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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-22908
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HOLLYWOOD MEDIA CORP.
(Exact name of registrant issuer as specified in its charter)
Florida 65-0385686
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2255 Glades Road, Suite 237 West
Boca Raton, Florida 33431
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(Address of principal executive offices) (Zip Code)
(561) 998-8000
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.01 par value,
held by non-affiliates on March 26, 2001, based on the last sale price of the
common stock on that date as reported by Nasdaq, was $66,249,500.
As of March 26, 2001, there were 25,012,982 shares of the issuer's common stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
HOLLYWOOD MEDIA CORP.
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 2000
Table of Contents
FORWARD-LOOKING STATEMENTS........................................................................................3
PART I
Item 1. Business..................................................................................................3
Item 2. Properties...............................................................................................18
Item 3. Legal Proceedings........................................................................................18
Item 4. Submission of Matters to a Vote of Security Holders......................................................19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................21
Item 6. Selected Financial Data .................................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ..........................................................................................23
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ............................................32
Item 8. Financial Statements and Supplementary Data .............................................................33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................................................70
PART III
Item 10. Directors and Executive Officers of the Registrant......................................................71
Item 11. Executive Compensation..................................................................................75
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................80
Item 13. Certain Relationships and Related Transactions..........................................................82
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K........................................89
2
FORWARD-LOOKING STATEMENTS
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Hollywood Media Corp. (the "Company" or "Hollywood Media") cautions
readers that certain important factors may affect the Company's actual results,
levels of activity, performance or achievements and could cause such results to
differ materially from any forward-looking statements that may be deemed to have
been made in this Form 10-K or that are otherwise made by or on behalf of the
Company. For this purpose, any statements contained in this Form 10-K 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," "should," "expect," "believe," "anticipate," "intend," "plan,"
"could," "estimate," "pro forma" or "continue" or the negative variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors that may affect the Company's results include, but are not
limited to, our continuing operating losses and accumulated deficit, our limited
operating history, the need for additional capital to finance our operations,
the need to manage our growth and integrate new businesses into the Company, our
ability to develop strategic relationships, our ability to compete with other
Internet companies, technology risks and the general risk of doing business over
the Internet, future government regulation, dependence on our founders, the
interests of our largest shareholder, Viacom Inc., and accounting considerations
related to our strategic alliance with Viacom Inc. The Company is also subject
to other risks detailed herein, including those risk factors discussed in the
"Risk Factors" section of this Form 10-K or detailed from time to time in the
Company's filings with the Securities and Exchange Commission. Because these
forward-looking statements are subject to risks and uncertainties, we caution
you not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Form 10-K.
PART I
Item 1. Business.
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Introduction
Leading Media Company Focused on the Hollywood and Entertainment
Verticals. Hollywood Media is a preeminent provider of entertainment-related
information, content and ticketing services to consumers and businesses. We
manage a number of integrated business units focused on Hollywood and the
entertainment industry. The Company derives a diverse stream of revenues from
this array of business units, including revenue from retail and wholesale movie
and Broadway ticket sales, business-to-business content syndication,
subscription fees, content licensing fees, advertising and book development. Due
to a common focus on the entertainment vertical, each of these business units
supports the others - with content shared between multiple business units and
customers cross-generated for one unit by another. For instance, our
Hollywood.com consumer content site funnels customers into our MovieTickets.com
affiliate (30.7% equity interest) while making use of movie listings supplied by
CinemaSource, a wholly owned subsidiary of the Company, which is the largest
business-to-business supplier of movie showtimes.
Poised to Capitalize on the Exploding Demand for Entertainment Data.
The Company is a market leader in supplying entertainment listing information
and ticketing services for data applications, both wired and wireless.
Entertainment content (particularly movie showtimes listings) has always been
"must carry" for newspapers and other traditional media, has quickly become
"must carry" for Internet portals and will soon be "must carry" content for
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wireless companies, interactive television providers and others who seek to
provide localized content to end users. The growing need for information
providers to supply local content and services directly to end users has created
tremendous demand for our top ranked database of movie listings and for access
to the Company's premier online ticketing services. Many of the leading
newspapers (including The New York Times), wireless service providers (including
AT&T Wireless, Sprint PCS and Verizon Wireless) and Internet portals (including
AOL, Yahoo!, Lycos, Excite, and TicketMaster/CitySearch) license our
content.
Strong Strategic Partnerships. The Company has strong financial and
business relationships with leading companies in the entertainment industry. We
have a strategic, seven-year agreement with Viacom, which calls for Viacom to
provide the Company with $105 million of marketing and promotion across a full
range of CBS media properties. This resource currently accounts for
approximately 95% of our total marketing expenditure and does not impact our
cash flow. Our MovieTickets.com affiliate is party to a separate transaction
with Viacom in which Viacom will provide MovieTickets.com with $25 million of
marketing over five years. In addition, in March 2001 our MovieTickets.com
affiliate reached an agreement with America Online under which
MovieTickets.com's ticketing services will be integrated and promoted throughout
AOL's online properties. MovieTickets.com will also integrate the ticketing
inventory of AOL's Moviefone into MovieTickets.com's existing ticketing
footprint to offer online movie ticketing coverage for 85% of all Internet-ready
movie screens in the country. As part of the agreement, AOL acquired a three
percent equity interest in MovieTickets.com for $8.5 million in cash.
Cutting Edge Initiatives. The Company is currently undertaking several
cutting edge initiatives that will further leverage its extensive base of
proprietary information and critical mass of customers. Our MovieTickets.com
affiliate launched its wireless ticketing service in May 2000 and has become one
of the top providers of wireless movie ticketing services. MovieTickets.com is
currently rolling out several new ticketing technologies, such as home printing
of tickets, which should further fuel strong ticketing revenue growth in the
future. We are also pursuing initiatives to generate additional revenues from
our leading database of proprietary consumer information, which is well suited
for targeted marketing initiatives. For instance, we can provide Hollywood
studios - which spend an average of $21.4 million on marketing per film - and
others with direct access to large numbers of movie goers and their movie
viewing habits.
Dynamic, Entrepreneurial and Experienced Management Team. Hollywood
Media is led by a dynamic and entrepreneurial management team that has a record
of past successes. CEO Mitchell Rubenstein and President Laurie Silvers have a
combined 40 years experience in the media industry and have built a number of
successful media businesses including the SciFi Channel, which the two founded
in 1985 and sold to USA Networks in 1992. Mr. Rubenstein and Ms. Silvers have
assembled the Company's integrated mix of businesses and oversee the Company's
direction. Each of the Company's business units is run by deep and experienced
management teams with significant expertise in their respective businesses.
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Businesses to Business Syndication Divisions
CinemaSource. CinemaSource is the largest supplier of movie showtimes
to the Internet and compiles movie showtimes for every movie theater in the
United States and Canada, representing approximately 36,000 movie screens. Since
its start in 1995, CinemaSource has substantially increased its operations and
currently provides movie showtime listings to more than 200 newspapers, wireless
companies, Internet sites, and other media outlets, including newspapers such as
The New York Times and Newsday, Internet companies including AOL's Digital City,
Yahoo!, Lycos, Excite, Ticketmaster/CitySearch, NBCi and wireless providers such
as Sprint PCS, AT&T Wireless and Verizon.
