, consider 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
development and licensing operation as a result of the general publishing
industry practice of paying royalties semi-annually. The Company's entertainment
retail business is also seasonal with the holiday season accounting for the
largest percentage of annual net sales. In addition, although not seasonal, the
Company's intellectual properties division and NetCo Partners 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
normal recurring operating expenses, the recognition of licensing revenue is
typically triggered by specific contractual events which occur at different
points in time rather than on an evenly recurring basis.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 1999, the Company sold an aggregate of
256,292 shares of its Common Stock to two accredited investors for prices
ranging from $8.91 to $11.88 per share pursuant to a private equity line of
credit agreement. The Company received gross proceeds of $2,609,320 in the
transactions and paid $140,661 in commissions and fees relating thereto.
In addition, the Company issued 77,038 shares of its Common Stock upon the
exercise of outstanding warrants and options with exercise prices ranging from
$0.01 to $8.00 per share. The Company received gross proceeds of $318,818 for
these various exercises and paid no commissions or fees relating to the
issuance.
During the quarter ended March 31, 1999, the Company issued stock options and
warrants to purchase an aggregate of 126,350 shares of the Company's Common
Stock, including 1,350 stock options granted to employees at exercise prices
ranging from $13.688 to $14.125; 50,000 options granted to a celebrity
spokesperson for the Company's website at $10.188 per share; and 75,000 warrants
granted to an investment banker at prices ranging from $5.00 to $11.00 per share
for services rendered in conjunction with the pending acquisition of
Hollywood.com. The various options and warrants are exercisable as early as
January 25, 1999 and expire five years from the date of issuance. No placement
fees or commissions were paid in connection with the issuance of the securities.
The foregoing securities 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 securities 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 securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Modification Agreement dated March 28,
1999 between the Company and BankBoston
Retail Finance Inc.
10.2 Second Modification Agreement dated March
26, 1999 between Tekno Comix, Inc. and
BankBoston Retail Finance Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, the Company filed a current
report on Form 8-K dated January 11, 1999. In Item 5 of such report, the Company
announced that it had entered into an Agreement and Plan of Merger to acquire
Hollywood.com, Inc. (formerly Hollywood Online, Inc.) from the Times Mirror
Company.
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<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 17, 1999 By: /s/ MITCHELL RUBENSTEIN
----------------------------------------------
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ MARCI L. YUNES
----------------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Modification Agreement dated March 28, 1999 between the Company and
BankBoston Retail Finance Inc.
10.2 Second Modification Agreement dated March 26, 1999 between Tekno Comix,
Inc. and BankBoston Retail Finance Inc.
27.1 Financial Data Schedule
EXHIBIT 10.1
MODIFICATION AGREEMENT
This MODIFICATION AGREEMENT entered into as of March 28, 1999, between
Big Entertainment, Inc., a Florida corporation, with an address 2255 Glades
Road, #237W, Boca Raton, Florida 33431 (the "Company") and BankBoston Retail
Finance Inc., a Delaware corporation with an address of 40 Broad Street, Boston,
Massachussetts 02109 (the "BBRF").
WHEREAS, BBRF established a revolving line of credit pursuant to a
certain Loan and Security Agreement by and between BBRF and Tekno Comix, Inc.
(the "Borrower"), a subsidiary of the Company dated as of December 30, 1997 (the
"Loan Agreement") for Borrower respecting which Lender agreed to lend to
Borrower upon Borrower's request, but subject to the terms and conditions set
forth in the Loan Agreement, up to Five Million Dollars and Zero Cents
($5,000,000). All capitalized terms used herein shall have the same meaning as
set forth in the Loan Agreement, unless otherwise defined herein.
WHEREAS, in consideration thereof, the Company entered into a certain
Purchase Warrant and Agreement with Lender dated as of December 30, 1997 whereby
it granted BBRF the right to purchase 30,000 shares of common stock of the
Company (the "Warrant").
