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 September 30, 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 November 12, 1999, the number of shares outstanding of the
issuer's common stock, $.01 par value, was 15,074,672.
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BIG ENTERTAINMENT, INC.
TABLE OF CONTENTS
PAGE(S)
-------
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998.............................. 3
Consolidated Statements of Operations for the Nine and Three
Months ended September 30, 1999 and 1998 (unaudited) .......... 4
Consolidated Statement of Shareholders' Equity for the
Nine Months ended September 30, 1999 (unaudited) .............. 5
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1999 and 1998 (unaudited)........... 6
Notes to Consolidated Financial Statements (unaudited)......... 7-15
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 16-30
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................... 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................32-33
Signature ................................................................ 34
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,229,996 $ 729,334
Receivables, net 1,107,541 568,779
Merchandise inventories 1,130,422 1,176,356
Prepaid expenses 1,162,353 501,501
Other receivables -- 250,000
Other current assets 155,765 139,974
------------- -------------
Total current assets 9,786,077 3,365,944
PROPERTY AND EQUIPMENT, net 3,604,000 3,145,201
INVESTMENT IN NETCO PARTNERS 883,043 1,004,673
INTANGIBLE ASSETS, net 4,154,214 151,405
GOODWILL, net 47,280,372 306,377
OTHER ASSETS 427,552 596,221
------------- -------------
TOTAL ASSETS $ 66,135,258 $ 8,569,821
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 351,346 $ 1,496,376
Revolving line of credit -- 758,917
Accrued professional fees 297,676 192,151
Other accrued expenses 1,189,561 1,174,136
Deferred revenue 121,706 89,632
Loan from shareholder/officer -- 100,000
Note payable 1,928,138 --
Current portion of capital lease obligations 736,173 882,185
------------- -------------
Total current liabilities 4,624,600 4,693,397
------------- -------------
CAPITAL LEASE OBLIGATIONS, less current portion 1,301,543 1,741,062
------------- -------------
DEFERRED REVENUE 376,860 376,860
------------- -------------
MINORITY INTEREST 276,414 235,067
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
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; 217,600 shares issued and outstanding at December 31,1998 -- 1,360,000
Series B variable rate convertible preferred stock, $5.21 stated value, 142,223 shares
authorized; 122,846 shares issued and outstanding at December 31,1998 -- 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; 50 and 250 shares issued and outstanding at June 30,1999 and
December 31,1998, respectively. Liquidation preference $500,000 -- 1,837,441
Series D-2, 7% convertible preferred stock, $10,000 stated value, 50 shares authorized;
50 shares issued and outstanding at December 31,1998 -- 314,820
Common stock, $.01 par value, 25,000,000 shares authorized; 14,939,672 and 8,161,329
shares issued at September 30,1999 and December 31,1998, respectively 149,397 81,613
Warrants outstanding 3,203,071 834,583
Deferred compensation (357,233) (510,333)
Additional paid-in capital 102,487,972 31,140,339
Accumulated deficit (45,927,366) (36,175,028)
------------- -------------
Total shareholders' equity 59,555,841 1,523,435
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 66,135,258 $ 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 NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES $ 5,829,924 $ 7,372,664 $ 2,774,734 $ 2,248,148
COST OF SALES 1,888,005 3,871,755 622,415 1,307,305
------------ ------------ ------------ ------------
Gross profit 3,941,919 3,500,909 2,152,319 940,843
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 6,503,347 4,569,610 3,164,678 1,286,205
Salaries and benefits 3,640,877 2,981,435 1,826,172 902,061
Depreciation 1,036,381 760,995 422,342 267,830
Amortization of goodwill and intangibles 2,102,688 23,571 1,455,856 7,857
Reserve for closed kiosks and lease termination costs 341,188 438,956 293,391 438,956
------------ ------------ ------------ ------------
Total operating expenses 13,624,481 8,774,567 7,162,439 2,902,909
------------ ------------ ------------ ------------
Operating loss (9,682,562) (5,273,658) (5,010,120) (1,962,066)
EQUITY IN EARNINGS (LOSS) OF NETCO PARTNERS 1,210,063 (97,880) 87,472 (388,274)
OTHER:
Interest, net (462,340) (613,549) (93,378) (172,425)
Other, net (362,554) 32,891 (81,616) 10,097
------------ ------------ ------------ ------------
Loss before minority interest (9,297,393) (5,952,196) (5,097,642) (2,512,668)
MINORITY INTEREST (343,191) (410,377) (104,239) (167,400)
------------ ------------ ------------ ------------
Net loss $ (9,640,584) $ (6,362,573) $ (5,201,881) $ (2,680,068)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.86) $ (0.89) $ (0.36) $ (0.36)
============ ============ ============ ============
</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 NINE MONTHS ENDED SEPTEMBER 30, 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
Dividends - preferred stock 67 -- -- -- --
Stock options and warrants exercised 9,075 -- -- -- --
Issuance of common stock in private
placements 9,893 -- -- -- --
Issuance of stock options and warrants
for services rendered -- -- -- -- --
Conversion of Series A,B,C,D,D-2
Preferred Stock 15,805 (1,360,000) (640,000) (2,000,000) (1,837,441)
Issuance of stock for services rendered 490 -- -- -- --
Employee stock bonus 25 -- -- -- --
Amortization of employee stock bonuses -- -- -- -- --
Issuance of stock for acquisitions 32,824 -- -- -- --
Shares repurchased (395) -- -- -- --
Net loss -- -- -- -- --
------------ ---------- --------- ---------- -----------
Balance - September 30,1999 $ 149,397 $ -- $ -- $ -- $ --
============ ========== ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
PREFERRED ADDITIONAL
STOCK PAID-IN WARRANTS DEFERRED ACCUMULATED
SERIES D-2 CAPITAL OUTSTANDING COMPENSATION DEFICIT TOTAL
----------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31,1998 $ 314,820 $ 31,140,339 $ 834,583 $ (510,333) $(36,175,028) $ 1,523,435
Dividends - preferred stock -- 79,741 -- -- (111,754) (31,946)
Stock options and warrants exercised -- 5,335,177 (497,583) -- -- 4,846,669
Issuance of common stock in private
placements -- 14,201,370 2,866,071 -- -- 17,077,334
Issuance of stock options and warrants
for services rendered -- 49,313 -- -- -- 49,313
Conversion of Series A,B,C,D,D-2
Preferred Stock (314,820) 6,136,456 -- -- -- --
Issuance of stock for services rendered -- 73,835 -- -- -- 74,325
Employee stock bonus -- 46,225 -- -- -- 46,250
Amortization of employee stock bonuses -- -- -- 153,100 -- 153,100
Issuance of stock for acquisitions -- 46,093,850 -- -- -- 46,126,674
Shares repurchased -- (668,334) -- -- -- (668,729)
Net loss -- -- -- -- (9,640,584) (9,640,584)
----------- ------------ ----------- ------------ ------------ ------------
Balance - September 30,1999 $ -- $102,487,972 $ 3,203,071 $ (357,233) $(45,927,366) $ 59,555,841
=========== ============ =========== ============ ============ ============
</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 STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,640,584) $ (6,362,573)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,139,069 784,566
Equity in earnings of Netco Partners, net of (invested)/return of capital 121,630 1,238,536
Issuance of compensatory stock, stock options and warrants 169,888 15,578
Amortization of deferred compensation costs 153,100 54,866
Recognition of deferred gain (9,062) (32,891)
Amortization of deferred financing costs 295,644 99,431
Amortization of discount on convertible debentures -- 107,750
Assets written off - closed stores 341,188 163,584
Minority interest 343,191 410,377
Changes in assets and liabilities:
Receivables 547,986 42,264
Prepaid expenses (511,001) 134,404
Merchandise inventories 45,934 487,752
Other current assets (83,107) (4,055)
Other assets 44,116 (145,497)
Accounts payable (1,445,474) (484,075)
Accrued professional fees 105,525 (73,734)
Deferred revenue (15,064) (318,601)
Other accrued expenses (221,789) 256,923
------------ ------------
Net cash used in operating activities (6,618,810) (3,625,395)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash received (7,307,908) --
Capital expenditures, net (175,348) (217,491)
Return of capital from Tekno Books to minority partner (301,844) (277,301)
------------ ------------
Net cash used in investing activities (7,785,100) (494,792)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments)/proceeds from revolving line of credit (758,917) 291,640
Proceeds from shareholder/officer loan 711,000 2,844,500
Repayments of shareholder/officer loan (811,000) (1,932,500)
Net proceeds from issuance of common stock 17,077,334 2,309,759
Proceeds from exercise of stock options and warrants 4,846,669 --
Dividends on preferred stock (28,097) (60,000)
Payments to repurchase common stock (668,729) --
Repayments under capital lease obligations (463,688) (19,476)
------------ ------------
Net cash provided by financing activities 19,904,572 3,433,923
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,500,662 (686,264)
CASH AND CASH EQUIVALENTS, beginning of period 729,334 887,153
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 6,229,996 $ 200,889
============ ============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 253,231 $ 398,803
============ ============
</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
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 nine and three months
ended September 30, 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) ACQUISITIONS:
(a) CinemaSource, Inc.:
On May 18, 1999, the Company acquired substantially all of the assets
of CinemaSource, Inc. ("CinemaSource"), a privately held company, pursuant to
the terms of the Asset Purchase Agreement dated March 29, 1999 for $6.5 million
in cash and 436,191 shares of the Company's common stock valued at $12.50 per
share. At the closing of the acquisition, the Company directed CinemaSource to
transfer the assets sold, on the Company's behalf, to its wholly owned
subsidiary, Showtimes.com, Inc. ("Showtimes.com"). The shares of the Company's
common stock issued at the time of 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. CinemaSource gathers movie data,
including showtimes, synopses, photos and trailers, from theaters across the
country, and then licenses this data, in a compiled manner, to both large and
small media companies. CinemaSource licenses this information to more than 100
different media outlets, including customers such as Yahoo!, Excite, Go Network,
Ticketmaster/City Search, Zip2, The New York Times website, usatoday.com,
latimes.com, iWon.com, The Washington Post website, the Boston Globe website,
the Newsday website, and all of the websites of Knight Ridder and
Advance/Newhouse.
(b) hollywood.com, Inc.:
On May 20, 1999, the Company acquired all of the capital stock of
hollywood.com, Inc. ("hollywood.com"), formerly called Hollywood Online Inc.,
from The Times Mirror Company
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<PAGE>
("Times Mirror"). The aggregate consideration paid to Times Mirror by the
Company consisted of a one-year unsecured promissory note for $1,928,138 and
2,300,075 shares of common stock, which was valued as of the date of the
transaction at $12.64 per share. As part of the transaction costs the Company
issued 53,452 shares of common stock for services rendered in connection with
the acquisition. Hollywood.com owns and operates the Hollywood.com website
offering viewers movie information, movie trailers, box office charts, movie
soundtracks, photos and exclusive interactive games, celebrity interviews, local
movie showtimes, and coverage of movie premieres, film festivals and
movie-related events. Hollywood.com has an exclusive contract with the National
Association of Theatre Owners (NATO). Through this contract, Hollywood.com
promotes its website to movie audiences by airing trailers featuring
Hollywood.com before the feature films that play in most NATO-member theatres.
In exchange, Hollywood.com provides websites for the exhibiting NATO members.
The value of this contract was recorded as an intangible asset of $4.6 million
and is being amortized over the remaining life of the contract, approximately
three years.
(c) Baseline II, Inc.:
On August 31, 1999, the Company purchased substantially all of the
motion picture-related data assets of Paul Kagan Associates, Inc., including the
PKBaseline.com website, several publications, including the MOTIO PICTURE
INVESTOR newsletter, and a consumer oriented movie website. The aggregate
purchase price paid for the Baseline assets consisted of 492,611 shares of
common stock and warrants to purchase an aggregate of 54,735 shares of common
stock at an exercise price of $18.27 per share. The shares of common stock
issued in the transaction can not be transferred by the holders for a period of
24 months following the closing of the transaction. The Company plans to combine
and promote these assets under the Hollywood.com brand.
The acquisitions of CinemaSource, hollywood.com and Baseline II were
accounted for as a purchase and, accordingly, the operating results of
CinemaSource, hollywood.com and Baseline have been included in the Company's
consolidated financial statements since the date of acquisition. The excess of
the aggregate purchase prices over the fair value of net assets acquired of
$48.5 million is being amortized over 10 years.