CinemaSource also syndicates entertainment news, movie reviews, and
celebrity biographies. In addition to charging guaranteed amounts for the data
that it provides to its customers, CinemaSource often shares in the advertising
revenue generated by its customers in connection with the data.
EventSource. We launched the EventSource business in mid-1999 as an
expansion of the operations of CinemaSource. EventSource compiles and syndicates
detailed information on community events in cities around the country, including
concerts and live music, sporting events, festivals, fairs and live theater.
EventSource entered into an agreement with AOL's Digital City in April 2000 to
provide event listings for up to 200 cities nationwide. In addition to Digital
City, other EventSource customers include the web sites of The New York Times
and Knight Ridder.
TheaterSource. We launched the TheaterSource business in mid-2000 as a
further expansion of the operations of EventSource. TheaterSource compiles and
syndicates a comprehensive database of theater productions and showtimes,
covering shows on Broadway, off-Broadway, touring companies, community
playhouses, dinner theaters throughout North America and in London's West End
theater district.
ConcertSource. We launched this business in October 2000. ConcertSource
offers extensive local listings of concerts and music-related events from major
arenas to small local jazz clubs, including a complete listing of every
performance from major touring groups to hometown bands. ConcertSouce currently
covers concert and event listings for the top 60 markets in the United States
and plans to expand its coverage to more than 200 markets throughout North
America.
Baseline. We own and operate Baseline, a business which includes a
pay-per-use subscription web site (located at Baseline.hollywood.com) and
various publications including the Motion Picture Finance Investor newsletter,
geared to movie studios, investment banks, news agencies, consulting firms and
other professionals in the entertainment industry. We acquired Baseline from
media analyst Paul Kagan. The Baseline business maintains one of the most
comprehensive movie and television-related databases and has been in operation
for over 15 years. Baseline is a comprehensive database of information on over
67,000 films and television programs, as well as biographies on entertainment
industry professionals. This rich, interactive database is accessible online to
our subscribers and includes credits, synopses, reviews and box office
statistics. Baseline continuously tracks production, distribution, and
exhibition of feature films worldwide, including box office projections,
budgets, and trends. Baseline customers include Bloomberg, Daily Variety, People
Magazine, Lexis-Nexis, Disney, DreamWorks, Paramount Pictures, Universal, Morgan
Stanley and Lehman Brothers.
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Internet Divisions
Hollywood.com. Hollywood.com is a premier entertainment related web
site featuring over one million pages of in-depth movie, television and other
entertainment content, including movie descriptions and reviews, digitized movie
trailers and photos, movie showtime listings, entertainment news, box office
results, interactive games, movie soundtracks, television listings, concert
information, celebrity profiles and biographies, comprehensive coverage of
entertainment awards shows and film festivals and exclusive video coverage of
movie premieres.
We sell banner advertising and sponsorships on Hollywood.com through
relationships with advertising rep. firms and through an internal sales staff.
Some of our recent advertisers include Microsoft, Toyota, Universal Studios,
eBay, Proctor & Gamble, Visa, M&Ms, Diet Coke, New Line Cinema, JC Penny, US
Army, Nissan, AT&T, Discovery/TLC, Nextel and Women.com.
We promote the Hollywood.com web site through our strategic
relationships with Viacom Inc. and the National Association of Theatre Owners
("NATO"). Through exclusive contracts with NATO and over 85 of its member
theater exhibitors, we promote the Hollywood.com web site to movie audiences by
airing trailers about Hollywood.com before feature films that play in
participating theaters and by displaying posters and other promotional materials
in those theaters. In exchange, we develop and maintain web site for many of the
theater exhibitors that feature their movie showtimes.
In January 2000 we entered into a strategic, seven-year relationship
with Viacom Inc. that provides for extensive promotion of the Hollywood.com and
Broadway.com web sites. Viacom has agreed to provide Hollywood.com and
Broadway.com with $105 million of promotion across its full range of CBS 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 and CBS syndicated television and radio
programs. The promotion provided by Viacom is valued based upon the average
price charged by Viacom for similar promotions during the applicable time
period. To supplement our internal sales efforts, we also have the right to
reallocate a portion of each year's promotional budget and require Viacom to
sell up to $1.5 million of advertising on the Hollywood.com and Broadway.com web
site. Viacom has agreed to include the Hollywood.com web site in all advertising
sale programs and presentations that are appropriate for the sale of advertising
on the web site. We will pay an 8% commission on any additional advertising
revenues generated by Viacom for us in excess of the $1.5 million guaranteed
amount selected by us each year.
We have entered into and are pursuing several strategic relationships
geared toward leveraging the Hollywood.com brand internationally. We entered
into an agreement with America Online Latin America, Inc. in late 1999 pursuant
to which we agreed to launch Portuguese and Spanish versions of the
Hollywood.com web site to be promoted on AOL in countries throughout Latin
America. We launched the br.hollywood.com Portuguese-language web site in Brazil
in November 1999 and the mx.hollywood.com and ar.hollywood.com Spanish-language
web site in Mexico and Argentina in May 2000. These web sites are tailored to
the local movie-going audience and feature much of the same content that is on
Hollywood.com, including daily entertainment news, movie descriptions and
reviews, movie previews, movie soundtracks, celebrity profiles and biographies
and interactive games. Each of these web sites are featured and promoted on the
entertainment channels of both AOL Latin America and El Sitio.com, a Latin
American-based Internet portal.
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Broadway.com. We launched Broadway.com on May 1, 2000. Broadway.com
features theater showtimes for virtually all professional live theater venues in
the U.S. as well as London's West End and hundreds of college and local live
theater venues; the ability to purchase Broadway, off-Broadway and West End
theater tickets online (See - Ticketing Divisions); the latest theater news;
interviews with stage actors and playwrights; opening-night coverage; original
theater reviews; and video excerpts from selected shows. Broadway.com also
offers current box office results, show synopses, cast and crew credits and
biographies, digitized show previews, digitized showtunes, and an in-depth Tony
Awards(R) area. Broadway.com generates revenue from ticket sales, advertising
sales, and syndication of its content to other Internet companies.
Ticketing Divisions
MovieTickets.com. MovieTickets.com Inc., was launched in late May 2000.
Each of Hollywood Media Corp., AMC Entertainment, Inc. and National Amusements,
Inc. currently owns approximately 30.7% of the equity of MovieTickets.com, Inc.
and the venture entered into an agreement with Viacom Inc. whereby Viacom
acquired a five percent interest for $25 million of advertising over five years.
MovieTickets.com is promoted through on-screen advertising in each participating
exhibitor's movie screens and through $25 million of Viacom advertising and
promotion over the next five years. In early 2001, America Online Inc. purchased
a 3% equity interest in MovieTickets.com for $8.5 million in cash. In connection
with that transaction, MovieTickets.com's ticket inventory will be promoted
throughout America Online's interactive properties and ticket inventory of AOL's
Moviefone will be featured on MovieTickets.com. As a result, MovieTickets.com
will feature online ticket sales for 85% of all Internet-ready movie screens in
the country.