WHEREAS, Borrower has failed to comply with certain terms of the Loan
Agreement and has requested that BBRF to waive the Borrower's non-compliance and
to modify certain aspects of the Loan Agreement.
WHEREAS, subject to the terms, and conditions in this Agreement and a
certain Second Modification Agreement by and between Lender and Borrower, BBRF
is willing to accommodate the Borrower's requests.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledge, BBRF and the Borrower mutually
agree as follows:
1. EFFECTIVE DATE OF AGREEMENT. This Modification Agreement shall become
effective (the "Effective Date") upon receipt by BBRF of the following items, in
form and substance acceptable to BBRF in its sole discretion: (i) an original
copy of the Second Modification Agreement executed by Borrower, BBRF and the
Company; (ii) an original executed copy of this Modification Agreement executed
by the Company; (iii) a paydown of the principal balance of the Loan Account by
$75,000.00.
2. MODIFICATIONS TO WARRANT.
(a) The following definition for the word "indebtedness" shall be
inserted as a new paragraph 1(E) and the existing paragraphs l(E) through l(I)
shall be enumerated as l(F) through l(J) respectively: "INDEBTEDNESS" includes,
without limitation, all Liabilities (as such term is defined in that certain
Loan and Security Agreement by and between BankBoston Retail Finance Inc. and
Tekno Comix, Inc. dated as of December 30, 1997, and any modifications,
amendments, substitutions or restatements thereof).
1
<PAGE>
(b) The word "INDEBTEDNESS" shall be deleted from the third and
fourth line of Section 2(B) of the Warrant and the word "indebtedness" shall be
substituted therefor.
3. COUNSEL FEES AND EXPENSES. the Company will, upon demand, pay all
counsel fees and expenses reasonably incurred by BBRF in connection with this
Agreement.
4. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which shall
constitute but one agreement.
5. BINDING EFFECT OF AGREEMENT. All covenants, agreements,
representations and warranties contained herein shall bind and inure to the
benefit of the respective successors and assigns of the parties hereto whether
expressed or not; provided that the Company may not assign or transfer its
rights hereunder.
6. FURTHER ASSURANCES. The Company will from time to time execute and
deliver to BBRF, and take or cause to be taken, all such other further action as
BBRF may request in order to effect and confirm or vest more securely in BBRF
all rights contemplated hereunder.
7. WAIVERS. No delay or omission on the part of BBRF in exercising any
right hereunder shall operate as a waiver of such right or any other right and
waiver on any one or more occasions shall not be construed as a bar to or waiver
of any right or remedy of BBRF on any future occasion.
8. MASSACHUSETTS LAW. This Agreement is intended to take effect as a
sealed instrument and has been executed or completed and is to be performed in
Massachusetts, and it and all transactions thereunder or pursuant thereto shall
be governed as to interpretation, validity, effect, rights, duties and remedies
of the parties thereunder and in all other respects by the domestic laws of
Massachusetts.
9. REPRODUCTIONS. This Agreement and all documents which have been or may
be hereinafter furnished by the Company to BBRF may be reproduced by BBRF by an
photographic, photostatic, microfilm, xerographic or similar process, and any
such reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made in the regular course of
business).
10. JURY WAIVER. THE COMPANY AND BBRF EACH HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY, AND AFTER AN OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL, WAIVE
ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING IN CONNECTION
WITH THIS AGREEMENT. THE COMPANY CETIFIES THAT BBRF NOR ANY OF ITS
REPRESENTATIVES, AGENTS OR COUNSEL HAS REPRESENTED, EXPRESSELY OR OTHERWISE,
THAT BBRF WOULD NOT IN THE EVENT OF ANY SUCH PROCEEDING SEEK TO ENFORCE THIS
WAIVER OF RIGHT TO TRIAL BY JURY.
2
<PAGE>
Executed under seal as of the date written above.