The purchase price of CinemaSource, hollywood.com and Baseline was
allocated to assets and liabilities acquired as follows:
Tangible assets $ 2,873,237
Intangible assets 4,564,513
Goodwill 48,511,847
Liabilities assumed (586,877)
------------
Total purchase price 55,362,720
Less value of common stock issued (46,126,674)
Less value of note issued (1,928,138)
------------
Paid in cash - purchase price 6,500,000
Paid in cash - acquisitions 807,908
------------
Total cash paid $ 7,307,908
============
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<PAGE>
The following are unaudited pro forma combined results of operations of
the Company, hollywood.com, CinemaSource and Baseline for the nine and three
month periods ended September 30, 1999 and 1998, as if the acquisitions of
hollywood.com, CinemaSource and Baseline had occurred at the beginning of each
period:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ------------------------------
1999 1998 1999 1998
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Revenues $ 8,138,613 $ 10,465,947 $ 3,001,673 $ 3,392,721
============== ============== ============= ============
Net Loss $ (17,225,730) $ (14,807,962) $ (5,456,596) $ (4,784,884)
============== ============== ============= ============
Pro Forma Diluted Loss Per Share $ (1.31) $ (1.40) $ (0.37) $ (0.44)
============== ============== ============= ============
Weighted Average Shares Outstanding 13,170,463 10,550,020 14,681,765 10,881,001
============== ============== ============= ============
</TABLE>
These unaudited pro forma combined results have been prepared for
comparative purposes only and include certain adjustments, such as additional
amortization expense as a result of goodwill and certain contractual adjustments
to salaries. They do not purport to be indicative of the results of operations
which actually would have resulted had the acquired companies been under common
control prior to the date of the acquisition or which may result in the future.
(3) DEBT:
On May 20, 1999, the Company delivered a $1,928,138 one-year unsecured
promissory note of the Company payable to Times Mirror as partial consideration
for the acquisition of hollywood.com, Inc. The promissory note has a maturity
date of May 20, 2000 (at which time the aggregate principal balance thereof must
be repaid in full) and bears interest at the prime rate in effect from time to
time of Citibank, N.A. plus 1%. Interest is due quarterly in arrears beginning
June 30, 1999 with the final payment due at maturity. The promissory note may be
prepaid in whole or in part at any time without payment of any premiums or
penalty.
As of September 30, 1999, the Company had no other indebtedness other
than the note payable to Times Mirror and capital lease obligations.
(4) 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 first quarter
of 1999. The net proceeds received from these investors for shares purchased
during 1999 totaled $2,468,659.
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<PAGE>
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.
On April 14, 1999, the holders of the Company's Series D 7% Convertible
Preferred Stock ("Series D Preferred Stock") converted 200 of the outstanding
shares of Series D Preferred Stock into 571,788 shares of the Company's common
stock.
On April 14, 1999, the holders of the Company's Series D-2 7%
Convertible Preferred Stock ("Series D-2 Preferred Stock") converted all of the
outstanding shares of Series D-2 Preferred Stock into 100,000 shares of the
Company's common stock.
On May 18, 1999, the holders of the Company's Series A and B Variable
Rate Convertible Preferred Stock ("Series A and B Preferred Stock") converted
all of the outstanding shares of Series A and B Preferred Stock into 300,631
shares of the Company's common stock.
On May 17, 1999, the Company issued 569,820 shares of common stock in a
private placement at a purchase price of $21.25 per share. In addition, the
Company issued to the same investors warrants to purchase an aggregate of
189,947 shares of common stock at an exercise price of $21.25 per share. The
gross proceeds of the private placement were $12,108,675. The Company issued
42,600 shares of common stock as a fee to the placement agent.
On May 18, 1999, the Company acquired substantially all of the assets
of CinemaSource. The purchase price consisted of cash and 436,191 shares of
common stock valued at $12.50 per share.
On May 20, 1999, the Company acquired all of the capital stock of
hollywood.com, Inc. The purchase price consisted of an unsecured promissory note
and 2,300,075 shares of common stock valued at $12.64 per share. As part of the
transaction costs the Company issued 53,452 shares of common stock for services
rendered in connection with the acquisition.
On August 26, 1999, the holder of the Company's Series D Preferred
Stock converted the remaining 50 outstanding shares of Series D Preferred Stock
into 108,071 shares of the Company's common stock.
On August 31, 1999, the Company acquired substantially all of the
motion picture-related assets of Paul Kagan Associates, Inc. for 492,611 shares
of common stock valued at $18.27 per share. The Company also issued to Paul
Kagan 163,185 shares of common stock for an aggregate purchase price of $2.5
million.
In 1998, the Company's Board of Directors approved a plan for the
repurchase of up to $1.0 million of the Company's common stock. Pursuant to this
plan, during 1999 the Company repurchased 39,500 shares of its common stock for
an aggregate consideration of $668,729, or an average purchase price of $16.93
per share.
During the nine months ended September 30, 1999, the Company issued
907,534 shares of common stock upon the exercise of outstanding stock options
and warrants, for which the Company received $4.8 million in exercise proceeds.
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<PAGE>
(5) 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 including TOM CLANCY'S NET FORCE. NetCo Partners has
entered into numerous licensing agreements, including book publishing agreements
with The Berkley Publishing Group, Random House Audio, 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 nine and three
months ended September 30, 1999 and 1998 are presented below:
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
Revenues $3,075,677 $ (99,195) $ 319,807 $ (880,140)
Gross Profit 2,508,575 (123,774) 270,417 (761,197)
Net Income 2,420,126 (195,760) 174,945 (776,548)
The increase in revenues during the nine and three months ended
September 30, 1999 is attributable to a modification of the agreement between
ABC and NetCo Partners that was recorded during Q3-98. Revenue was reduced by
$1.2 million during Q3-98 as a result of the modification of the ABC mini-series
agreement for Net Force.
As of September 30, 1999, NetCo Partners had $2,583,678 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 $1,516,566 as of September 30,
1999.
As of September 30, 1999, the Company has received cumulative profit
distributions from NetCo Partners since its formation totaling $4,272,129, in
addition to reimbursement of substantially all amounts advanced by the Company
to fund the operations of NetCo Partners.
(6) 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.
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<PAGE>
The following table sets forth the computation of basic and diluted
loss per share for the nine and three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Loss $ (9,640,584) $ (6,362,573) $ (5,201,881) $ (2,680,068)
Preferred Stock Dividends (119,557) (187,151) (28,097) (62,849)
------------ ------------ ------------ ------------
Net Loss Available to Common $ (9,760,141) $ (6,549,724) $ (5,229,978) $ (2,742,917)
Shareholders
Weighted Average Shares Outstanding 11,372,691 7,321,143 14,343,100 7,652,124
------------ ------------ ------------ ------------
Basic and Diluted Loss per Share $ (0.86) $ (0.89) $ (0.36) $ (0.36)
============ ============ ============ ============
</TABLE>
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 nine and three
months ended September 30, 1999 and 1998. Options and warrants to purchase
3,345,256 shares of common stock at exercise prices ranging from $0.01 to $22.00
per share were also not included in the computation of loss per share for the
nine and three months ended September 30, 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. Because the market price of the common
stock has increased since the time the sale/leaseback transaction was entered
into, the Company has the right to cause a significant portion of these shares
to be released from escrow and returned to the Company.
(7) SEGMENT REPORTING:
The Company has two reportable segments: Internet/mall-based retail and
intellectual properties. The Internet/mall-based retail segment operates several
different Internet businesses including hollywood.com, our movie content
website, bigE.com, our e-commerce website where we sell movie and other
entertainment merchandise over the Internet, CinemaSource, a provider of movie
showtimes listings to the Internet industry, PKBaseline, a comprehensive
database of movie information oriented towards movie industry professionals, and
retail stores and kiosks that sell entertainment-related merchandise. The
Company has greatly reduced its mall-based retail store operations during 1998
and currently anticipates closing all mall locations by the end of 1999 (see
Note 10). The intellectual properties segment owns or controls the exclusive
rights to certain original entertainment properties 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.
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<PAGE>
The Company does not have intersegment sales or transfers. The
following table illustrates the financial information regarding the Company's
reportable segments.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Internet/Mall-Based Retail $ 4,569,742 $ 5,633,429 $ 2,542,329 $ 1,510,656
Intellectual Properties 1,260,182 1,739,235 232,405 737,492
------------ ------------ ------------ ------------
$ 5,829,924 $ 7,372,664 $ 2,774,734 $ 2,248,148
============ ============ ============ ============
GROSS PROFIT:
Internet/Mall-Based Retail $ 3,197,273 $ 2,410,912 $ 2,023,041 $ 668,726
Intellectual Properties 744,646 1,089,997 129,278 272,117
------------ ------------ ------------ ------------
$ 3,941,919 $ 3,500,909 $ 2,152,319 $ 940,843
============ ============ ============ ============
DEPRECIATION AND AMORTIZATION EXPENSE:
Internet/Mall-Based Retail $ 3,047,036 $ 604,067 $ 1,839,341 $ 206,769
Intellectual Properties 92,033 180,499 38,857 68,918
------------ ------------ ------------ ------------
$ 3,139,069 $ 784,566 $ 1,878,198 $ 275,687
============ ============ ============ ============
OPERATING LOSS:
Internet/Mall-Based Retail $ (5,759,226) $ (3,829,753) $ (2,828,733) $ (1,277,414)
Intellectual Properties (3,923,336) (1,443,905) (2,181,387) (684,652)
------------ ------------ ------------ ------------
$ (9,682,562) $ (5,273,658) $ (5,010,120) $ (1,962,066)
============ ============ ============ ============
INTEREST, NET:
Internet/Mall-Based Retail $ 417,701 $ 385,948 $ 74,367 $ 154,614
Intellectual Properties 44,639 227,601 19,011 17,811
------------ ------------ ------------ ------------
$ 462,340 $ 613,549 $ 93,378 $ 172,425
============ ============ ============ ============
CAPITAL EXPENDITURES (NET)
Internet/Mall-Based Retail $ 156,731 $ 209,899 $ 69,183 $ 107,585
Intellectual Properties 18,617 7,592 - -
------------ ------------ ------------ ------------
$ 175,348 $ 217,491 $ 69,183 $ 107,585
============ ============ ============ ============
</TABLE>
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<PAGE>
(8) 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 September 30, 1999 will be collected in full,
and that no reserve for uncollectible accounts is necessary (see Note 5).
Significant estimates also include management's assessment of the net realizable
value of the carrying value of the Company's mall-based retail operations (see
Note 10).
The net debit for retail operations will be recovered through future
operations or sales proceeds.
(9) PENDING TRANSACTIONS:
On August 30, 1999, the Company entered into a definitive agreement
with CBS Corporation providing for the issuance to CBS of 6,672,031 shares of
our common stock for an aggregate purchase price of $105,303,030. $100,000,000
of the purchase price is payable by CBS in advertising, promotion and content
over a seven-year term. CBS will conduct the advertising and promotion across
its full range of media properties, including the CBS television network, CBS
owned and operated television stations, CBS cable networks, Infinity
Broadcasting Corporation's radio stations and outdoor billboards, CBS Internet
sites and CBS syndicated television and radio programs. To supplement the
Company's internal sales efforts, the Company will have the right to require CBS
to sell advertisements on the Hollywood.com website generating advertising
revenues of up to $1.5 million per year and will pay an 8% commission on any
additional advertising revenues generated by CBS for the Company. The balance of
the purchase price is payable in cash by CBS to the Company upon the closing of
the transaction. The Company will also issue to CBS upon the closing of the
transaction a Warrant to purchase an additional 1,178,892 shares of common stock
for an aggregate exercise price of $10,937,002. Half of the warrant exercise
price is payable in cash and half is payable in additional advertising and
promotion during the 24-month period immediately following the exercise of the
Warrant by CBS. Closing of the CBS transaction is subject to approval of the
issuance of common stock to CBS by the Company's shareholders. The transaction
will be voted upon by the Company's shareholders at the annual meeting of
shareholders scheduled to be held in December 1999.
(10) COMMITMENTS AND CONTINGENCIES:
TAX LOAN - As part of the Asset Purchase Agreement between the Company
and CinemaSource, the Company has agreed to make a loan to the shareholder of
CinemaSource 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). As of September 30, 1999, a loan had not been granted.
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 two to
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<PAGE>
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. 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 mall-based retail division, and a reserve of
$467,554 for the estimated cost of the early lease terminations. During the nine
months ended September 30, 1999, the Company reduced this reserve by $187,689
for payments made to the lessors under various lease termination agreements and
increased the reserve by $150,000. At September 30, 1999, the remaining carrying
value of the fixed assets of the retail operations is approximately $2.5
million. The Company intends to write-off the net book value of fixed assets
remaining when the mall-based retail stores are closed.
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.
(11) RECLASSIFICATION:
Certain amounts in the 1998 financial statements have been reclassified
to conform with the 1999 classification.
(12) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE NINE MONTHS ENDED
SEPTEMBER 30,1999:
o The Company recorded the conversion of $6,152,261 of Series
A,B,C,D, and D-2 Preferred Stock into 1,580,490 shares of common
stock.
o Non-cash dividends on its Series A,B,C, D and D-2 Convertible
Preferred Stock in the amount of $83,657 were recorded, of which
$79,808 was paid through the issuance of 6,675 shares of common
stock.
o Capital lease transactions totaled $56,068.
o The Company issued 2,500 shares of restricted stock valued at
$46,250 as an incentive stock bonus to an officer.
NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998:
o Capital lease transactions totaled $60,501.
o Dividends on Series A and B Convertible Preferred Stock in the
amount of $127,151 which were paid through the issuance of 30,410
shares of common stock were recorded.
o Convertible debentures of $650,000 were converted into 173,568
shares of common stock, plus accrued interest.
o The Company issued 236,230 shares of restricted common stock
valued at $796,225 to employees of the Company.