MovieTickets.com's current participating exhibitors include AMC
Entertainment Inc., National Amusements, Inc., Famous Players Inc., Marcus
Theaters, Muvico Entertainment and several regional exhibitors. These exhibitors
operate theaters located in all of the top 20 markets and approximately 70% of
the top 50 markets in the United States and Canada and represent approximately
50% of the top 100 grossing theaters in North America. AMC Entertainment Inc. is
the largest movie theater operator in the United States based on box office
sales and Famous Players generates approximately half of all box office sales in
Canada. The MovieTickets.com web site allows users to purchase movie tickets and
retrieve them at "will call" windows or kiosks at theaters. The web site also
features bar coded tickets that can be printed at home and presented directly to
the ticket taker at the theater. The web site contains movie content from the
Company's various units including Baseline for all current and future release
movies, movie reviews and synopses, digitized movie trailers and photos, and box
office results. The web site generates revenues from service fees charged to
users for the purchase of tickets and the sale of advertising.
Theatre Direct International and Broadway.com. We acquired Theatre
Direct International (TDI) as of September 15, 2000. Founded in 1990, TDI is a
live theater marketing and sales agency serving over 40,000 domestic and
international travel professionals, traveling consumers and New York-area
theater patrons. TDI is a ticketing wholesaler to the travel industry that
provides groups and individuals with access to theater tickets and knowledgeable
service, covering shows on Broadway, long running shows off-Broadway and shows
in London. TDI sells tickets through an 800 toll-free number, through SABRE (a
travel agent reservation system), via the Broadway.com web site and by fax. As a
marketing agency, TDI represents 12 producers and 17 Broadway shows to the
travel industry around the world. The 17 Broadway shows are Aida, Beauty and the
Beast, Blast, Cabaret, Chicago, Contact, 42nd Street, Jane Eyre, Kiss Me Kate,
Les Miserables, Rent, Riverdance, The Full Monty, The Lion King, The Music Man,
The Rocky Horror Show and The Phantom of the Opera. In addition, TDI's education
division, Broadway Classroom, markets group tickets to schools across the
country. TDI's offline ticketing service complements the online ticketing
services available on Broadway.com. The combined companies provide live theater
ticketing and related content for all Broadway shows and most shows running
off-Broadway and in London's West End at over 200 venues in multiple markets to
a customer base consisting of over 40,000 travel agencies, tour operators,
corporations and educational institutions, in addition to numerous newspapers
and web site.
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Intellectual Properties Business
Intellectual Properties. 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 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).
NetCo Partners. In June 1995, the Company and C.P. Group Inc. ("C.P.
Group"), entered into an agreement to form NetCo Partners. NetCo Partners is
engaged in the development and licensing of Tom Clancy's NetForce.
The Company and C.P. Group are each 50% partners in NetCo Partners. Tom
Clancy is a shareholder of C.P. Group. At the inception of the partnership, C.P.
Group contributed to NetCo Partners all rights to Tom Clancy's NetForce, and the
Company contributed to NetCo Partners all rights to Tad Williams' MirrorWorld,
Arthur C. Clarke's Worlds of Alexander, Neil Gaiman's Lifers, and Anne
McCaffrey's Saraband. NetCo Partners owns Tom Clancy's NetForce which was
licensed to Putnam Berkley for a series of mass market paperbacks and to ABC
Television for a television mini-series and video distribution in accordance
with the terms of the partnership agreement and the other properties have
reverted back to the Company.
Book Development and Book Licensing. Our intellectual properties
division also includes a book development and book licensing operation through
our 51% owned subsidiary, Tekno Books, that develops and executes book projects,
typically with best-selling authors. 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. Our intellectual properties division has licensed books for
publication with more than 60 book publishers, including HarperCollins, Bantam
Doubleday Dell, Random House, Simon & Schuster, Penguin Putnum and Warner Books.
The book development and book licensing division has a library of more than
1,200 books. The Chief Executive Officer of Tekno Books, Dr. Martin H.
Greenberg, is also a director of the Company and owner of the remaining 49%
interest in Tekno Books.
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Tekno Books also owns a 50% interest in Mystery Scene Magazine, a trade
journal of the mystery genre of which Dr. Greenberg is co-publisher. During
1995, the Company directly acquired an additional 25% interest in the magazine.
Risk Factors
The forward-looking statements contained in this Form 10-K involve
known and unknown risks, uncertainties and other factors that may cause the
Company's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements anticipated, expressed or implied by such forward-looking
statements. Such factors include, among others, those discussed in this section
as well as those discussed elsewhere in this Form 10-K and in our other filings
with the SEC.
We may not be able to compete successfully.
Internet Businesses. The market for Internet services and products is
relatively new, intensely competitive and rapidly changing. The number of web
site on the Internet competing for consumers' attention and spending has
proliferated and we expect that competition will continue to intensify.
Competition could result in less user traffic to our web site, price reductions
for content that we syndicate and advertising that we offer, a decline in
product sales, reduced margins or loss of market share, any of which could have
a material adverse effect on our business, results of operations and financial
condition. We compete, directly and indirectly, for advertisers, viewers,
members and content providers with the following categories of companies:
o online services or web site targeted to entertainment enthusiasts,
particularly moviegoers and theatergoers, such as Film.com, IMDb.com
and Playbill.com;
o publishers and distributors of traditional off-line media, such as
television, radio and print, including those targeted to movie
enthusiasts, many of which have established or may establish web site,
such as Eonline.com;
o traditional movie and entertainment organizations and vendors of
entertainment merchandise and products, including conventional retail
stores and catalog retailers, many of which have established web site,
including Disney and Warner Brothers;
o general purpose consumer online services such as AOL, Yahoo! and
Microsoft Network, each of which provides access to movie-related
information and services; and
o web search and retrieval and other online services, such as Excite,
Lycos and Yahoo! and other high-traffic web site.
We believe that the principal competitive factors in attracting and
retaining users are the depth, breadth and timeliness of content, the ability to
offer compelling and entertaining content and brand recognition. Other important
factors in attracting and retaining users include ease of use, service quality
and cost. We believe that the principal competitive factor in attracting and
retaining advertisers include the number of users of our web site, the
demographics of our users, price and the creative implementation of
advertisement placements and sponsorship promotions. There can be no assurance
that we will be able to compete favorably with respect to these factors.
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Our ability to compete depends on many factors, many of which are
outside of our control. These factors include the quality of information
contained on our web site and on our competitors' web site, the ease of use of
services developed either by us or by our competitors, the timing and market
acceptance of new and enhanced services developed either by us or by our
competitors, and sales and marketing efforts by us and our competitors.
Based on our review of publicly available documents, we believe some of
our existing competitors, as well as potential new competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger user bases than we
do and, therefore, have significantly greater ability to attract advertisers and
users. In addition, many of these competitors may be able to respond more
quickly than us to new or emerging technologies and changes in Internet user
requirements and to devote greater resources than us to the development,
promotion and sale of their services. There can be no assurance that our current
or potential competitors will not develop products and services comparable or
superior to those developed by us or adapt more quickly than us to new
technologies, evolving industry trends or changing Internet user preferences.