Witness Big Entertainment, Inc. (the "Company")
/s/ NANCY GRONINGER By: /s/ MARCI L. YUNES
- -------------------------- -------------------------
Name: Marci L. Yunes
Title: Chief Financial Officer
Accepted: BankBoston Retail Finance, Inc.
By: /s/ JOSEPH V. BALSAMO
-----------------------------------
Name: Joseph V. Balsamo
Title: Vice President
3
EXHIBIT 10.2
SECOND MODIFICATION AGREEMENT
This SECOND MODIFICATION AGREEMENT entered into at Boston,
Massachusetts, as of March 26, 1999, between TEKNO COMIX, INC., a Florida
corporation, with an address of 2255 Glades Road, Suite 237W, Boca Raton, Fl
59431-7383 (the "Borrower") and BANKBOSTON RETAIL FINANCE INC., a Delaware
corporation with an address of 40 Broad Street, Boston, Massachusetts 02109 (the
"Lender").
WHEREAS, the Lender and Borrower entered into a certain Loan and
Security Agreement dated as of December 30, 1997 (as may be amended from time to
time, the "Loan Agreement") whereby the Lender established a revolving line of
credit for Borrower of up to Five Million Dollars and Zero Cents ($5,000,000).
The Loan Agreement and all other documents, agreements, instruments,
certificates, amendments or renewals, including without limitation all
guaranties and security agreements executed and delivered to the Lender in
connection with the Loan Agreement are collectively hereinafter referred to as
the "Loan Documents".
WHEREAS, the Borrower has been in the process of phasing out its retail
store locations.
WHEREAS, as a result of such phase-out, the Borrower has failed to
observe and comply with certain covenants as set forth on Exhibit "A" hereto
(the "Existing Non-Compliance Items").
WHEREAS, the Borrower has requested that the Lender modify certain
terms of the Loan Agreement and waive the Existing Non-Compliance Items set
forth on Exhibit "A".
WHEREAS, subject to the terms and conditions in this Agreement, the
Lender is willing to modify the terms of the Loan Agreement as provided herein
and waive the Existing Non-Compliance Items set forth on Exhibit "A".
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Lender and the Borrower
mutually agree as follows:
1. DEFINITIONS. All capitalized terms used herein shall have the same
meaning as set forth in the Loan Agreement, unless otherwise defined herein.
2. EFFECTIVE DATE OF THIS MODIFICATION. This Modification Agreement
shall become effective (the "Effective Date") upon receipt by Lender of the
following items, in form and substance acceptable to Lender in its sole
discretion, which receipt must occur on or before March 26, 1999: (i) an
original copy of this Agreement executed by Borrower, Lender and Big
Entertainment, Inc.; (ii) an original executed copy of a Warrant Modification
Agreement executed by Big Entertainment, Inc. in the form attached hereto as
Exhibit B; (iii) a paydown by Borrower of the Loan Account by $75,000.00.
1
<PAGE>
3. WAIVER OF EXISTING NON-COMPLIANCE ITEMS. The Borrower hereby
represents that the Existing Non-Compliance Items set forth on Exhibit A
constitute all of the Borrower's defaults under the Loan Agreement as of this
date. The Lender hereby waives the defaults existing as a result of the Existing
Non-Compliance Items set forth on Exhibit A. The waiver set forth in this
Section 3 shall be effective only for the specific purposes and in the specific
instance described above, and shall not affect or otherwise modify the
Liabilities of the Borrower under the Loan Documents.
4. MODIFICATIONS. The Loan Agreement shall be modified as follows:
(a) A new Section 1-1(b)(i)(E) shall be added which reads as
follows: "MINUS (E) Seventy Five Thousand Dollars ($75,000.00)."
(b) The following sentence shall be added to the end of
Section 1-1(b)(ii)(A): "The foregoing percentages shall be reduced by one
percentage point per week commencing as of January 18, 1999."
(c) A new Section 1-1(b)(ii)(E) shall be added which reads as
follows: "MINUS (E) Seventy Five Thousand Dollars ($75,000.00)."