(13) SUBSEQUENT EVENT:
The Company announced that during the fourth quarter it will change its
name to Hollywood.com, Inc. and its new ticker symbol will be HOLL. The name
change is subject to the approval of the Company's shareholders at the annual
meeting of shareholders scheduled to be held in December 1999.
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<PAGE>
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 our control, and actual results may differ
materially depending on a variety of important factors. Such factors include,
but are not limited to, the limited operating history of our Internet business,
our continued operating losses and accumulated deficit, our need to raise
additional working capital, the continued closing of our mall-based retail
stores, dependence on our relationships with authors, our ability to compete in
the Internet and licensing industries, dependence on key management personnel,
and other factors discussed in the Company's filings with the Securities and
Exchange Commission.
GENERAL
We are a diversified Internet company whose primary businesses are the
operation of movie and entertainment-related content and e-commerce websites and
the development and licensing of intellectual properties. We also operate five
mall-based retail stores, which we expect to close by the end of 1999. We have
two operating divisions: the Internet and retail division and the intellectual
properties division. The Internet and retail division conducts its operations
through the following wholly owned direct and indirect subsidiaries of the
Company:
o hollywood.com, Inc., the owner of the Hollywood.com website;
o Big Online, Inc., the owner of the bigE.hollywood.com website;
o Hollywood.com International, Inc., the company engaged in
expanding the hollywood.com and bigE.com websites
internationally;
o Showtimes.com, Inc., the owner of the CinemaSource and
EventSource businesses;
o Baseline, Inc., the owner of the PKBaseline.com website; and o
Tekno Comix, Inc., the owner of five mall-based retail stores.
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.
INTERNET OPERATIONS
We operate several different movie and entertainment-related Internet
businesses, including Hollywood.com, our movie content website,
bigE.hollywood.com, our e-commerce
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website where we sell movie and other entertainment merchandise over the
Internet, CinemaSource and EventSource, providers of movie showtimes listings
and event listings to the Internet industry and other media companies, and
PKBaseline.com, a comprehensive database of movie information oriented toward
movie industry professionals.
We launched our Internet store, bigE.com, in November 1998 and renamed
it bigE.hollywood.com in September 1999. It features a product line of branded
licensed merchandise including toys, apparel, video games, art, collectibles,
housewares, accessories, costumes, games, high tech merchandise and media items.
Our merchandise is based on movies and television shows such as Star Wars,
Pokemon, Southpark, X-Files, Austin Powers and Star Trek, and popular culture.
Our strategy is to make our website a one-stop shopping experience for anyone
seeking entertainment merchandise. We attract customers to bigE.hollywood.com
from relationships that we have with other Internet companies and their
websites, including latimes.com, usatoday.com, Yahoo!, Excite, nj.com and
others.
On May 20, 1999, we acquired hollywood.com, Inc., which owns
Hollywood.com, a movie content website with approximately 1 million pages of
movie information including movie descriptions, commentary, movie news,
celebrity information, movie showtimes listings, box office reports, movie
soundtrack excerpts, and an extensive multimedia library. We acquired
hollywood.com, Inc. from The Times Mirror Company for $31 million, which was
paid by issuing Times Mirror 2,300,075 shares of our common stock and a one-year
unsecured promissory note for $1,928,138. There were several reasons why we
found the acquisition of Hollywood.com to be attractive. The primary reason was
the "Hollywood.com" brand name, which is already established on the Internet as
a popular movie website. We also believe that people around the world associate
the "Hollywood" name with movies and entertainment. A second reason was the
exclusive contract that Hollywood.com has with the National Association of
Theatre Owners (NATO). Through this contract, Hollywood.com promotes its website
to movie audiences by airing trailers featuring Hollywood.com before the feature
films that play in most NATO-member theatres. In exchange, Hollywood.com
provides websites for the exhibiting NATO members. These websites contain movie
showtimes information for each theatre. In addition, as part of the acquisition,
we are able to offer stories from the LOS ANGELES TIMES, which is owned by Times
Mirror, on our website, and bigE.hollywood.com is the exclusive movie
merchandise store featured on latimes.com.
On May 18, 1999, we purchased substantially all of the assets of
CinemaSource, Inc. Our wholly owned subsidiary, Showtimes.com, Inc., operates
the CinemaSource business and is developing the EventSource business.
CinemaSource provides movie showtimes and other movie-related information to the
Internet industry and other media companies. CinemaSource provides this
information to more than 100 different media outlets, including customers such
as Yahoo!, Excite, Go Network, Ticketmaster/CitySearch, Zip 2, The New York
Times website, usatoday.com, latimes.com, iWon.com, The Washington Post website,
the Boston Globe website, the Newsday website and all of the websites of Knight
Ridder and Advance/Newhouse. EventSource is a new business that is expanding
through the existing CinemaSource customer base. EventSource provides
information on entertainment events, such as concerts, in major cities around
the country. We paid $6.5 million in cash and issued 436,191 shares of our
common stock for the CinemaSource assets.
On August 31, 1999, we purchased substantially all of the motion
picture-related assets of Paul Kagan Associates, Inc., including the
PKBaseline.com website, several publications, including the MOTION PICTURE
INVESTOR, and a consumer oriented movie website. The PKBaseline.com website is a
comprehensive database of movie information, which subscribers access by paying
a fee for each piece of data that is downloaded. The website includes film
credits, information on film projects in production, new movie releases, box
office data, film
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<PAGE>
synopses, biographies of entertainment celebrities, and film reviews. The data
includes comprehensive information on over 67,000 films in the last half
century. Baseline data continuously tracks production, distribution, and
exhibition of feature films worldwide, including box office projections,
budgets, and trends. The aggregate purchase price for the Baseline assets
consisted of 492,611 shares of our common stock and warrants to purchase an
aggregate of 54,735 shares of our common stock at an exercise price of $18.27
per share.
On August 30, 1999, we entered into a definitive agreement with CBS
Corporation providing for the issuance to CBS of 6,672,031 shares of our common
stock for an aggregate purchase price of $105,303,030. $100,000,000 of the
purchase price is payable by CBS in advertising, promotion and content over a
seven-year term. CBS will conduct the advertising and promotion across its full
range of media properties, including the CBS television network, CBS owned and
operated television stations, CBS cable networks, Infinity Broadcasting
Corporation's radio stations and outdoor billboards, CBS Internet sites and CBS
syndicated television and radio programs. To supplement the Company's internal
sales efforts, the Company will have the right to require CBS to sell
advertisements on The Hollywood.com website generating advertising revenues of
up to $1.5 million per year and will pay an 8% commission on any additional
advertising revenue generated by CBS for the Company. The balance of the
purchase price is payable in cash by CBS to the Company upon the closing of the
transaction. The Company will also issue to CBS upon the closing of the
transaction a Warrant to purchase an additional 1,178,892 shares of common stock
for an aggregate exercise price of $10,937,002. Half of the warrant exercise
price is payable in cash and half is payable in additional advertising and
promotion during the 24-month period immediately following the exercise of the
Warrant by CBS. Closing of the CBS transaction is subject to approval of the
issuance of common stock to CBS by the Company's shareholders. The transaction
will be voted upon by the Company's shareholders at the annual meeting of
shareholders scheduled to be held in December 1999.
We are integrating our Internet assets (Hollywood.com,
bigE.hollywood.com, CinemaSource, and PKBaseline.com) into a comprehensive movie
and entertainment Internet business that generates revenues through advertising
sales, content syndication and online retail sales. We plan to increase our
promotional efforts for our Internet business through the $100 million of
advertising and promotion to be provided by CBS upon the closing of the
transaction discussed above, and by continuing our other marketing programs. We
also plan to expand the Hollywood.com and bigE.hollywood.com websites
internationally through our recently announced affiliation with AOL Latin
America and through relationships with other prospective foreign partners. On
August 5, 1999, we announced a multi-year commerce and content agreement under
which hollywood.com will be an anchor tenant in the entertainment channels of
AOL branded services in Latin America and bigE.com will be prominently
positioned in the shopping channels of AOL branded services in Latin America. We
expect to launch a Portuguese language version of Hollywood.com and
bigE.hollywood.com for the Brazilian market during the fourth quarter of 1999.
We plan to launch a Spanish version of the sites in 2000 for the rest of Latin
America.
RETAIL STORES
In addition to our Internet store, we currently operate five mall-based
retail stores that sell entertainment-related merchandise. We greatly reduced
our mall-based operations during 1998 and currently anticipate selling or
closing all of our mall stores by the end of 1999.
INTELLECTUAL PROPERTIES DIVISION
GENERAL. Our intellectual properties division owns the exclusive rights
to intellectual properties, which are complete stories and ideas for stories,
created by best-selling authors and
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<PAGE>
media celebrities. Some examples of our intellectual properties are LEONARD
NIMOY'S PRIMORTALS, MICKEY SPILLANE'S MIKE DANGER and ANNE MCCAFFREY'S ACORNA
THE UNICORN GIRL. We license rights to our intellectual properties to companies
such as book publishers, film and television studios, multi-media software
companies and producers of other products. These licensees develop books,
television series and other products based on the intellectual properties
licensed from us. We generally obtain the exclusive rights to the intellectual
properties and the right to use the creator's name in the titles of the
intellectual properties (e.g., MICKEY SPILLANE'S MIKE DANGER and LEONARD NIMOY'S
PRIMORTALS). Our intellectual properties division also includes a book
development and book licensing operation that develops and executes book
projects, typically with best-selling authors. They license the books for
publication with book publishers such as HarperCollins, Bantam Doubleday Dell,
Random House, Simon & Schuster, Penguin Putnam and Warner Books. The book
development and book licensing division has a library of more than 1,000 books.
LICENSING ACTIVITIES. Set forth below is a discussion of certain of the
Company's intellectual properties published or otherwise active during the third
quarter of 1999 and the licensing activities related thereto. 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.
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.
o TOM CLANCY'S NET FORCE ("Net Force") (a NetCo Partners' property)
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 adult books as audio books by Random House
Audio Publishing and Harper Collins Audio Publishing; and for
book publication and distribution rights in foreign countries and
languages throughout the world with eight different foreign
publishers. The second adult novel currently occupies the
number three position on The New York Times Bestseller List.
The fifth and sixth young adult novels were published
domestically during the third 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
NET FORCE novels.
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. The hard cover edition of the third book in
the series was published during the third quarter of 1999.
This intellectual property has also been licensed to Books on
Tape, Inc. for production of unabridged audio recordings of
the first three prose novels, two of which were
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<PAGE>
released in early 1999, and to various other parties for
licensing rights in certain countries outside the United
States and Canada.
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).
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 NET FORCE, 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.
BOOK DEVELOPMENT AND LICENSING. The Company 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 1,100 books published since its inception (approximately 375
published since the fourth quarter of 1994, when the Company acquired its
interest in Tekno Books) and approximately 190 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, Penguin
Putnam and Warner Books), translated into 32 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
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<PAGE>
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 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. The agreement with Classica granted 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. The
agreement with Classica expired on September 12, 1999. The Company is currently
evaluating whether to extend the agreement.
Tekno Books owns a 50% interest in MYSTERY SCENE MAGAZINE, a trade
journal of the mystery genre. The Company also owns a 25% interest in the
magazine.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 ("Q3-99") AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1998 ("Q3-98"), AND NINE MONTHS ENDED SEPTEMBER
30, 1999 ("Y3-99") AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
("Y3-98").
The following table summarizes the Company's revenues, cost of sales
and gross profit by division for Q3-99 and Q3-98, Y3-99, and Y3-98 respectively:
INTELLECTUAL INTERNET/MALL-
PROPERTIES BASED RETAIL TOTAL
---------- ---------- ----------
Q3-99
Net Revenues $ 232,405 $2,542,329 $2,774,734
Cost of Sales 103,127 519,288 622,415
---------- ---------- ----------
Gross Profit $ 129,278 $2,023,041 $2,152,319
========== ========== ==========
Q3-98
Net Revenues $ 737,492 $1,510,656 $2,248,148
Cost of Sales 465,375 841,930 1,307,305
---------- ---------- ----------
Gross Profit $ 272,117 $ 668,726 $ 940,843
========== ========== ==========
Y3-99
Net Revenues $1,260,182 $4,569,742 $5,829,924
Cost of Sales 515,536 1,372,469 1,888,005
---------- ---------- ----------
Gross Profit $ 744,646 $3,197,273 $3,941,919
========== ========== ==========
Y3-98
Net Revenues $1,739,235 $5,633,429 $7,372,664
Cost of Sales 649,238 3,222,517 3,871,755
---------- ---------- ----------
Gross Profit $1,089,997 $2,410,912 $3,500,909
========== ========== ==========
-22-
<PAGE>
NET REVENUES
The Company acquired the Baseline II, Inc. Internet business on August
31, 1999. Therefore, the Q3-99 results of operations for the Internet and
mall-based retail division are not reflective of the results of operations for
future periods.
Net revenues (not taking into account the Company's 50% interest in
NetCo Partners) increased by 23%, or $526,586, to $2,774,734 for Q3-99 from
$2,248,148 for Q3-98. Net revenues for Y3-99 decreased by $1,542,740, or 21%, to
$5,829,924 from $7,372,664 for Y3-98. The decrease in net revenues is
attributable to the decrease in retail revenues as a result of the phase-out of
the Company's mall-based retail operations offset by an increase in Internet
revenues resulting from the acquisitions of three Internet businesses in 1999.