Increased competition could result in price reductions, reduced margins or loss
of market share, any of which would materially and adversely affect our
business, results of operations and financial condition. In addition, as we
expand internationally, we will face new competition. There can be no assurance
that we will be able to compete successfully against current and future
competitors, or that competitive pressures faced by us would not have a material
adverse effect on our business, results of operations and financial condition.
Ticketing Businesses. The market for Internet and wireless ticketing
services and products is relatively new, intensely competitive and rapidly
changing. The number of telephone services, online services, wireless services
and web site on the Internet competing for consumers' attention and spending has
proliferated and we expect that competition will continue to intensify. We
compete, directly and indirectly, for advertisers, viewers, members and content
providers with the following categories of companies:
o telephone services, wireless services and web site targeted to
entertainment enthusiasts, moviegoers, theatergoers and other
eventgoers, which feature directories of movies, shows, events,
showtimes, theater and event locations and related content, and also
allow users to purchase tickets; and
o travel agents and other traditional ticketing organizations, companies,
agents and brokers.
Intellectual Properties and Book Development and Licensing Businesses.
Numerous companies and individuals are engaged in the business of licensing
entertainment properties and characters in the entertainment-related licensing
market. We compete with a wide range of other corporations as well as
individuals in the licensing market. Competition in the book licensing and
packaging business is somewhat less intense than that in the other areas of our
business, as it is based for the most part on unique, original concepts and
long-term relationships.
We may not be able to successfully protect our Trademarks and
Proprietary Rights.
Internet Businesses. We own trademark registrations in the
United States for ALL ABOUT MOVIES, HOLLYWOOD ONLINE AND MOVIETUNES and in a
number of foreign countries for HOLLYWOOD ONLINE. We have filed trademark
applications in the United States and in foreign countries for the marks
HOLLYWOOD.COM, MOVIETUNES.COM, THE GOLDEN HITCH, BROADWAY.COM and the slogans
GIVING TRAILERS THE RESPECT THEY DESERVE, ISN'T IT TIME YOU WENT HOLLYWOOD!, ON
STAGE! ONLINE, and WHERE MOVIEGOERS GO.
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Our performance and ability to compete are dependent to a significant
degree on our internally developed and licensed content and technology. We rely
on a combination of copyright, trademark and trade secret laws, confidentiality
and nondisclosure agreements with our employees and with third parties and
contractual provisions to establish and maintain our proprietary rights. There
can be no assurance that the steps taken by us to protect our proprietary rights
will be adequate, or that third parties will not infringe upon or misappropriate
our copyrights, trademarks, service marks and similar proprietary rights. In
addition, effective copyright and trademark protection may be unenforceable or
limited in certain foreign countries. In the future, litigation may be necessary
to enforce and protect our trademarks, service marks, trade secrets, copyrights
and other intellectual property rights. Any such litigation would be costly and
could divert management's attention, which could have a material adverse effect
on our business, results of operations and financial condition. Adverse
determinations in such litigation could result in the loss of certain of our
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties, or prevent us from selling our services, any one of
which could have a material adverse effect on our business, results of
operations and financial condition.
There can be no assurance that third parties will not bring copyright
or trademark infringement claims against us, or claim that our use of certain
technology violates a patent. Even if these claims are not meritorious, they
could be costly and could divert management's attention, which could have a
material adverse effect on our business, results of operations and financial
condition. If it is determined that we have infringed upon or misappropriated a
third party's proprietary rights, there can be no assurance that any necessary
licenses or rights could be obtained on terms satisfactory to us, if at all. The
inability to obtain any required license on satisfactory terms could have a
material adverse effect on our business, results of operations and financial
condition. If our competitors prepare and file applications that claim
trademarks owned or registered by us, we may oppose these applications and have
to participate in administrative proceedings to determine priority of right in
the trademark, which could result in substantial costs to us, even if the
eventual outcome is favorable to us. An adverse outcome could require us to
license disputed rights from third parties or to cease using such trademarks. In
addition, inasmuch as we license a substantial portion of our content from third
parties, our exposure to copyright infringement or right of privacy or publicity
actions may increase; because we must rely upon such third parties for
information as to the origin and ownership of such licensed content. We
generally obtain representations as to the origins, ownership and right to use
such licensed content and generally obtain indemnification to cover any breach
of any such representations; however, there can be no assurance that such
representations will be accurate or that such indemnification will provide
adequate compensation for any breach of such representation. There can be no
assurance that the outcome of any litigation between such licensors and a third
party or between us and a third party will not lead to royalty obligations for
which we are not indemnified or for which such indemnification is insufficient,
or that we will be able to obtain any additional license on commercially
reasonable terms if at all.
In 1999 we obtained a federal trademark registration for the name
HOLLYWOOD ONLINE and in 1998 we obtained a federal trademark registration for
the name BIG ENTERTAINMENT. In December 2000 we changed our corporate name and
primary branding to HOLLYWOOD MEDIA CORP. We have filed a number of United
States trademark applications for HOLLYWOOD MEDIA CORP., HOLLYWOOD.COM,
BROADWAY.COM and variants thereof, and foreign trademark applications for
HOLLYWOOD.COM. There can be no assurance that we will be able to secure adequate
protection for these names or other trademarks in the United States or in
foreign countries. If we obtain registration of those trademarks, we may not be
able to prevent our competitors from using different trademarks that contain the
words "Hollywood" or "Broadway." Many countries have a "first-to-file" trademark
registration system; and thus we may be prevented from registering our marks in
certain countries if third parties have previously filed applications to
register or have registered the same or similar marks. It is possible that our
competitors or others will adopt product or service names similar to ours,
thereby impeding our ability to build brand identity and possible leading to
customer confusion. Our inability to protect our HOLLYWOOD.COM and BROADWAY.COM
marks and other marks adequately could have a material adverse effect on our
business, results of operations and financial condition.
11
Intellectual Properties Business. The Company has applied for trademark
and copyright protection for each of its major intellectual property titles and
featured characters. The Company (including Netco Partners) currently has
approximately 46 U.S. registered trademarks and approximately 7 trademark
applications are pending related to this business. As the Company's properties
are developed, the Company intends to apply for further trademark and copyright
protection in the United States and certain foreign countries.
Copyright protection in the United States on new publications of works
for hire extend for a term of 95 years from the date of initial publication or
120 years from the year of creation, whichever expires first. Trademark
registration in the United States extends for a period of ten years following
the date of registration. To maintain the registration, affidavits must be filed
between the fifth and sixth years following the registration date affirming that
the trademark is still in use in commerce and providing evidence of such use.
The trademark registration must be renewed prior to the expiration of the
ten-year period following the date of registration.
We have a history of losses and an accumulated deficit. We anticipate
further losses in the future and our operating results could fluctuate
significantly on a quarterly and annual basis.
We have incurred significant losses since we began doing business. In
the years ended December 31, 2000, 1999 and 1998 we had net losses of
approximately $51.8, $24.7 and $10.7 million, respectively. As of December 31,
2000, we had an accumulated deficit of approximately $112.8 million. We expect
to incur additional losses during the next several years while we continue to
grow our businesses. Our future success will depend on the continued growth in
the use of the Internet in general and our web site in particular and our
ability to generate advertising, syndication and ticketing revenues.