(d) The definition of Maturity Date set forth in Article 3 of
the Loan Agreement shall be deleted and the following new definition shall be
substituted therefore: "June 30, 1999".
(e) The following shall be added as a new Section 1-13: "1-13.
WAIVER OF FEES. The Commitment Fee and Facility Fee and the fee arising upon
early termination pursuant to Section 1-12, above, otherwise due to Lender as of
June 30, 1999 shall be waived IF AND ONLY IF the Liabilities that have accrued
through June 30, 1999 have been paid in full and the Revolving Credit (and the
Lender's obligation to lend thereunder) has been irrevocably terminated on or
before June 30, 1999; PROVIDED, HOWEVER, such payment is made by or on behalf of
the Borrower voluntarily and not as result of a liquidation of the Borrower's
assets, either by Borrower or Borrower's representative or Lender exercising its
Rights and Remedies. The foregoing waiver is exclusive of any fees paid by the
Borrower to the Lender prior to June 30, 1999, and any monthly Facility Fee due
to be paid by Borrower before June 30, 1999.
(f) The financial and other reporting requirements and
financial covenants set forth in Section 9-7, 9-11(c), (d) and (e), 9-10(d),
9-12 and 9-13 of the Loan Agreement are hereby deleted in their entirety,
effective as of January 1, 1999, and Section 9-6(a)(j) of the Loan Agreement is
hereby modified to read in the first line thereof: "Within thirty (30) days of
the end of the previous month:"
5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants to the Lender as follows:
(a) REPRESENTATIONS AND WARRANTIES: NO EVENT OF DEFAULT.
Except as otherwise disclosed herein, the representations and warranties herein,
in the Loan Agreement and in each other Loan Document and certificate or other
writing delivered to the Lender on or prior to the date of this Modification
Agreement shall be correct and accurate on and as of the
2
<PAGE>
Effective Date as though made on and as of such date; and no Default or Event of
Default shall have occurred and be continuing as of the date hereof or would
result from this Agreement becoming effective in accordance with its terms.
(b) ORGANIZATION, GOOD STANDING, ETC. The Borrower (i) is a
corporation, duly organized, validly existing and in good standing under the
laws of its state of organization, (ii) has all requisite power and authority to
execute, deliver and perform this Agreement, and to perform the Loan Agreement,
as amended hereby, and (iii) is duly qualified to do business and is in good
standing in each jurisdiction in which the character of the properties owned or
leased by it or in which the transaction of its business makes such
qualification necessary.
(c) AUTHORIZATION, ETC. The execution, delivery and
performance by the Borrower of this Agreement, and the performance by the
Borrower of the Loan Agreement, as amended hereby, (i) have been duly authorized
by all necessary action, (ii) do not and will not contravene the Borrower's
charter, or by-laws, any applicable law or any contractual restriction binding
on or otherwise affecting it or any of its properties; (iii) do not and will not
result in or require the creation of any lien or other encumbrance (other than
pursuant to any Loan Documents) upon or with respect to any of its properties,
and (iv) do not and will not result in any suspension, revocation, impalment,
forfeiture or nonrenewal of any material permit, license, authorization or
approval applicable to its operations or any of its properties.
(d) GOVERNMENT APPROVALS. No authorization or approval of
other action by, and no notice to or filing with, any governmental authority or
agency or other regulatory body is required in connection with the due
execution, delivery and performance by the Borrower of this Agreement, or for
this performance of the Loan Agreement, as amended hereby.
(e) ENFORCEABILITY OF LOAN DOCUMENTS. This Agreement, the Loan
Agreement, as amended hereby, and each other Loan Document to which the Borrower
is a party is a legal, valid and binding obligation of such Borrower,
enforceable against the Borrower in accordance with its terms, except as such
enforceability may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally.