For Q3-99, revenues generated by the Internet/mall-based retail division
amounted to 92% of the Company's total revenues while revenues from the
intellectual properties division amounted to 8% of the total (does not include
revenues from 50% interest in NetCo Partners). By comparison for Q3-98,
Internet/mall-based retail revenues amounted to 67% of the total and
intellectual properties revenues amounted to 33% of the total.
GROSS PROFIT
Overall Company gross profit increased by 129%, or $1,211,476, to
$2,152,319 for Q3-99 from $940,843 for Q3-98. As a percentage of net revenues,
gross profit increased to 78% for Q3-99 from 42% for Q3-98. The Company's
overall gross profit increased $441,010 or 13%, from $3,500,909 for Y3-98 to
$3,941,919 for Y3-99. The increase in gross profit is attributable to the change
in the mix of revenues being recognized in our Internet/mall-based retail
division. Revenues from our mall-based retail operations, which generate a lower
gross profit, have decreased substantially, while revenues from our Internet
business, which generate a higher gross profit, have increased.
-23-
<PAGE>
INTERNET/MALL-BASED RETAIL DIVISION
The Internet and mall-based retail division generates revenues through
the sale of advertising on the Company's websites, the sale of entertainment
merchandise over the Internet and in mall-based retail stores, licensing movie
showtimes listings and other movie content to the Internet industry and other
media companies, and licensing movie data through its comprehensive database of
movie information oriented towards movie industry professionals. The composition
of net revenues is as follows:
<TABLE>
<CAPTION>
Q3-99 Q3-98
------------------ ------------------
$ % $ %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Internet Sales $2,383,536 94 $ -- --
Retail Sales 158,793 6 1,128,006 75
Advertising Income - Retail (ABC) -- -- 382,650 25
---------- --- ---------- ---
TOTAL $2,542,329 100 $1,510,656 100
========== === ========== ===
<CAPTION>
Y3-99 Y3-98
------------------ -------------------
$ % $ %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Internet Sales $3,293,257 72 $ -- --
Retail Sales 1,056,485 23 4,000,779 71
Advertising Income - Retail (ABC) 220,000 5 1,282,650 23
Franchise Fee Income -- -- 350,000 6
---------- --- ---------- ---
TOTAL $4,569,742 100 $5,633,429 100
========== === ========== ===
</TABLE>
Net revenues for this division increased by 68%, or $1,031,673, to
$2,542,329 for Q3-99 from $1,510,656 for Q3-98 and decreased 19%, or $1,063,687
from $5,633,429 for Y3-98 to $4,569,742 for Y3-99. The Company's decision to
exit the mall-based retail business in 1998 has contributed greatly to the
reduced level of retail revenues. This decrease in revenues was offset by an
increase in Internet revenues recognized as a result of the Company's
acquisitions during Q2-99 and Q3-99 of three Internet businesses.
Net revenues include revenues earned from several different movie and
entertainment-related Internet businesses, including Hollywood.com, our movie
content website, bigE.hollywood.com, our e-commerce website where we sell movie
and other entertainment merchandise over the Internet, CinemaSource and
EventSource, providers of movie showtimes listings and event listings to the
Internet industry and other media companies, and PKBaseline.com, a comprehensive
database of movie information oriented toward movie industry professionals.
Internet sales were $2,383,536 for Q3-99. The Internet businesses described
above were acquired during 1999 and the e-commerce business launched during
Q4-98; therefore, there are no sales in Q3-98 or Y3-98. On a pro forma basis if
these Internet businesses were acquired in 1998, then revenues would have been
$2,428,984 for Q3-99 as compared to $1,062,575 for Q3-98, an increase
-24-
<PAGE>
of $1,366,409 or 129%. In addition, on a pro forma basis revenues would have
been $5,602,486 for Y3-99 as compared to $2,867,575 for Y3-98, an increase of
$2,734,911 or 95%.
Also included in net revenues (as Internet sales) is imputed income
earned under the NATO contract, which the Company acquired through its
acquisition of hollywood.com during Q2-99 and barter advertising revenue.
Through the NATO contract hollywood.com promotes its website to movie audiences
by airing trailers about hollywood.com before the feature films that play in
most NATO-member theatres. In exchange, hollywood.com provides websites for the
exhibiting NATO members. In Q3-99 the Company recorded $745,437 in promotional
revenue earned under the NATO contract and recorded $1,167,853 for Y3-99.
The Company also recorded $63,707 in barter advertising revenue for Q3-99 and
$76,707 for Y3-99.
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 at September 30,
1999. Retail sales decreased 86%, or $969,213, to $158,793 for Q3-99 as compared
to $1,128,006 for Q3-98 and decreased 74%, or $2,944,294, to $1,056,485 for
Y3-99 as compared to $4,000,779 for Y3-98 principally due to the closure of the
mall-based stores as 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. 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 decreased by
$382,650 for Q3-99 because the Company discontinued playing the video clips
during the first quarter of 1999.
Revenues for the entertainment retail division for Y3-98 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 Internet and mall-based retail division increased
by $1,354,315 or 203% from $668,726 for Q3-98 to $2,023,041 for Q3-99 and
increased by $786,361 or 33% from $2,410,912 for Y3-98 to $3,197,273 for Y3-99.
The gross profit increased for Q3-99 because the Internet revenues have
increased and are generating higher gross profits than the revenues from the
mall-based retail operations, which have decreased. As a percentage of Internet
and retail division revenues, gross profit increased to 80% for Q3-99 from 44%
for Q3-98 and from 43% for Y3-98 to 70% for Y3-99.
-25-
<PAGE>
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>
Q3-99 Q3-98
-------------------- --------------------
$ % $ %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Book Development & Licensing $ 214,963 92 $ 735,549 100
Other 17,442 8 1,943 --
---------- ----- ---------- -----
Totals $ 232,405 100 $ 737,492 100
========== ===== ========== =====
<CAPTION>
Y3-99 Y3-98
-------------------- --------------------
$ % $ %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Book Development & Licensing $1,208,347 96 $1,706,914 98
Other 51,835 4 32,321 2
---------- ----- ---------- -----
Totals $1,260,182 100 $1,739,235 100
========== ===== ========== =====
</TABLE>
Book development and licensing represented 92% of the revenues
generated by the intellectual properties division for Q3-99 and 96% for Y3-99.
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 decreased by $520,586, or 71%, to $214,963 for Q3-99 from $735,549 for
Q3-98. Book development and licensing decreased $498,567 or 29% from $1,706,914
in Y3-98 to $1,208,347 in Y3-99. The decrease in revenues is attributable to a
lesser number of manuscripts being delivered in Q3-99 and Y3-99 as compared to
Q3-98 and Y3-98. Revenues vary quarter to quarter dependent on the various
stages of the book projects. Revenues are recognized 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 contingencies.
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
increased by 798%, or $15,499, to $17,442 for Q3-99 from $1,943 for Q3-98. Other
revenues increased $19,514 or 60%, to $51,835 for Y3-99, from $32,321 for Y3-98.
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
under "Equity in Earnings of NetCo Partners."
-26-
<PAGE>
Gross profit for the intellectual properties division (not including
the Company's 50% equity in the earnings of NetCo Partners) decreased by 52%, or
$142,839, to $129,278 for Q3-99 from $272,117 for Q3-98. Gross profits decreased
32% or $345,351 to $744,646 for Y3-99 from $1,089,997 for Y3-98.
EQUITY IN EARNINGS OF NETCO PARTNERS
The Company's 50% share in the earnings of NetCo Partners increased by
123%, or $475,746, to $87,472 for Q3-99 from $(388,274) for Q3-98 and increased
$1,307,943 from $(97,880) for Y3-98 to $1,210,063 for Y3-99. Revenue increased
for Q3-99 and Y3-99 because of an adjustment made in Q3-98 that reduced revenue
by $1.2 million as a result of a modification of the ABC mini-series contract.
See revenue recognition described below.
NET FORCE 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 six
young adult novels were published in the U.S. during 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 NET FORCE novels.
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, depreciation, amortization of goodwill and
intangibles and reserve for closed stores. Operating expenses increased by 147%,
or $4,259,530, to $7,162,439 for Q3-99 from $2,902,909 for Q3-98 and by
$4,849,914, or 55%, from $8,774,567 for Y3-98 to $13,624,481 for Y3-99. The
increase in total expenses in Q3-99 as compared to total operating expenses in
Q3-98 reflects increases in selling, general and administrative expenses of
$1,878,473 or 146%, in salaries and benefits of $924,111, or 102%, or and in
amortization of goodwill and intangibles of $1,447,999. The increase in
operating expenses is primarily attributable to additional amortization of
goodwill and intangibles, additional depreciation, and additional costs as a
result of the acquisition of hollywood.com, CinemaSource, and PKBaseline during
1999. Included in selling, general and administrative expenses is non-cash
advertising expense of $822,145 for Q3-99, which represents the value of the
advertising that the Company supplies to various websites and affiliates in
accordance with the NATO contract and other barter contracts and $382,600 for
Q3-98 which represents ABC advertising expense.
-27-
<PAGE>
INTEREST EXPENSE, NET
Net interest expense decreased by 46%, or $79,047, to $93,378 for Q3-99
as compared to $172,425 for Q3-98, and 25% or $151,209, from $613,549 for Y3-98
to $462,340 for Y3-99 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 offset by interest income earned in 1999.
NET LOSS
The Company generated a net loss of $5,201,881 for Q3-99 as compared to
a net loss of $2,680,068 for Q3-98, an increase of 94% or $2,521,813. For Y3-99
the net loss increased by 52% or $3,278,011 from $6,362,573 for Y3-98 to
$9,640,584 for Y3-99. The significant portion of the increased loss for Q3-99 is
attributable to the reduction in retail revenues from our mall-based retail
locations and the increase in amortization of goodwill and intangibles and costs
associated with operating the Internet businesses. On a per share basis, the
loss per common share was ($.36) for Q3-98 and Q3-99, while the loss per common
share improved by $.03 from ($.89) for Y3-98 to ($.86) for Y3-99.
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 and 1999, the Company began to phase out its
mall-based retail operations. The Company is in the process of closing its
remaining mall-based retail stores.
The Company is presently focusing its efforts on further development
and expansion of its Internet business, both through acquisitions and strategic
alliances, and through expansion of its e-commerce operations. The Company has
successfully completed the acquisitions of hollywood.com, CinemaSource and
Baseline. The Company believes that it will be well-positioned in the Internet
business with revenues derived from advertising sales, content syndication and
online retail sales.
SHAREHOLDERS' EQUITY
Shareholders' equity increased from $1,523,435 at December 31, 1998 to
$59,555,841 at September 30, 1999. The increase in shareholders' equity is
attributable to the net proceeds received from the issuance of additional shares
of common stock to acquire hollywood.com, CinemaSource and Baseline, the
exercise of stock options and warrants, and the private placement, offset by the
Company's net loss for Y3-99 of $9,640,584.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of
$6,229,996 and working capital of $5,161,477, 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 Q3-99 was $6,618,810,
primarily representing cash used to fund the Company's net loss and a decrease
in accounts payable. Net cash used in investing activities was $7,785,100, while
$19,904,572 in cash was provided by financing activities. As a result of all of
the above, cash and cash equivalents increased by $5,500,662 for Y3-99. During
Y3-98, net cash used in operating
-28-
<PAGE>
activities was $3,625,395, net cash used in investing activities was $494,792,
and $3,433,923 in cash was provided by financing activities.
On May 20, 1999 the Company issued a $1,928,138 unsecured promissory
note of the Company to Times Mirror to pay a portion of the purchase price for
the acquisition of hollywood.com. The promissory note has a maturity date of May
20, 2000 (at which time the aggregate principal balance thereof must be repaid
in full) and bears interest at the prime rate in effect from time to time of
Citibank, N.A. plus 1%. Interest is due quarterly in arrears beginning June 30,
1999 with the final payment due at maturity. The promissory note may be prepaid
in whole or in part at any time without payment of any premiums or penalty.
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 purchased during 1999 totaled $2,609,320, less costs to issue the shares
totaling $140,661, which were charged to additional paid-in capital.
On May 17, 1999, the Company issued 569,820 shares of common stock in a
private placement at a purchase price of $21.25 per share. In addition, the
Company issued to the same investors warrants to purchase an aggregate of
189,947 shares of common stock at an exercise price of $21.25 per share. The
gross proceeds of the private placement were $12,108,675. The Company issued
42,600 shares of common stock as a fee to the placement agent.
During the nine months ended September 30, 1999, the Company issued
907,534 shares of common stock upon the exercise of outstanding stock options
and warrants, for which the Company received $4.8 million 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 September 30, 1999, there were 3,345,256 options
and warrants outstanding at exercise prices ranging from $0.01 to $22.00 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. There can be no
assurances, however, that any or all of the remaining outstanding options and
warrants will be exercised.
On August 31, 1999, the Company issued 163,185 shares of common stock
under a subscription agreement for an aggregate purchase price of $2.5 million.
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.