In addition, our Internet and ticketing operating results may fluctuate
significantly in the future as a result of a variety of factors, including:
o the level of Internet usage generally and the level of traffic on our
web site in particular;
o supply and demand for Internet advertising;
o seasonal trends in Internet usage, Internet sales and advertising
placements;
o the addition or loss of advertisers;
o our ability to enter into or renew strategic relationships and
agreements with popular media and entertainment organizations, web site
and media celebrities;
o the amount and timing of our marketing expenditures and other costs
relating to the expansion of our Internet operations;
o price competition or pricing changes in the industry;
o new products, web site or Internet services introduced by us or our
competitors;
o technical difficulties, security concerns or system downtime affecting
the Internet generally or the operation of our web site in particular;
and
o general economic conditions and economic conditions specific to the
Internet, electronic commerce and online media.
12
As a result, our operating results for any particular period may not
accurately predict our future operating results.
We may require additional capital to finance our operations and there
can be no assurance that additional financing will be available
We have required substantial financing to fund our acquisitions and
growth and we expect to continue to require additional financing for marketing
and promotional activities, to fund our growth plan and for working capital. Our
current operating plans and assumptions indicate that anticipated cash flows
when combined with cash on hand and other potential sources of capital will be
enough to meet our working capital requirements for the next twelve months. If
plans change or our assumptions prove to be inaccurate, we may need to seek
further financing or curtail our operations. Our long-term financial success
depends on our ability to generate enough revenue to offset operating expenses.
To the extent we do not generate sufficient revenues to offset expenses we will
require further financing to fund our ongoing operations. We cannot assure you
that any additional financing will be available or if available, that it will be
on favorable terms.
We must manage our growth in order to achieve the desired results.
We have significantly expanded our Internet and ticketing operations
over the past two years through our acquisitions of the businesses of
hollywood.com, Inc., CinemaSource, Inc., Baseline II, Inc., BroadwayTheater.com,
Inc. and Theatre Direct NY, Inc. and through the launch of Broadway.com,
MovieTickets.com and our Portuguese and Spanish-language sites in Brazil,
Argentina and Mexico. We plan to continue to expand our operations and market
presence by entering into joint ventures, acquisitions, business combinations,
investments, or other strategic alliances. These transactions create risks such
as:
o difficulty assimilating the operations, technology and personnel of the
combined companies;
o disruption of our ongoing business;
o increased marketing and advertising expenses to promote new ventures;
o problems retaining key technical and managerial personnel;
o the availability of financing to make acquisitions;
o expenses associated with amortization of goodwill and other purchased
intangible assets;
o additional operating losses and expenses of acquired businesses; and
o impairment of relationships with existing employees, customers and
business partners.
We may not succeed in addressing these risks. In addition, some of our
new businesses may incur operating losses. To the extent that we are unable to
identify and successfully integrate future ventures into our operations, our
growth strategy may not be successful and our stock price could be adversely
impacted.
13
We are dependent on our ability to develop strategic relationships with
media and entertainment organizations.
The success of our Internet operations is dependent in part on our
ability to enter into and renew strategic relationships and agreements with
media and entertainment organizations. Our intellectual property division is
dependent on our ability to identify, attract and retain best-selling authors
and media celebrities who create our intellectual properties. Our business could
be harmed by the loss of the services of one or more of the people who have
developed relationships with the best-selling authors and media celebrities who
create our intellectual properties. Similarly, our business could be harmed if
those relationships change or if we do not develop new relationships.
Our operations could be negatively impacted by systems interruptions.
The hardware and software used in our Internet operations, or that of
our affiliates, could be damaged by fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events. Our web site could
also be affected by computer viruses, electronic break-ins or other similar
disruptive problems. These system problems could affect our business. Insurance
may not adequately compensate us for any losses that may occur due to any
failures or interruptions in systems. We do not currently have a formal system
disaster recovery plan. General Internet traffic interruptions or delays could
also harm our business. As with Internet web site in general, our web site may
experience slower response times or decreased traffic for a variety of reasons.
Additionally, online service providers have experienced significant outages in
the past, and could experience outages, delays and other difficulties due to
system failures unrelated to our systems. To the extent our services are
disrupted, we could lose viewers to our web site and our advertising revenues
could decline.
We are subject to additional security risks by doing business over the
Internet.
A significant obstacle to consumer acceptance of electronic commerce
over the Internet has been the need for secure transmission of confidential
information in transaction processing. Internet usage could decline if any
well-publicized compromise of security occurred. We may incur additional costs
to protect against the threat of security breaches or to alleviate problems
caused by these breaches. If a third person were able to misappropriate our
users' personal information or credit card information, we could be held liable.
We may not be able to adapt as Internet technologies and customer
demands continue to evolve.
To be successful, we must adapt to rapidly changing Internet
technologies by continually enhancing our web site and introducing new services
to address our customers' changing demands. We could incur substantial costs if
we need to modify our services or infrastructure in order to adapt to changes
affecting providers of Internet services. Our business, results of operations
and financial condition would be adversely affected if we incurred significant
costs to adapt, or if we cannot adapt to these changes.
Government regulation of the Internet could impact our business.
Federal and state governments have recently adopted many new laws and
regulations directly applicable to the Internet. In addition, laws and
regulations may be adopted in the future that further address issues such as
user privacy, pricing, taxation, content, copyrights, advertising, and the
characteristics and quality of products and services. Although we endeavor to
14
comply with all applicable laws and regulations, as new laws are adopted there
is a risk that we will not be in full compliance. Any new laws or regulations
relating to the Internet could also hurt our business.
We may not be able to acquire or maintain effective web addresses.
We hold rights to more than 150 web domain names, including
hollywood.com, hollywood.net, broadway.com, broadway.net, musicsite.com,
showtimes.com, theater.com, allaboutmovies.com, cableguide.com, cablesite.com,
cdguide.com, cdsite.com, cinemasite.com, eguide.com, esites.com, filmpick.com,
moviecritics.com, movieguide.com, moviepeople.com and moviesite.com.
Governmental agencies typically regulate domain names. These regulations are
subject to change. We may not be able to acquire or maintain appropriate domain
names in all countries in which we plan to do business. Furthermore, regulations
governing domain names may not protect our trademarks and similar proprietary
rights. We may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or diminish the value of our trademarks and
other proprietary rights. In addition, we may not be able to secure the rights
to appropriate domains using new top level domains that are developed and
marketed from time to time, such as ".cc."
We are dependent on Mitchell Rubenstein and Laurie S. Silvers, our
founders.
Mitchell Rubenstein, our Chairman of the Board and Chief Executive
Officer, and Laurie S. Silvers, our Vice Chairman, President and Secretary, have
been primarily responsible for our organization and development. The loss of the
services of either of these individuals would hurt our business. Their
employment agreements provide, among other things, that if we terminate either
of their agreements without "cause," we will have also terminated the other's
agreement without "cause." Termination without "cause" entitles each to receive
his or her salary for the remainder of the term of employment.