6. MISCELLANEOUS.
(a) CONTINUED EFFECTIVENESS OF THE LOAN DOCUMENTS. Except as
otherwise expressly provided herein, the Loan Agreement and the other Loan
Documents are, and shall continue to be, in full force and effect, and are
hereby ratified and confirmed in all respects, except that on and after the date
hereof (i) all references in the Loan Agreement to "this Agreement", "hereto",
"hereof", "hereunder" or words of like import referring to the Loan Agreement
shall mean the Loan Agreement as amended by this Agreement and (ii) all
references in the other Loan Documents to the "Loan Agreement", "thereto",
"thereof", "thereunder" or words of like import referring to the Loan Agreement
shall mean the Loan Agreement as amended by this Agreement. Except as expressly
provided herein, the execution, delivery and effectiveness of this Agreement
shall not operate as an amendment of any right, power or remedy of the Lenders
under the Loan Agreement or any other Loan Document, nor constitutes an
amendment of any provision of the Loan Agreement or any other Loan Documents.
3
<PAGE>
(b) COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by different parties hereto in separate counterparts
(including, without limitation, by telecopy), each of which shall be deemed to
be an original, but all of which taken together shall constitute one and the
same agreement.
(c) HEADINGS. Section headings herein are included for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
(d) GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the law of the Commonwealth of Massachusetts.
(e) COSTS AND EXPENSES. The Borrower agrees to pay on demand
all fees, costs and expenses of the Lender (including, without limitation, the
reasonable fees, costs and other client charges of legal counsel to the Lender)
in connection with the preparation, execution and delivery of this Agreement and
the other related agreements, instruments and documents.
(f) MODIFICATION AGREEMENT AS LOAN DOCUMENTS. The Borrower
hereby acknowledges and agrees that this Agreement constitutes a "Loan Document"
under the Loan Agreement. Accordingly, it shall be an Event of Default under the
Loan Agreement if (i) any representation or warranty made by the Borrower under
or in connection with this Agreement shall have been untrue, false or misleading
in any material respect when made, or (ii) the Borrower shall fail to perform or
observe any term, covenant or agreement contained in this Agreement.
(g) WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER EACH
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF THE LENDER IN THE NEGOTIATION,
ADMINISTRATION, PERFORAMNCE OR ENFORCEMENT HEREOF.
INTENTIONALLY LEFT BLANK
4
<PAGE>
Executed under seal as of the date written above.
Borrower:
Tekno Comix, Inc.
By: /s/ MARCI L. YUNES
----------------------------------
Name: Marci L. Yunes
Title: Chief Financial Officer
Accepted: BankBoston Retail Finance, Inc.
By: /s/ JOSEPH V. BALSAMO
--------------------------------------------------
Name: Joseph V. Balsamo
Title: Vice President
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the undersigned guarantor hereby irrevocably and
unconditionally acknowledges and confirms to the Lender that its guaranty of the
Liabilities of the Borrower continues in full force and effect and is a valid
and binding obligation of the undersigned guarantor in accordance with its
terms, that no defenses, offsets, claims, counterclaims exist with respect to
such guaranty, and that such guaranty is enforceable in accordance with its
terms, and guarantees and shall continue to guarantee in accordance with its
terms the performance of all amounts guaranteed thereby.
Executed under seal as of the date written above.
Witness Big Entertainment, Inc. ("Guarantor")
/s/ NANCY GRONINGER
- ------------------------
By: /s/ MARCI L. YUNES
---------------------------------
Name: Marci L. Yunes
Title: Chief Financial Officer
5
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 332,178
<SECURITIES> 0
<RECEIVABLES> 673,141
<ALLOWANCES> 39,982
<INVENTORY> 875,753
<CURRENT-ASSETS> 2,816,473
<PP&E> 5,070,960
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<CURRENT-LIABILITIES> 3,154,848
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4,152,261
<COMMON> 89,981
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<TOTAL-LIABILITY-AND-EQUITY> 8,782,112
<SALES> 1,315,774
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