-29-
<PAGE>
YEAR 2000 ISSUES
The Company has completed a survey of the software and hardware used in
its Internet operations and believes that all major systems and components are
currently year 2000 compliant. Management also 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, it is unlikely that any material portion of the existing retail
systems will be used by the Company after year-end 1999. The Company has
determined that the software and hardware for the point-of-sale registers in the
stores is not year 2000 compliant. As the Company presently only operates five
stores, if it needed to replace all of its point-of-sale software and registers,
the cost is not 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
material expenditures that will be necessary for the Company to be year 2000
compliant, beyond those already incurred. There can be no assurances, however,
that significant expenditures will 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. Although the Company has completed a survey of its major operating
systems, it plans to continue to assess the impact of year 2000 on its business.
The year 2000 issue is not currently expected to have a material adverse 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 September 30, 1999, the Company issued an
aggregate of 492,611 shares of common stock to three entities as consideration
for the Company's acquisition of the assets of Baseline II, Inc. and certain
related assets. The Company issued to the same entities warrants to purchase an
aggregate of 54,735 shares of common stock at an exercise price of $18.27 per
share. The warrants became exercisable upon issuance and will expire three years
from the date of issuance. The Company also issued to Paul Kagan 163,185 shares
of common stock for an aggregate purchase price of $2.5 million.
During the quarter ended September 30, 1999, the Company also issued
stock options and warrants to purchase an aggregate of 782,139 shares of the
Company's common stock, including 682,139 stock options granted to employees at
exercise prices ranging from $15.63 to $22.00 and a warrant to purchase 100,000
shares at an exercise price of $21.42 per share. Options granted to employees
are subject to vesting periods ranging from six months to four years and
generally expire five years from the date of issuance. The warrant is expected
to become exercisable during the fourth quarter of 1999 and will expire ten
years from the date it becomes exercisable. The Company did not pay any
placement fees or commissions in connection with the issuance of the securities.
In addition, the Company issued 570,563 shares of its common stock upon
the exercise of outstanding warrants and options with exercise prices ranging
from $5.00 to $10.188 per share. The Company received gross proceeds of
$3,144,857 for these various exercises and paid no fees or commissions relating
to the issuances.
On August 26, 1999, a holder of the Company's Series D 7% Convertible
Preferred Stock converted 50 of the outstanding shares of Series D Preferred
Stock into 108,071 shares of the Company's common stock.
The common stock issued by the Company upon exercise of options granted
under the Company's 1993 Stock Option Plan and its Directors Stock Option Plan
were registered under the Securities Act of 1933 pursuant to a Registration
Statement on Form S-8 filed by the Company with the Securities and Exchange
Commission on October 23, 1996. The other securities described above were issued
without registration under the Securities Act of 1933 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.
-31-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY
NO. DESCRIPTION REFERENCE FROM
--- ----------- --------------
<S> <C> <C>
3.1 Articles of Incorporation, as amended (1)
3.2 Articles of Amendment to Articles of Incorporation of the Company for
Designation of Preferences, Rights and Limitations of 7% Series D Convertible
Preferred Stock (1)
3.3 Articles of Amendment to Articles of Incorporation of the Company for (2)
Designation of Preferences, Rights and Limitations of 7% Series D-2
Convertible Preferred Stock
3.4 Articles of Amendment to Articles of Incorporation of the Company amending (7)
Designation of Preferences, Rights and Limitations of Series A Variable Rate
Convertible Preferred Stock
3.5 Articles of Amendment to Articles of Incorporation of the Company amending (7)
Designation of Preferences, Rights and Limitations of Series B Variable Rate
Convertible Preferred Stock
3.6 Bylaws (3)
4.1 Form of Common Stock Certificate (3)
4.2 Rights Agreement dated as of August 23, 1996 between the Company and American
Stock Transfer & Trust Company, as Rights Agent (4)
10.1 Securities Purchase Agreement, dated July 28, 1999, between the
Company and AOL Latin America, S.L.
10.2 Warrant dated July 28, 1999 by the Company issued in the name of AOL Latin
America, S.L. for 100,000 shares of Common Stock
10.3 Stock Purchase Agreement, dated as of August 26, 1999, between the Company and (5)
CBS Corporation
10.4 Asset Purchase Agreement, dated as of August 30, 1999, by and among the (6)
Company, Baseline II, Inc., Paul Kagan Associates, Inc., Cinema Enterprises
Group LLC and Paul Kagan
10.5 Non-Competition Agreement, dated as of August 31, 1999, by and among the (6)
Company, Baseline II, Inc., Paul Kagan Associates, Inc. and Paul Kagan
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
10.6 Warrant dated August 31, 1999 by the Company issued in the name of Baseline (6)
II, Inc. for 49,262 shares of Common Stock (with similar Warrants to purchase
3,284 and 2,189 shares of Common Stock issued in the name of Paul Kagan
Associates, Inc. and Paul Kagan, respectively)
27.1 Financial Data Schedule
</TABLE>
- ------------------
(1) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998.
(2) Incorporated by reference from the exhibit filed with the Company's
Registration statement on Form S-3 (No. 333-68209).
(3) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 33-69294).
(4) Incorporated by reference from Exhibit 1 to the Company's Current
Report on Form 8-K filed on October 20, 1999.
(5) Incorporated by reference from Exhibit 1 to the Company's Current
Report on Form 8-K filed on September 28, 1999.
(6) Incorporated by reference from Exhibits 1, 2 and 3 to the Company's
Current Report on Form 8-K.
(7) Incorporated by reference from the exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on September 15, 1999
announcing the consummation of the acquisition of Baseline II, Inc. and certain
related assets on August 31, 1999. The Company filed a Current Report on Form
8-K on September 28, 1999 announcing that it entered into a definitive agreement
with CBS Corporation providing for the issuance by the Company to CBS
Corporation of 6,672,031 shares of the Company's common stock for an aggregate
purchase price of $105,303,030.
-33-
<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: November 12, 1999 By: /s/ Mitchell Rubenstein
--------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
(Principal executive, financial and
accounting officer)
-34-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY
NO. DESCRIPTION REFERENCE FROM
--- ----------- --------------
<S> <C> <C>
3.1 Articles of Incorporation, as amended (1)
3.2 Articles of Amendment to Articles of Incorporation of the Company for
Designation of Preferences, Rights and Limitations of 7% Series D Convertible
Preferred Stock (1)
3.3 Articles of Amendment to Articles of Incorporation of the Company for (2)
Designation of Preferences, Rights and Limitations of 7% Series D-2
Convertible Preferred Stock
3.4 Articles of Amendment to Articles of Incorporation of the Company amending (7)
Designation of Preferences, Rights and Limitations of Series A Variable Rate
Convertible Preferred Stock
3.5 Articles of Amendment to Articles of Incorporation of the Company amending (7)
Designation of Preferences, Rights and Limitations of Series B Variable Rate
Convertible Preferred Stock
3.6 Bylaws (3)
4.1 Form of Common Stock Certificate (3)
4.2 Rights Agreement dated as of August 23, 1996 between the Company and American
Stock Transfer & Trust Company, as Rights Agent (4)
10.1 Securities Purchase Agreement, dated July 28, 1999, between the
Company and AOL Latin America, S.L.
10.2 Warrant dated July 28, 1999 by the Company issued in the name of AOL Latin
America, S.L. for 100,000 shares of Common Stock
10.3 Stock Purchase Agreement, dated as of August 26, 1999, between the Company and (5)
CBS Corporation
10.4 Asset Purchase Agreement, dated as of August 30, 1999, by and among the (6)
Company, Baseline II, Inc., Paul Kagan Associates, Inc., Cinema Enterprises
Group LLC and Paul Kagan
10.5 Non-Competition Agreement, dated as of August 31, 1999, by and among the (6)
Company, Baseline II, Inc., Paul Kagan Associates, Inc. and Paul Kagan
</TABLE>
-35-
<PAGE>
<TABLE>
<S> <C> <C>
10.6 Warrant dated August 31, 1999 by the Company issued in the name of Baseline (6)
II, Inc. for 49,262 shares of Common Stock (with similar Warrants to purchase
3,284 and 2,189 shares of Common Stock issued in the name of Paul Kagan
Associates, Inc. and Paul Kagan, respectively)
27.1 Financial Data Schedule
</TABLE>
-36-
BIG ENTERTAINMENT, INC.
================================================================================
SECURITIES PURCHASE AGREEMENT
July 28, 1999
================================================================================
<PAGE>
EXHIBITS
A -- Form of Warrant
B -- Registration Rights Statement
2
<PAGE>
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is
entered into effective as of July 28, 1999 by and between BIG ENTERTAINMENT,
INC., a Florida corporation (the "Company") and AOL LATIN AMERICA, S.L., a
limited liability company organized under the laws of Spain ("Purchaser").
SECTION 1
SALE OF STOCK; CLOSING; DELIVERY
1.1 SALES OF STOCK. Subject to the terms and conditions hereof, the
Company agrees to issue and sell to Purchaser, and Purchaser agrees to buy from
the Company (i) 135,000 shares (the "Shares") of the Company's authorized Common
Stock, par value $.01 per share (the "Common Stock"), and (ii) a Warrant
exercisable to purchase 100,000 shares of Common Stock (the "Warrant" and,
together with the Shares, the "Securities"). The aggregate purchase price for
the Securities (the "Consideration") shall be equal to the services to be
delivered to the Company's wholly owned subsidiary, Hollywood.com International,
Inc., by the Purchaser pursuant to the Interactive Services Agreement of even
date herewith between Hollywood.com International, Inc. and the Purchaser (the
"Services Agreement").
1.2 CLOSING. The closing of the purchase and sale of the Shares
hereunder (the "Closing") will take place on the date hereof (the "Closing
Date"), at the offices of the Company, 2255 Glades Road, Suite 237W, Boca Raton,
FL 33431, or at such other time and place upon which the Company and Purchaser
may mutually agree.
1.3 PAYMENT AND DELIVERY. At the Closing, the Company will deliver to
Purchaser a certificate representing the Warrant substantially in the form of
EXHIBIT A hereto against delivery by the Purchaser of an executed copy of the
Services Agreement. On the earlier of (i) the Launch Date and (ii) the date that
is 90 days after the Closing Date, the Company will deliver to Purchaser a
certificate representing the Shares. As used herein, "Launch Date" means the
first date on which the Portuguese-language AOL Proprietary Service is
operational and commercially available in Brazil.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as follows:
2.1 ORGANIZATION AND STANDING; ARTICLES OF INCORPORATION AND BYLAWS.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Florida. The Company has delivered to
the Purchaser true and complete copies of the Company's Articles of
Incorporation and Bylaws. The
3
<PAGE>
Company has all requisite corporate power and authority to own and operate its
properties and assets, and to carry on its business as presently conducted.
2.2 CORPORATE POWER. The Company has all requisite corporate power and
authority to execute and deliver this Agreement and the Warrant, to sell and
issue the Shares hereunder and the shares of Common Stock underlying the Warrant
(the "Warrant Shares"), and to carry out and perform its obligations under the
terms of this Agreement and the Warrant.
2.3 CAPITALIZATION. The authorized capital stock of the Company
consists of 25,000,000 shares of Common Stock of which 13,682,334 shares were
issued and outstanding as of July 27, 1999, (each together with a Common Stock
purchase right (the "Rights") issued pursuant to the Rights Agreement, dated as
of August 23, 1996 by and between the Company and American Stock Transfer &
Trust Company (the "Rights Agreement") and 394,466 shares were issued and held
as collateral for lease obligations of the Company, and 1,000,000 shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock") of which, as
of July 27, 1999, 50 shares of 7% Series D Convertible Preferred Stock, $10,000
stated value per share, were issued and outstanding. The outstanding shares have
been duly authorized and validly issued, and are fully paid and nonassessable.
2.4 AUTHORIZATION. All corporate action on the part of the Company
necessary for the authorization, execution, delivery and performance of this
Agreement and the Warrant by the Company, the authorization, sale, issuance and
delivery of the Securities and the performance of all of the Company's
obligations hereunder and thereunder has been taken. This Agreement and the
Warrant, when executed and delivered by the Company, shall constitute valid and
binding obligations of the Company, enforceable in accordance with their terms,
except as such enforcement is subject to the effect of (i) any applicable
bankruptcy, insolvency, reorganization or other laws relating to or affecting
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shares, when issued in compliance with the provisions of this Agreement,
will be validly issued, fully paid and nonassessable.
2.5 SEC DOCUMENTS. The Company has furnished to Purchaser copies of its
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and its
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999 and
all other statements, reports, registration statements (other than registration
statements on Form S-8, if any) filed by the Company with the Securities and
Exchange Commission ("SEC") since December 31, 1998 and prior to the date hereof
(collectively, the "SEC Documents"). As of their respective filing dates, the
Company's SEC Documents complied as to form in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the Securities Act of 1933, as amended (the "Securities Act"), as the
case may be. As of their respective filing dates (or if amended or supplemented,
as of the date of such amendment or supplement), none of the SEC Documents
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
4
<PAGE>
therein, in light of the circumstances under which they were made, not
misleading. Each of the historical financial statements of the Company contained
in the SEC Documents has been prepared in all material respects in accordance
with (a) generally accepted accounting principles ("GAAP") (except that the
March 31, 1999 unaudited financial statements may not contain all footnotes
required by GAAP and may be subject to normal year-end audit adjustments) and
(b) the books and records of the Company. Such financial statements present
fairly in all material respects the financial position and results of operations
of the Company as of and for the periods ending on their dates. Except as
disclosed in the SEC Documents, since March 31, 1999 there has been no material
adverse change in the Company's business, results of operations or financial
condition.