There is intense competition for qualified personnel in our industry
and the limited availability of qualified individuals could become an issue of
increasing concern in the future. Our future success will be dependent upon our
ability to attract and retain qualified and creative key management personnel.
Viacom Inc. beneficially owns approximately 31% of our common stock and
its interests may differ from yours.
Viacom Inc.'s significant equity interest in us and other rights we
have granted to Viacom could delay or prevent a merger or other transaction
involving a change of control of us that could be beneficial to you. Viacom
beneficially owns approximately 31% of our outstanding common stock. Viacom also
currently has the right to nominate two individuals for election to our board of
directors. If we issue common stock or securities convertible into common stock
in the future, Viacom will, with some exceptions, have the right to purchase for
cash securities from us so it can maintain its percentage ownership. As a result
of its equity interest in us and its right to nominate individuals for election
to our board, Viacom may be able to influence our management and affairs.
15
The accounting treatment of Viacom Inc.'s investment in us will result
in future non-cash expenses on our income statement.
Viacom Inc.'s commitment to provide $105.5 million of advertising,
promotion and content for our Hollywood.com and Broadway.com web site is
recorded as an asset on our balance sheet. The original amount of the asset was
approximately $137 million, the fair market value of the common stock issued to
Viacom in exchange for the $105.5 million of advertising and $10.8 million in
cash. As we receive the advertising, promotion and content from Viacom over the
seven-year term of the agreements, we will record a non-cash expense on our
income statement in an amount equal to the value paid for the advertising,
promotion and content received. We currently expect to record an expense of
approximately $19.6 million per year to reflect the value of the advertising,
promotion and content expected to be received each year during the seven-year
term. This expense will result in a net loss to us to the extent our revenues do
not increase by an amount at least equal to the amount of the expense.
Our stock price is volatile.
The trading price of our common stock has and may continue to fluctuate
significantly. During the past 12 months, the trading price for our common stock
on the Nasdaq Stock Market has ranged from $3.00 to $16.25 per share. Our stock
price may fluctuate in response to a number of events and factors, such as our
quarterly operating results, announcements of new products or services,
announcements of mergers, acquisitions, strategic alliances, or divestitures and
other factors, including similar announcements by other companies that investors
may consider to be comparable to us. In addition, the stock market in general,
and the market prices for Internet-related companies in particular, have
experienced extreme volatility that often has been unrelated to the operating
performance of the companies. These broad market and industry fluctuations may
adversely affect the price of our stock, regardless of our operating
performance.
Our stock price may be hurt if the number of investors seeking to sell
shares of our common stock in the public market increases.
As of March 26, 2000, approximately 12 million shares of our common
stock, representing approximately 48% of our outstanding shares of common stock,
constituted "restricted securities" as defined in Rule 144 under the Securities
Act. Most of these shares are subject to agreements with the Company permitting
the holders thereof to demand that the Company register the shares for resale
under the Securities Act. This will permit the sale of registered shares of
common stock in the open market or in privately negotiated transactions without
compliance with the requirements of Rule 144. We are unable to estimate the
amount, timing or nature of future sales of outstanding common stock. Sales of
substantial amounts of our common stock in the public market could adversely
affect the market price for our common stock. In addition, a decline in the
price of our common stock would likely impede our ability to raise capital
through the issuance of additional shares of common stock or other equity
securities.
Our common stock price may be hurt by the effects of outstanding
options, warrants and convertible securities.
As of March 15, 2001, we had options and warrants outstanding for the
purchase of an aggregate of approximately 4.7 million shares of our common stock
with an average exercise price of $11.96 per share, and we plan to issue
additional options from time to time to our employees and directors. Exercise of
these options and warrants will cause dilution to existing shareholders. As long
as these options and warrants remain unexercised or are not converted, the terms
under which we can obtain additional capital may be adversely affected.
Moreover, the holders of the options and warrants may exercise or convert them
at a time when we are attempting to obtain needed capital by a new offering of
our securities on terms more favorable than those provided by these securities.
16
In connection with our financing on August 22, 2000, we issued
adjustment warrants to certain investors. We have issued and expect to continue
through September 2001 to issue additional shares of common stock to the
investors for no additional consideration upon their exercise of the adjustment
warrants. The precise number of shares of common stock to be issued is
determined in accordance with a formula set forth in the adjustment warrants.
Additionally, our board of directors may, without shareholder approval,
issue additional shares of preferred stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of our common stock.
There are risks that may make it difficult for us to achieve the
outcomes predicted in our forward-looking statements.
Many of the statements included in this Form 10-K and in the documents
incorporated by reference in this Form 10-K, including the description of our
plans, strategies, pending or possible acquisitions and financing plans, are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual
future performance could differ materially from these forward-looking statements
or that are otherwise made by us or on our behalf. "Forward-looking statements"
are not based on historical facts and are typically phrased using words such as
"may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate"
or "continue" and similar expressions or variations.
Important factors that could cause actual results to differ materially
from our expectations include those risks identified under this "Risk Factors"
section, well as those discussed elsewhere in this Form 10-K and in our filings
with the Securities and Exchange Commission. We caution you not to place undue
reliance on these forward-looking statements. All written and oral
forward-looking statements attributable to the us or persons acting on our
behalf are qualified in their entirety by these cautionary statements.
Employees
At March 15, 2001, we employed approximately 213 full-time and 29
part-time employees. Of our 242 employees, 110 employees are engaged in our
business-to-business syndication and licensing divisions conducted through
Baseline, CinemaSource and EventSource, 44 employees are engaged in our
ticketing divisions, 37 employees are engaged in the development and production
of Hollywood.com, Broadway.com and our other content-based web sites, 4
employees are engaged in our intellectual properties division, and 47 are
corporate, technology and administrative employees. None of the employees are
represented by a labor union, nor have we experienced any work stoppages. We
consider our relations with our employees to be good.
17
Item 2. Properties.
-----------
The Company leases office space in Florida, California, Connecticut and
New York. The general terms of the leases for each of these locations are as
follows:
Current
Location Square Feet Monthly Rent Expiration Date
-------- ----------- ------------ ---------------
Baseline and 8,500 $23,375 October 31, 2010
Broadway.com
New York, NY
Corporate Headquarters 9,200 $19,876 August 31, 2002
Boca Raton, FL 5,850 $9,040 September 30, 2006
Hollywood.com 2,002 $5,672 July 31, 2001
Hollywood, California
CinemaSource, EventSource, 5,365 $7,040 September 30, 2002
Theatersource and ConcertSource 5,660 $5,000 Month to Month
Ridgefield, CT
Theatre Direct International 3,250 $8,125 March 31, 2009
New York, NY 710 $2,012 November 30, 2003
Item 3. Legal Proceedings.
-----------------
The Company is a party to various legal proceedings arising in the
ordinary course of business, including the proceedings described below and
litigation related to four separate leases that were terminated by the Company
upon the closing of its retail business. We do not expect any of these legal
proceedings to have a material adverse impact on the Company's financial
condition or results of operations.