2.6 NO VIOLATION. Neither the execution and delivery of this Agreement
or the Warrant nor the consummation of the transactions or performance of the
Company's obligations contemplated hereby or thereby will conflict with, result
in a material breach or violation of, or cause a material default under, any
provision of the Company's Articles of Incorporation or Bylaws, each as is
currently in effect, any instrument, contract or agreement that is material to
the business of the Company and its subsidiaries, taken as a whole, or any
judgment, writ, decree, order, law, statute, ordinance, rule or regulation
applicable to the Company or any of its subsidiaries.
2.7 COMPLIANCE WITH CORPORATE INSTRUMENTS AND LAWS. The Company is not
in violation of any provisions of its Articles of Incorporation or Bylaws as
currently in effect. Each of the Company and each of its subsidiaries is in
compliance in all material respects with all applicable laws, statutes, rules,
and regulations of all governmental and regulatory authorities which are
applicable and the compliance with which is material to the Company and its
subsidiaries taken as a whole.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Purchaser hereby represents and warrants to the Company with respect to
the purchase of the Securities as follows:
3.1 EXPERIENCE. It has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests.
3.2 ACCREDITED INVESTOR. It is an "accredited investor" as such term is
defined in Rule 501(a) of the Securities Act.
3.3 INVESTMENT. It is acquiring the Securities for investment for its
own account, not as a nominee or agent, and not with the view to, or for resale
in connection with, any distribution thereof. It understands that the Shares to
be purchased have not been, and will not be, registered under the Securities Act
or any state securities laws by
5
<PAGE>
reason of a specific exemption from the registration provisions of the
Securities Act and applicable state securities laws, the availability of which
depends upon, among other things, the bona fide nature of the investment intent
and the accuracy of Purchaser's representations as expressed herein.
3.4 RESTRICTIONS ON TRANSFERABILITY. It acknowledges that the Securities
and the Common Stock underlying the Warrant must be held indefinitely unless
subsequently registered under the Securities Act or unless an exemption from
such registration is available. The Purchaser understands that the certificate
or certificates representing the Securities and the Common Stock underlying the
Warrant shall bear the following restrictive legend until registered:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY
NOT BE OFFERED, SOLD OR OTHERWISE DISPOSED OF UNLESS SUCH
OFFER, SALE OR OTHER DISPOSITION IS REGISTERED PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE BASED ON AN OPINION OF COUNSEL
OF THE TRANSFEROR TO SUCH EFFECT IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER.
3.5 NO FEDERAL OR STATE APPROVAL. It understands that no federal or
state agency has passed upon the Securities or made any finding or determination
as to the fairness of the investment or any recommendation or endorsement of the
Securities.
3.6 ACCESS TO DATA. It has had an opportunity to discuss the Company's
business, management and financial affairs with its management.
3.7 AUTHORIZATION. This Agreement and the Warrant, when executed and
delivered by Purchaser, will constitute valid and legally binding obligations of
Purchaser, enforceable in accordance with their terms, except as such
enforcement is subject to the effect of (i) any applicable bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights generally and (ii) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
3.8 BROKERS OR FINDERS. The Company has not, and will not, incur,
directly or indirectly, as a result of any action taken by Purchaser, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement.
3.9 NO VIOLATION. Neither the execution and delivery of this Agreement
or the Warrant nor the consummation of the transactions or performance of the
Purchaser's obligations contemplated hereby or thereby will conflict with,
result in a material breach
6
<PAGE>
or violation of, or cause a material default under, any provision of the
Purchaser's organizational documents, each as is currently in effect, any
instrument, contract or agreement that is material to the business of the
Purchaser or any judgment, writ, decree, order, law, statute, ordinance, rule or
regulation applicable to the Purchaser.
3.10 NO OWNERSHIP OR SHORT POSITION. Purchaser does not "beneficially
own" (as defined under Rule 13d-3 of the Exchange Act) any shares of Common
Stock. The Purchaser has not entered into a short position or similar
arrangement with respect to any shares of the Common Stock at any time from and
after July 1, 1999 to and including the date hereof.
SECTION 4
COVENANTS
4.1 REGISTRATION RIGHTS. The Purchaser shall have the registration
rights set forth in the Registration Rights Statement attached hereto as
Exhibit B.
4.2 RIGHTS. If any Rights are outstanding at the time the Shares or any
Warrant Shares are issued under this Agreement or the Warrant, the Company
shall, in accordance with the Rights Agreement, issue to the Purchaser one Right
for each Share or Warrant Share so issued.
4.3 RETURN OF SHARES. In the event that the Launch Date has not
occurred prior to the one-year anniversary of the Closing Date, the certificate
representing the Shares shall be canceled and the Purchaser shall immediately
return the certificate to the Company and this Agreement shall terminate.
SECTION 5
MISCELLANEOUS
5.1 GOVERNING LAW. This Agreement shall be governed and construed in
all respects in accordance with the laws of the State of Florida as applied to
agreements made and performed in Florida by residents of the State of Florida.
The Company and the Purchaser each hereby consents to personal jurisdiction in
any action brought with respect to this Agreement and the transactions
contemplated hereby in any Circuit Court in Palm Beach County, Florida and in
the United States District Court for the Southern District of Florida. The
Company and the Purchaser each also agrees that service of process may be
accomplished pursuant to the provisions of Section 5.6 hereof.
5.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
5.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents
delivered pursuant hereto at the Closing constitute the full and entire
7
<PAGE>
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
5.4 PUBLICITY. Except as may be required by applicable law or
regulation, neither the Company nor Purchaser shall issue any press release or
otherwise make a public statement with respect to the transactions contemplated
by this Agreement without the other party's consent, which shall not be
unreasonably withheld or delayed.
5.5 CONFIDENTIALITY. Purchaser acknowledges and agrees that any
information or data it has acquired from the Company, not otherwise properly in
the public domain or obtained from sources other than the Company (which
sources, to Purchaser's knowledge, were not bound by any obligations of
confidentiality with respect to such information), was received in confidence.
Purchaser agrees not to divulge, communicate or disclose, except as may be
required by law or for the performance of this Agreement, or use to the
detriment of the Company or for the benefit of any other person or persons, or
misuse in any way, any confidential information of the Company.
8
<PAGE>
5.6 NOTICES, ETC. Unless otherwise provided, any notice, request,
demand or other communication required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given upon personal delivery
to the party to be notified, or when sent by telex or telecopier (with receipt
confirmed), or one business day after deposit with overnight courier or three
business days after deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed as follows (or at such other
address as a party may designate by notice to the other):
IF TO THE COMPANY:
Big Entertainment, Inc.
2255 Glades Road, Suite 237W
Boca Raton, FL 33431
Attention: Mitchell Rubenstein, Chief Executive Officer
Telephone: (561) 998-8000
Facsimile: (561) 998-2974
WITH A COPY TO:
Big Entertainment, Inc.
2255 Glades Road, Suite 237W
Boca Raton, FL 33431
Attention: W. Robert Shearer, General Counsel
Telephone: (561) 998-8000
Facsimile: (561) 998-2974
IF TO THE PURCHASER:
AOL Latin America
6600 North Andrews Avenue
Suite 500
Fort Lauderdale, FL 33309
Attention: John Gardiner
Telephone: (954) 772-0703
Facsimile: (954) 772-7089
WITH A COPY TO:
Arnold & Porter
555 12th Street, N.W.
Washington, DC 20004
Attention: Robert B. Ott
Facsimile: (202) 942-5999
9
<PAGE>
5.7 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
invalid, unenforceable or void, this Agreement shall continue in full force and
effect without said provision. In such event, the parties shall negotiate, in
good faith, a legal, valid and enforceable substitute provision which most
nearly effects the intent of the parties in entering into this Agreement.
5.8 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.9 FACSIMILE SIGNATURES. Any signature page delivered by a fax machine
or telecopy machine shall be binding to the same extent as an original signature
page, with regard to any agreement subject to the terms hereof or any amendment
thereto. Any party who delivers such a signature page agrees to later deliver an
original counterpart to any party which requests it.
5.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
10
<PAGE>
The foregoing agreement is hereby executed as of the date first above
written.
BIG ENTERTAINMENT, INC.
By: /S/ W. ROBERT SHEARER
Name: W. ROBERT SHEARER
Title: SENIOR VICE PRESIDENT
AOL LATIN AMERICA, S.L.
By: /S/ ALEJANDRO LATORRE
Name: ALEJANDRO LATORRE
Title: ADMINISTRATOR
SECURITIES PURCHASE AGREEMENT SIGNATURE PAGE
11
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS STATEMENT
This Registration Rights Statement (this "Statement") sets forth
the registration rights granted by Big Entertainment, Inc. (the "Company") to
the Purchaser under the Securities Purchase Agreement dated as of July 28, 1999
by and between the Company and AOL Latin America, S.L. (the "Purchase
Agreement"). Capitalized terms defined in the Purchase Agreement and used herein
without definition have the same meanings herein as in the Purchase Agreement.
In consideration of the agreements of the Purchaser contained in
the Purchase Agreement, the Company hereby grants to the Purchaser the rights
set forth herein:
1. DEFINITIONS. For purposes of this Statement:
(a) "Commencement Date" means the first anniversary of the Closing
Date under the Purchase Agreement.
(b) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute.
(c) "Investors" means (i) the Purchaser, and (ii) any affiliate of
the Purchaser or its successor.
(d) "Register," "registered," and "registration" refer to a
registration effected by preparing and filing with the Securities and Exchange
Commission (the "Commission") a registration statement or similar document on
Form S-3 (or its successor) in compliance with the Securities Act, and the
declaration or ordering by the Commission of effectiveness of such registration
statement or document.
(e) "Registration Expenses" means all expenses in connection with
the Company's performance of or compliance with its obligations under this
Statement, including, without limitation, all (i) registration, qualification
and filing fees; (ii) fees, costs and expenses of compliance with securities or
blue sky laws; (iii) printing expenses; (iv) messenger, telephone and delivery
expenses incurred by the Company; (v) fees, expenses and disbursements of
counsel for the Company and of all independent certified public accountants
retained by the Company (including the expenses of any special audit and "cold
comfort" letters required by or incident to such performance); (vi) Securities
Act liability insurance if the Company so desires; (vii) fees, expenses and
disbursements of any other individuals or entities retained by the Company in
connection with the registration of the Registrable Securities; (viii) fees,
costs and expenses incurred in connection with the listing of the Registrable
Securities on each national securities exchange or automated quotation system on
which the Company has made application for the listing of its Common Stock; and
(ix) internal expenses of the Company (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties and expenses of any annual audit). Registration Expenses shall
<PAGE>
not include selling commissions, discounts or other compensation paid to
underwriters or other agents or brokers to effect the sale of Registrable
Securities, or counsel fees and any other expenses incurred by Investors in
connection with any registration that are not specified in the immediately
preceding sentence.
(f) "Registrable Securities" means (i) shares of Common Stock issued
pursuant to the Purchase Agreement, the Warrant issued pursuant to the Purchase
Agreement, or the warrant issued by the Company pursuant to Section 6.1(b)(ii)
of the Interactive Services Agreement, dated July 28, 1999, by and between the
Company and the Purchaser, or (ii) shares of Common Stock or other securities of
the Company issued as a dividend or other distribution on or in exchange for any
of the shares of Common Stock specified in clause (i).
(g) "Requestor" means the Investor requesting the registration in
question.
(h) "Securities Act" means the Securities Act of 1933, as amended,
or any successor statute.
2. DEMAND REGISTRATIONS. Investors shall have two demand rights, one
demand right shall be exercisable by the Investors on or after the Commencement
Date (the "Initial Demand"), and a second demand right shall be exercisable on
or after the third anniversary of the Commencement Date (the "Second Demand").
The Company shall not be required to effect more than two (2) registrations
pursuant to this Section 2 and shall not be required to effect any registration
on any form other than a Form S-3 (or its successor).
(a) REQUEST FOR REGISTRATION. If an Investor submits a written
request (a "Demand Notice") to the Company that the Company register, on a shelf
registration statement, Registrable Securities under and in accordance with the
Securities Act (a "Demand Registration"), then the Company shall:
(i) within 10 business days after receipt of such Demand Notice,
give written notice of the proposed registration to all other Investors; and
(ii) as soon as practicable, use diligent efforts to effect such
registration as may be so requested and as would permit or facilitate the sale
and distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Investors joining in such request as are specified in written
requests received by the Company within 20 days after the date the Company mails
the written notice referred to in clause (i) above.
Notwithstanding the foregoing, if the Company shall furnish to the
Investors a certificate signed by the chief executive officer or president of
the Company stating that in the good faith judgment of the board of directors of
the Company, it would be materially detrimental to the Company or its
stockholders for a registration statement to be filed on or before the date
filing would be required in connection with any Demand Registration and it is
therefore essential to defer the filing of such registration statement,
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<PAGE>
the Company shall have the right to defer such filing or delay its effectiveness
for a reasonable period not to exceed 90 days provided that such right shall not
be exercised more than once with respect to a request for registration
hereunder.