Steven B. Katinsky v. The Times Mirror Company, Hollywood.com, Inc. and
Hollywood Online Inc. filed on September 8, 2000 in Superior Court of the State
of California for the County of Los Angeles. The lawsuit was dismissed in
December 2000 and the parties were ordered to arbitrate the dispute. Claim
against Tribune Company (formerly The Times Mirror Company) and the Company
seeking a performance cycle bonus allegedly owing to the claimant by Tribune
Company in connection with the sale of Hollywood Online Inc. from Tribune
Company to the Company. The claimant is seeking monetary damages in excess of
$19.8 million for alleged fraud by the defendants in connection with the sale of
Hollywood Online Inc. to the Company. The Company is indemnified by Tribune
Company for the amount of any such performance cycle bonus payable to the
claimant. The Company believes that all claims by the claimant against the
Company are without merit and intends to defend them vigorously.
18
Interviews.com v. Hollywood Online, Inc. filed on August 17, 2000 in
Superior Court of the State of California for the County of Los Angeles. The
lawsuit was dismissed in January 2001 and the parties were given the right to
arbitrate the dispute. The parties have not commenced an arbitration proceeding.
Claim by Interviews.com that the Company's wholly owned subsidiary,
hollywood.com, Inc. (formerly known as Hollywood Online Inc.), did not timely
perform its obligations with respect to the transfer of several domain names
under an Assignment Agreement dated December 17, 1997. Interviews.com is owned
and controlled by Steven Katinsky, the claimant in the matter described above.
All matters related to this claim occurred prior to the Company's acquisition of
Hollywood Online, Inc. in May 1999 and all domain names subject to the dispute
have been transferred to the claimant. The domain names transferred were not
being utilized by the Company and were not related to the Company's business.
The claimant is seeking monetary damages in excess of $5 million. The Company
believes that this claim is without merit and intends to defend it vigorously.
Item 4. Submission of Matters to a Vote of Securityholders.
---------------------------------------------------
The Company held its annual meeting of shareholders on December 15,
2000. The following describes the matters voted upon at the annual meeting and
the number of votes cast for and against, as well as abstentions and broker
non-votes, if any, with respect to each matter:
A. Election of Directors
Nominee Votes For Votes Against
------- --------- -------------
Mitchell Rubenstein 19,753,586 1,173,447
Laurie S. Silvers 19,753,586 1,173,447
Dr. Martin H. Greenberg 19,753,586 1,173,447
Harry T. Hoffman 20,832,026 95,007
Russell I. Pillar 20,832,026 95,007
Jules L. Plangere, Jr. 20,832,026 95,007
Mitchell Semel 20,832,026 95,007
Deborah J. Simon 20,832,026 95,007
David D. Williams 20,430,835 496,198
B. Approval of an amendment and restatement of the Company's Second
Amended and Restated Articles of Incorporation to change the Company's
name to Hollywood Media Corp.
Number Percentage
------ ----------
For 20,915,926 99%
Against 9,877 1%
19
C. Approval and adoption of the Company's 2000 Stock Incentive Plan.
Number Percentage
------ ----------
For 15,736,972 75%
Against 2,642,463 12.6%
D. Ratification of the selection of Arthur Andersen LLP as the Company's
independent public accountants for the year ending December 31, 2000.
Number Percentage
------ ----------
For 20,915,391 99%
Against 8,480 1%
20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
--------------------------------------------------------
Market for Common Stock
Hollywood Media Corp.'s common stock trades on The Nasdaq Stock Market
("Nasdaq") under the symbol HOLL. The following table sets forth, for the
periods indicated below, the high and low sales prices for the common stock, as
reported by Nasdaq.
High Low
---- ---
2000
First Quarter............................... $ 20.500 $ 14.500
Second Quarter.............................. $ 15.750 $ 7.500
Third Quarter............................... $ 11.813 $ 5.375
Fourth Quarter.............................. $ 8.000 $ 3.000
1999
First Quarter............................... $ 17.250 $ 9.875
Second Quarter.............................. $ 34.000 $ 12.375
Third Quarter............................... $ 25.000 $ 15.000
Fourth Quarter.............................. $ 24.500 $ 14.250
Holders of Common Stock
As of March 15, 2001, there were 214 record holders of the Company's
common stock and approximately 2,976 beneficial holders of the Company's common
stock.
Dividend Policy
The Company has never paid cash dividends on its common stock and
currently intends to retain any future earnings to finance its operations and
the expansion of its business. Therefore, the payment of any cash dividends on
the common stock is unlikely in the foreseeable future. Any future determination
to pay cash dividends will be at the discretion of the Board of Directors and
will be dependent upon the Company's earnings, capital requirements and
financial condition and such other factors deemed relevant by the Board of
Directors.
Sales of Unregistered Securities
See Note 11 to the Financial Statements included in Item 8 of Part II
of this Form 10-K with respect to sales of unregistered securities by the
Company during 2000. All of such sales were made pursuant to the exemption from
registration afforded by Section 4(2) of the Securities Act.
21
Item 6 Selected Financial Data
-----------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Net revenue $ 29,517,505 $ 10,106,111 $ 11,126,516 $ 10,291,447 $ 7,611,113
Cost of sales 14,264,002 3,572,832 5,987,383 5,447,989 4,922,761
------------- ------------- ------------- ------------- -------------
Gross profit 15,253,503 6,533,279 5,139,133 4,843,458 2,688,352
------------- ------------- ------------- ------------- -------------
Operating Expenses:
General and administrative 11,220,529 8,227,022 5,196,364 4,902,675 4,969,883
Selling and marketing 9,593,871 5,074,568 2,566,702 1,378,085 --
Salaries and benefits 11,810,803 5,916,024 4,151,725 3,884,926 3,374,090
Amortization of CBS advertising
non-cash 24,244,647 2,344,950 -- -- --
Amortization of goodwill and intangibles 6,775,206 3,704,011 31,428 347,312 451,683
Depreciation and amortization 4,323,331 1,627,056 1,076,983 831,623 --
Provision for closed stores and
lease termination costs 233,763 4,551,094 1,121,028 -- --
------------- ------------- ------------- ------------- ------------
Total operating expenses 68,202,150 31,444,725 14,144,230 11,344,621 8,795,656
------------- ------------- ------------- ------------- -------------
Operating Loss (52,948,647) (24,911,446) (9,005,097) (6,501,163) (6,107,304)
Equity in Earnings of Investments 1,906,132 1,188,142 877,549 2,702,049 --
Interest income (expense), net (339,522) (563,909) (818,849) (323,118) (182,700)
Other income (expense), net (54,434) (3,440) 42,989 73,894 55,470
Minority Interest (411,029) (366,371) (347,081) (354,609) (421,075)
Deferred tax (expense) benefit -- -- (1,407,600) 1,407,600 --
------------- ------------- ------------- ------------- ------------
Net loss $ (51,847,500) $ (24,657,024) $ (10,658,089) $ (2,995,347) $ (6,655,609)
============= ============= ============= ============= =============
Net loss per share - basic and diluted $ (2.23) $ (2.01) $ (1.47) $ (.51) $ (1.22)
============= ============= ============= ============= =============
Weighted average common and common
Equivalent shares outstanding -
Basic and diluted 23,270,862 12,310,195 7,456,651 6,316,013 5,477,595
============= ============= ============= ============= =========
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,911,224 $ 2,475,345 $ 729,334 $ 887,153 $ 1,675,852
Working capital (deficit) 14,871,414 (4,817,879) (1,407,449) (175,730) 1,285,093
Total assets 169,278,082 62,482,825 8,569,821 12,639,921 8,243,419
Capital lease obligations, less current portion 721,521 995,213 1,741,062 1,803,344 731,807
Total shareholders' equity 158,693,890 49,498,786 1,523,435 5,103,853 4,191,867
22
Item 7 Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
---------------------
Overview
We are an entertainment-focused media and Internet company that offers
widely recognized brands and a broad collection of entertainment content data
and related information in the industry, which we license to media and other
companies including the New York Times, AOL Time Warner, Yahoo!, Sprint, AT&T
Wireless, Verizon and others. The Company owns an extensive ticketing network
and is engaged in the development and licensing of intellectual properties and
licensing of books. The Company generates revenues through the
business-to-business syndication of entertainment-related content, the sale of
live theater tickets, the sale of advertising, and from advances paid by
publishers and royalties received from our library of book titles.