(b) UNDERWRITING. No Demand Registration shall involve an
underwriting and the Company shall have no obligation to enter into any
underwriting agreement in connection with a Demand Registration.
3. COMPANY REGISTRATION.
(a) NOTICE OF REGISTRATION. If at any time or from time to time, the
Company shall determine to register any of its Common Stock, whether or not for
its own account, other than a registration relating to employee benefit plans or
a registration effected on Form S-4 (or its successor) or relating to the first
underwritten public offering of Common Stock consummated by the Company within
eighteen (18) months of the date hereof, the Company shall:
(i) provide to each Investor written notice thereof at least ten
days prior to the filing of the registration statement by the Company in
connection with such registration; and
(ii) include in such registration, and in any underwriting
involved therein, all those Registrable Securities specified in a written
request by each Investor received by the Company within five days after the
Company mails the written notice referred to above, subject to the provisions of
Section 3(b) below.
(b) UNDERWRITING. The right of any Investor to registration pursuant
to this Section 3 shall be conditioned upon the participation by such Investor
in the underwriting arrangements specified by the Company in connection with
such registration and the inclusion of the Registrable Securities of such
Investor in such underwriting to the extent provided herein. All Investors
proposing to distribute their Registrable Securities through such underwriting
shall (together with the Company) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by
the Company and take all other actions, and deliver such opinions and
certifications, as may be reasonably requested by such managing underwriter.
Notwithstanding any other provision of this Section 3, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit the number of
Registrable Securities to be included in such registration. The Company shall so
advise all Investors distributing Registrable Securities through such
underwriting, and there shall be excluded from such registration and
underwriting, to the extent necessary to satisfy such limitation, shares held by
the Investors. As among the Investors as a group, the number of Registrable
Securities that may be included in the registration and underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities required to be included (determined without regard to any
requirement of a request to be included in such registration) in such
registration held by all Investors at the time of filing the registration
statement. To facilitate the allocation of shares in accordance with the
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<PAGE>
above provisions, the Company may round the number of shares allocated to any
Investor to the nearest 100 shares.
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 3 prior to the effectiveness of such registration whether or not any
Investor has elected to include Registrable Securities in such registration.
4. EXPENSE OF REGISTRATION. All Registration Expenses incurred in
connection with the registration and other obligations of the Company pursuant
to Sections 2, 3 and 5 shall be borne by Company.
5. REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of this Statement to effect the registration of Registrable
Securities, the Company shall:
(a) promptly prepare and file with the Commission a registration
statement with respect to such Registrable Securities on Form S-3, and use its
reasonable diligent efforts to cause such registration statement to become
effective as promptly as practicable and remain effective thereafter as provided
herein, provided that prior to filing a registration statement or prospectus or
any amendments or supplements thereto, including documents incorporated by
reference after the initial filing of any registration statement, the Company
will furnish to each of the Investors whose Registrable Securities are covered
by such registration statement, their counsel and any underwriters copies of all
such documents proposed to be filed sufficiently in advance of filing to provide
them with a reasonable opportunity to review such documents and comment thereon;
(b) prepare and file with the Commission such amendments (including
post-effective amendments) and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and current and to comply with the provisions
of the Securities Act with respect to the sale or other disposition of all
Registrable Securities covered by such registration statement, including such
amendments (including post-effective amendments) and supplements as may be
necessary to reflect the intended method of disposition by the prospective
seller or sellers of such Registrable Securities;
(c) use its reasonable best efforts to continue the effectiveness of
such registration statement as follows:
(i) if pursuant to the Initial Demand, and such demand is
exercised before the third anniversary of the Commencement Date, until the later
of (x) two years from the effective date of the registration statement relating
thereto and (y) the third anniversary of the Commencement Date;
(ii) if pursuant to the Initial Demand, and such demand is
exercised on or after the third anniversary of the Commencement Date, until two
years from the effective date of the registration statement relating thereto;
and
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(iii) if pursuant to the Second Demand, until two years from the
effective date of the registration statement relating thereto;
(d) subject to receiving reasonable assurances of confidentiality,
for a reasonable period after the filing of such registration statement, and
throughout each period during which the Company is required to keep a
registration effective, make available for inspection by the selling holders of
Registrable Securities being offered, and any underwriters, and their respective
counsel, such financial and other information and books and records of the
Company, and cause the officers, directors, employees, counsel and independent
certified public accountants of the Company to respond to such inquiries as
shall be reasonably necessary, in the judgment of such counsel, to conduct a
reasonable investigation within the meaning of Section 11 of the Securities Act;
(e) promptly notify the selling holders of Registrable Securities
and any underwriters and confirm such advice in writing, (i) when such
registration statement or the prospectus included therein or any prospectus
amendment or supplement or post-effective amendment has been filed, and, with
respect to such registration statement or any post-effective amendment, when the
same has become effective, (ii) of any comments by the Commission, by the
National Association of Securities Dealers Inc. ("NASD"), and by the blue sky or
securities commissioner or regulator of any state with respect thereto or any
request by any such entity for amendments or supplements to such registration
statement or prospectus or for additional information, (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of such
registration statement or the initiation or threatening of any proceedings for
that purpose, (iv) if at any time the representations and warranties of the
Company cease to be true and correct in all material respects, (v) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, or (vi) at any
time when a prospectus is required to be delivered under the Securities Act,
that such registration statement, prospectus, prospectus amendment or supplement
or post-effective amendment, or any document incorporated by reference in any of
the foregoing, contains an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading;
(f) furnish to each selling holder of Registrable Securities being
offered, and any underwriters, prospectuses or amendments or supplements
thereto, in such quantities as they may reasonably request and as soon as
practicable, that update previous prospectuses or amendments or supplements
thereto;
(g) use reasonable diligent efforts to (i) register or qualify the
Registrable Securities to be included in a registration statement hereunder
under such other securities laws or blue sky laws of such jurisdictions within
the United States of America as any selling holder of such Registrable
Securities or any underwriter of the securities being sold shall reasonably
request, (ii) keep such registrations or qualifications in effect for so long as
the registration statement remains in effect and (iii) take any and all such
actions as may be reasonably necessary or advisable to enable such holder or
underwriter to
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<PAGE>
consummate the disposition in such jurisdictions of such Registrable Securities
owned by such holder; PROVIDED HOWEVER, that the Company shall not be required
for any such purpose to (x) qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not otherwise be required to
qualify but for the requirements of this Section 5(h), (y) subject itself to
taxation in any such jurisdiction or (z) consent to general service of process
in any such jurisdiction;
(h) cause all such Registrable Securities to be listed or accepted
for quotation on each securities exchange or automated quotation system on which
the Company's Common Stock then trades; and
(i) otherwise use reasonable diligent efforts to comply with all
applicable provisions of the Securities Act, and rules and regulations of the
Commission, and make available to its security holders, as soon as reasonably
practicable, an earnings statement covering a period of at least twelve months
which shall satisfy the provisions of Section 11(a) of the Securities Act and
Rule 158 thereunder.
6. INDEMNIFICATION. In the event any of the Registrable Securities are
included in a registration statement under this Statement:
(a) the Company will indemnify each Investor who participates in
such registration, each of its officers, directors, partners and agents, and
each person controlling such Investor within the meaning of Section 15 of the
Securities Act, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse each such Investor, each of its officers, directors, partners and
agents and each person controlling such Investor, each such underwriter and each
person who controls any such underwriter, for reasonable legal fees and other
expenses incurred by them in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Investor or underwriter.
(b) Each Investor will, if Registrable Securities held by such
Investor are included in the securities as to which such registration,
qualification or compliance is
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being effected, indemnify the Company, each of its officers, directors, partners
and agents, each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Investor, each of its officers, directors, partners and agents and
each person controlling such Investor within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading, and will reimburse
the Company, such Investors, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Investor.
(c) Each party entitled to indemnification under this Section 6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought provided
that failure to give such prompt notice shall not relieve the Indemnifying Party
of its obligations hereunder unless it is materially prejudiced thereby, and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld). Such Indemnified Party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall be that of such Indemnified Party unless
(i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the
Indemnifying Party shall have failed to assume the defense of such action or
proceeding and employ counsel reasonably satisfactory to such Indemnified Party
in any such action or proceeding or (iii) the named parties to any such action
or proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party and such Indemnified Party shall have been
advised by counsel that there may be one or more legal defenses available to
such Indemnified Party which are different from or additional to those available
to the Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing of an election to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense of such action or proceeding on behalf of such
Indemnified Party, it being understood, however, that the Indemnifying Party
then shall have the right to employ separate counsel at its own expense and to
participate in the defense thereof, and shall not, in connection with any one
such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate
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<PAGE>
firm of attorneys at any time for all Indemnified Parties, which firm shall be
designated in writing by a majority of the Indemnified Parties who are eligible
to select such counsel). No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnified Party may consent to entry of any judgment or enter
into any settlement without the prior written consent of the Indemnifying Party.
(d) If the indemnification provided for in this Section 6 is held by
a court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage or expense referred to herein,
then the Indemnifying Party, in lieu of indemnifying the Indemnified Party,
shall contribute to the amount paid or payable by such Indemnified Party with
respect to such loss, liability, claim, damage or expenses in the proportion
that is appropriate to reflect the relative fault of the Indemnifying Party and
the Indemnified Party in connection with the statements or omissions that
resulted in such loss, liability, claim, damage, or expense, as well as any
other relevant equitable considerations. The relative fault of the Indemnifying
Party and the Indemnified Party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
7. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock and until five years
from the date thereof, the Company shall use reasonably diligent efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, beginning 90 days
after the Company registers a class of securities under Section 12 of the
Exchange Act or completes a registered offering under the Securities Act; or
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements).
8. TERMINATION OF REGISTRATION RIGHTS. No Investor shall be entitled to
exercise any right provided for in this Statement after fifteen years following
the Commencement Date or after such time as all Registrable Securities held by
such Investor may be sold under Rule 144 (or any successor rule) under the
Securities Act within a single three-month period.
9. INFORMATION TO BE PROVIDED BY THE INVESTORS. Each Investor whose
Registrable Securities are included in any registration pursuant to this
Agreement shall
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furnish the Company such information regarding such Investor and the
distribution proposed by such Investor as may be reasonably requested in writing
by the Company and as shall be required in connection with such registration or
the registration or qualification of such securities under any applicable state
securities law.
10. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. The provisions of this Statement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to depart from the provisions hereof may
not be given unless the Company has obtained the written consent of the
Purchaser. Notwithstanding the foregoing, a waiver or consent to departure from
the provisions hereof with respect to a matter which relates exclusively to the
rights of Investors whose Registrable Securities are being sold pursuant to a
registration statement and which does not directly or indirectly affect the
rights of other Investors may be given by the holders of a majority of the
Registrable Securities being sold by such holders.
(b) NOTICES. All communications provided for hereunder shall be sent
by registered or certified mail, reputable overnight delivery service or
facsimile transmission. Communications to an Investor shall be sent to such
Investor at its address set forth in the Purchase Agreement or, if the Investor
was not a Purchaser, in the security register or other records of the Company.
Communications to the Company shall be sent to the Company as provided in the
Purchase Agreement.
(c) DESCRIPTIVE HEADINGS. The descriptive headings of the several
Sections of this Statement are inserted for convenience only and do not
constitute a part of this Statement.
(d) GOVERNING LAW. This Statement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the law of
the State of Florida as applied to agreements entered into and wholly performed
in Florida, without giving effect to the choice of law or conflicts principles
thereof.
(e) PART OF PURCHASE AGREEMENT. This Statement constitutes a part of
the Purchase Agreement and is subject to all provisions thereof.
(f) SEVERABILITY. Any provision of this Statement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
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WARRANT
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR OTHERWISE DISPOSED OF UNLESS
REGISTERED PURSUANT TO THE PROVISIONS OF THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE
BASED ON AN OPINION OF COUNSEL OF THE HOLDER TO SUCH EFFECT IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER.
DATED AS OF JULY 28, 1999
BIG ENTERTAINMENT, INC.
(A FLORIDA CORPORATION)
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
FOR VALUE RECEIVED, BIG ENTERTAINMENT, INC., a Florida
corporation (the "COMPANY"), hereby certifies that AOL Latin America, S.L., or
its registered assigns (the "HOLDER") is entitled, subject to the provisions of
this Warrant, to purchase from the Company One Hundred Thousand (100,000) fully
paid and non-assessable shares of Common Stock (as defined below) at a price per
share equal to $21.42 (the "EXERCISE Price").
The term "COMMON STOCK" means the Common Stock, par value $.01
per share, of the Company as constituted on July 28, 1999 (the `BASE DATE"). The
number of shares of Common Stock purchasable upon the exercise of this Warrant
may be adjusted from time to time as hereinafter set forth. The shares of Common
Stock deliverable upon such exercise, and as adjusted from time to time as set
forth in this Warrant, are hereinafter referred to as the "WARRANT SHARES." The
term "COMPANY" means and includes the corporation named above as well as (i) any
immediate or more remote successor corporation resulting from the merger or
consolidation of such corporation (or any immediate or more remote successor
corporation of such corporation) with another corporation, or (ii) any
corporation to which such corporation (or any immediate or more remote successor
corporation of such corporation) has transferred its property or assets as an
entirety or substantially as an entirety.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification or the posting of bond, and upon
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surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant so lost, stolen, destroyed
or mutilated shall be at any time enforceable by anyone.
The Holder agrees with the Company that this Warrant is issued, and all
the rights hereunder shall be held subject to, all of the conditions,
limitations and provisions set forth herein.
1. EXERCISE OF WARRANT.
1.1 EXERCISE GENERALLY. This Warrant may be exercised in whole or in
part, at any time, or from time to time during the period commencing on the
Launch Date and expiring 5:00 p.m., eastern time, on the tenth anniversary of
the Launch Date (the "EXPIRATION DATE") (or, if such day is a day on which
banking institutions in New York are authorized by law to close, then on the
next succeeding day that shall not be such a day) by presentation and surrender
of this Warrant to the Company at its principal office, or at the office of its
stock transfer agent, if any, with a copy of the Warrant Exercise Form marked as
Annex A attached hereto duly executed and accompanied by payment (either in cash
or by certified or official bank check, payable to the order of the Company) of
the Exercise Price for the number of Warrant Shares specified in such form and
with any appropriate instruments of transfer duly executed by the Holder or its
duly authorized attorney. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the Warrant Shares purchasable hereunder. Upon receipt by the
Company of this Warrant, together with the Exercise Price, at its office, or by
the stock transfer agent of the Company at the stock transfer agent's office, in
proper form for exercise, the Holder shall be deemed to be the holder of record
of the Warrant Shares issuable upon such exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares shall not then be actually delivered to the Holder. The
Company shall pay any and all documentary stamp or similar issue or transfer
taxes payable in respect of the issue or delivery of shares of Common Stock on
exercise of this Warrant. As used herein, "LAUNCH DATE" means the first date on
which the Portuguese-language AOL Proprietary Service is operational and
commercially available in Brazil.
2. RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and delivery upon exercise of this Warrant all shares of Common Stock
from time to time receivable upon exercise of this Warrant. All such shares
shall be duly authorized and, when issued upon such exercise, shall be validly
issued, fully paid and non-assessable and free of all preemptive rights.
3. FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant, but the
Company shall pay the Holder an amount equal to the fair market value of such
fractional share of
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Common Stock in lieu of each fraction of a share otherwise called for upon any
exercise of this Warrant, as determined by the Board of Directors of the Company
(which fair market value shall, in any event and for so long as the Common Stock
is listed for trading on any national securities exchange or quoted for trading
through any inter-dealer quotation system, be deemed to be the closing sales
price of the Common Stock on the date notice of exercise of this Warrant is
given to the Company as provided herein or, if such day is not a trading day,
then such price on the last trading day preceding the date of such notice).
4. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations, entitling the
Holder or Holders thereof to purchase in the aggregate the same number of shares
of Common Stock purchasable hereunder. Upon surrender of this Warrant to the
Company or at the office of its stock transfer agent, if any, with a copy of the
Assignment Form marked as Annex B attached hereto duly executed and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants that carry the same rights upon
presentation hereof at the office of the Company or at the office of its stock
transfer agent, if any, together with a written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
hereof.
5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights as a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. ANTI-DILUTION PROVISIONS.
6.1 ADJUSTMENT FOR RECAPITALIZATION. If the Company shall at any time
subdivide its outstanding shares of Common Stock by recapitalization,
reclassification or split-up thereof, or if the Company shall declare a stock
dividend or distribute shares of Common stock to its stockholders, the number of
Warrant Shares subject to this Warrant immediately prior to such subdivision
shall be proportionately increased and the Exercise Price shall be
proportionately decreased, and if the Company shall at any time combine the
outstanding shares of Common Stock by recapitalization, reclassification or
combination thereof, the number of Warrant Shares subject to this Warrant
immediately prior to such combination shall be proportionately decreased and the
Exercise Price shall be proportionately increased. Any such adjustments pursuant
to this Section 6.1 shall be effective at the close of business on the effective
date of such subdivision or combination or if any adjustment is the result of a
stock dividend or distribution then the effective date of such adjustment based
thereon shall be the record date therefor.
6.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case
of any reorganization of the Company (or any other corporation, the securities
of
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which are at the time receivable on the exercise of this Warrant) after the Base
Date or in case after such date the Company (or any such other corporation)
shall consolidate with or merge into another corporation or convey all or
substantially all of its assets to another corporation, then, and in each such
case, the Holder of this Warrant upon the exercise thereof as provided in
Section 1 at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the securities and property receivable upon the exercise of this Warrant prior
to such consummation, the securities or property to which such Holder would have
been entitled upon such consummation if such holder had exercised this Warrant
immediately prior thereto; in each such case, the terms of this Warrant shall be
applicable to the securities or property receivable upon the exercise of this
Warrant after such consummation.
6.3 NO DILUTION. The Company shall not, by amendment of its Articles of
Incorporation or through reorganization, consolidation, merger, dissolution,
issue or sale of securities, sale of assets or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Warrant, but shall at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant against
dilution or other impairment. Without limiting the generality of the foregoing,
while this Warrant is outstanding, the Company (a) shall not permit the par
value, if any, of the shares of Common Stock receivable upon the exercise of
this Warrant to be above the amount payable therefor upon such exercise and (b)
shall take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue or sell fully paid and non-assessable
shares of Common Stock upon the exercise of this Warrant.
6.4 NOTICES OF RECORD DATE, ETC. In case:
(a) the Company shall take a record of the holders of its Common Stock
for the purpose of entitling them to receive any dividend (other than a cash
dividend at the same rate as the rate of the last cash dividend theretofore
paid) or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities, or
to receive any other right; or
(b) of any capital reorganization of the Company, any reclassification
of the capital stock of the Company, any consolidation or merger of the Company
(other than a re-incorporation merger) with or into another corporation, or any
conveyance of all or substantially all of the assets of the Company to another
corporation; or
(c) of any voluntary dissolution, liquidation or winding up of the
Company,
then, and in each such case, the Company shall mail or cause to be mailed to the
Holder of this Warrant at the time outstanding a notice specifying, as the case
may be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii)
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the date on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding up is to take place, and the
time, if any, is to be fixed, as to which the holders of record of Common Stock
shall be entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, conveyance, dissolution, liquidation or winding up. Such
notice shall be mailed at least 20 days prior to the date therein specified and
the Warrant may be exercised prior to said date during the term of the Warrant.
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT. This Warrant and any
Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise
disposed of unless registered under the Securities Act and any applicable state
securities laws or pursuant to available exemptions from such registration,
provided that the transferor delivers to the Company an opinion of its counsel
satisfactory in form and substance to the Company confirming the availability of
such exemption.
8. LEGEND. Unless the Warrant Shares have been registered under the
Securities Act, upon exercise of this Warrant, all certificates representing the
Warrant Shares shall bear on the face thereof substantially the following
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD
OR OTHERWISE DISPOSED OF UNLESS REGISTERED PURSUANT TO THE
PROVISIONS OF THE SECURITIES ACT AND REGISTERED UNDER ANY
APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE BASED ON AN OPINION OF COUNSEL
OF THE HOLDER TO SUCH EFFECT IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER.
9. NOTICES. All notices required hereunder shall be in writing and
shall be deemed given when telecopied, delivered personally or three days after
mailing when mailed by certified or registered mail, return receipt requested,
to the Company at its principal office, or to the Holder at the address set
forth on the record books of the Company, or at such other address of which the
Company or the Holder has been advised by notice hereunder.
10. APPLICABLE LAW. The Warrant is issued under and shall for all
purposes be governed by and construed in accordance with the substantive laws of
the State of Florida without giving effect to principles or policies of
conflicts of laws thereof. The Company and the Holder hereby submit to the
jurisdiction of the federal and state
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courts located in Palm Beach County Florida and the Southern District of Florida
in connection with any dispute related to this Warrant or any transaction or any
other matter contemplated hereby (to the extent legally permissible).
11. CONVERSION. In lieu of exercising this Warrant or any portion
hereof, at any time, the Holder hereof shall have the right to convert this
Warrant or any portion hereof into Warrant Shares by executing and delivering to
the Company at its principal office the written Notice of Conversion in the form
attached hereto as ANNEX C, specifying the portion of the Warrant to be
converted, and accompanied by this Warrant. The number of shares of Warrant
Shares to be issued to Holder upon such conversion shall be computed using the
following formula:
X=(P)(Y)(A-B)/A
where X = the number of shares of Common Stock to be issued
to the Holder for the portion of the Warrant being
converted.
P = the portion of the Warrant being converted
expressed as a decimal fraction.
Y = the total number of Warrant Shares
issuable upon exercise of the Warrant in full.
A = the fair market value of one Warrant
Share, which means the average closing sale
price of one share of Common Stock during
the five trading days immediately prior to
the date the Notice of Conversion is
received by the Company, as reported in the
principal market for such securities or, if
no such market exists, the fair market value
of one share of Common Stock as determined
in good faith by the Company's Board of
Directors.
B = the Exercise Price on the date of conversion.
Any portion of this Warrant that is converted shall be immediately
canceled. This Warrant or any portion hereof shall be deemed to have been
converted immediately prior to the close of business on the date of its
surrender for conversion as provided above, and the person entitled to receive
the Warrant Shares issuable upon such conversion shall be treated for all
purposes as the holder of such shares of record as of the close of business on
such date. As promptly as practicable after such date, the Company shall issue
and deliver to the person or persons entitled to receive the same a certificate
or certificates for the number of full Warrant Shares issuable upon such
conversion. If the Warrant shall be converted for less than the total number of
Warrant Shares then issuable upon conversion, promptly after surrender of the
Warrant upon such conversion, the Company will execute and deliver a new
warrant, dated the date hereof, evidencing the right of the Holder to the
6
<PAGE>
balance of the Warrant Shares purchasable hereunder upon the same terms and
conditions set forth herein.
[SIGNATURE ON FOLLOWING PAGE]
7
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed on its behalf, in its corporate name, by its duly authorized officer, all
as of the day and year first above written.
BIG ENTERTAINMENT, INC.
By:/S/ W. ROBERT SHEARER
-------------------------------------------
W. Robert Shearer
Senior Vice President
8
<PAGE>
ANNEX A
WARRANT EXERCISE FORM
THE UNDERSIGNED hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing _______ shares of Common Stock of Big
Entertainment, Inc., a Florida corporation, and hereby makes payment of
$_________ in payment therefor.
By:_________________________________________________
Signature
_________________________________________________
Name
_________________________________________________
Title
_________________________________________________
Date
INSTRUCTIONS FOR ISSUANCE OF STOCK
(if other than to the registered holder of the within Warrant)
Name____________________________________________________________________________
(Please typewrite or print in block letters)
Address_________________________________________________________________________
_________________________________________________________________________
Social Security or
Taxpayer Identification Number__________________________________________________
9
<PAGE>
ANNEX B
ASSIGNMENT FORM
For value received, __________________________________________
hereby sells, assigns, and transfers unto
Name____________________________________________________________________________
The right to purchase Common Stock of Big Entertainment, inc., a Florida
corporation, represented by this Warrant to the extent of shares as to which
such right is exercisable and does hereby irrevocably constitute and appoint
________________________________________________________________________________
Attorney, to transfer the same on the books of the Company with full power of
substitution in the premises.
Dated: _________
By:_________________________________________________
Signature
_________________________________________________
Name
_________________________________________________
Title
10
<PAGE>
ANNEX C
NOTICE OF CONVERSION
TO: Big Entertainment, Inc.
2255 Glades Road, Suite 237W
Boca Raton, FL 33431
1. The undersigned hereby elects to acquire _______________ Warrant Shares of
Big Entertainment, Inc. pursuant to the terms of the attached Warrant, by
conversion of _________ percent (_____%) of the Warrant.
2. Please issue a certificate or certificates representing said Warrant Shares
in the name of the undersigned or in such other name as is specified below:
____________________________________________________
(Name)
____________________________________________________
(Address)
_________________________ ____________________________________________________
(Date) (Name of Warrant Holder)
By:_________________________________________________
Title:______________________________________________
(Title and signature of authorized person)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,229,996
<SECURITIES> 0
<RECEIVABLES> 1,243,610
<ALLOWANCES> 136,069
<INVENTORY> 1,130,422
<CURRENT-ASSETS> 9,786,077
<PP&E> 6,053,329
<DEPRECIATION> (2,449,329)
<TOTAL-ASSETS> 66,135,258
<CURRENT-LIABILITIES> 4,624,600
<BONDS> 0
0
0
<COMMON> 149,397
<OTHER-SE> 59,406,444
<TOTAL-LIABILITY-AND-EQUITY> 66,135,258
<SALES> 5,829,924
<TOTAL-REVENUES> 5,829,924
<CGS> 1,888,005
<TOTAL-COSTS> 13,624,481
<OTHER-EXPENSES> 362,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 462,340
<INCOME-PRETAX> (9,640,584)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,640,584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,640,584)
<EPS-BASIC> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