We were incorporated in 1993 and our business initially consisted of
publishing comic books, the development and licensing of intellectual
properties, and the operation of entertainment-related retail stores. During
1997 we stopped publishing comic books, and during 1998 and 1999 we phased out
all of our retail stores in order to focus our resources on the launch of an
Internet business. In January 2001, we closed our e-commerce division in order
to focus on our profitable business segments.
Since 1998, we have significantly expanded our business through
acquisitions of other entertainment-related businesses and the development of
strategic relationships with major media companies to promote our businesses.
o On May 18, 1999, we purchased substantially all of the assets of
CinemaSource, Inc., a business-to-business company that licenses movie
showtimes and other movie-related information to newspaper companies,
wireless companies, Internet sites and other media outlets.
o On May 20, 1999, we acquired hollywood.com, Inc., which owns and
operates Hollywood.com.
o On August 31, 1999, we purchased Baseline II which includes the
PKBaseline.com pay-per-use movie database web site and several
movie-related publications.
o On January 3, 2000, we completed an agreement with Viacom Inc. (as
successor to CBS Corporation) providing for the issuance to Viacom of
6,672,031 shares of our common stock in exchange for $105.5 million of
CBS advertising and promotion over seven years across its full range of
media properties and $10.8 million in cash.
o On May 1, 2000 we launched Broadway.com.
o On May 1, 2000 we acquired substantially all the assets of
BroadwayTheater.com. BroadwayTheater.com sells theater tickets online
predominately for Broadway, off-Broadway and London theater. This
business was integrated within Broadway.com.
o On September 15, 2000 we acquired Theatre Direct International (TDI), a
ticketing wholesaler of Broadway, off-Broadway and London theater
tickets to the travel industry (including travel agencies and tour
operators) and educational institutions.
23
These changes to our business have affected our results of operations
and financial condition. Historically, we generated revenues from our
intellectual properties business and our entertainment retail operations. Our
intellectual properties business primarily consists of the licensing of complete
stories and ideas for stories to book publishers and film and television studios
and book development and book packaging activities. Our retail operations
consisted of the sale of entertainment-related products and other merchandise at
mall-based retail stores. As the result of the closing of all of our retail
stores by the end of 1999, we will rely on our b2b syndication operations,
Broadway and movie ticketing operations, advertising sales and our intellectual
properties business to generate revenues for the foreseeable future.
The growth of our syndication, ticketing and Internet ad sales
operations has required substantial financing and we expect to continue to
require additional financing to fund our growth plan and for working capital.
Our operating plans and assumptions indicate that anticipated cash flows when
combined with other potential sources of capital, will be enough to meet our
working capital requirements for the year 2000. If plans change or our
assumptions prove to be inaccurate, we may need to seek further financing or
curtail our operations. Our long-term financial success depends on our ability
to generate enough revenue to offset operating expenses. To the extent we do not
generate sufficient revenues to offset expenses we will require further
financing to fund our ongoing operations.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included in Item 8 of Part II of this Report.
Results of Operations
Year ended December 31, 2000 ("fiscal 2000") as compared to the Year
ended December 31, 1999 ("fiscal 1999") and year ended December 31, 1998
("fiscal 1998")
The following table summarizes the Company's revenues, cost of sales,
and gross profit by division for fiscal, 2000, 1999 and 1998, respectively:
24
Business to
Internet Business Intellectual E-
Ad Sales (b2b) Ticketing Properties (a) Commerce Retail Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fiscal 2000
Net Revenues $ 8,777,397 $ 5,442,309 $12,278,008 $ 1,998,091 $ 987,181 $ 34,519 $29,517,505
Cost of Sales 791,770 270,806 10,663,913 1,125,815 1,146,007 265,691 14,264,002
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit $ 7,985,627 $ 5,171,503 $ 1,614,095 $ 872,276 $ (158,826) $ (231,172) $15,253,503
=========== =========== =========== =========== =========== =========== ===========
Fiscal 1999
Net Revenues $ 3,950,931 $ 1,765,732 $ -- $ 1,888,868 $ 924,098 $ 1,576,482 $10,106,111
Cost of Sales 435,940 122,496 -- 826,355 677,509 1,510,532 3,572,832
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit $ 3,514,991 $ 1,643,236 $ -- $ 1,062,513 $ 246,589 $ 65,950 $ 6,533,279
=========== =========== =========== =========== =========== =========== ===========
Fiscal 1998
Net Revenues $ -- $ -- $ -- $ 2,337,019 $ -- $ 8,789,497 $11,126,516
Cost of Sales -- -- -- 1,191,261 -- 4,796,122 5,987,383
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit $ -- $ -- $ -- $ 1,145,758 $ -- $ 3,993,375 $ 5,139,133
=========== =========== =========== =========== =========== =========== ===========
(a) This does not include the Company's 50% interest in NetCo
Partners which is accounted for under the equity method of
accounting and is reported as equity in earnings of investments.
Composition of our segments is as follows:
o Internet ad sales - Includes advertising sold on the web sites
Hollywood.com, Broadway.com and the international versions of
Hollywood.com.
o Business to Business (b2b) - Includes our CinemaSource, EventSource,
TheaterSource, ConcertSource and Baseline syndication operations.
o Ticketing - Includes our TDI ticketing business as well as the online
ticketing operations generated through Broadway.com.
o Intellectual Properties - Includes our book development and book
licensing operation through our 51% owned subsidiary Tekno Books and
our 50.5% interest in Fedora, publisher of Mystery Scene Magazine. Does
not include our 50% interest in NetCo Partners.
o E-Commerce - The Company exited the e-commerce business in
January 2001.
o Retail - This included the Company's brick and mortar retail operations
which were closed on December 31, 1999.
25
Net Revenues
Total revenues for the year ended December 31, 2000 were $29,517,505
compared to $10,106,111 for the year ended December 31, 1999 and $11,126,516 for
the year ended December 31, 1998. Revenues increased $19,411,394 or 192% in 2000
from 1999. This increase is attributable to having a complete fiscal year of
operations in 2000 for the Company's business to business and ad sales
divisions, the growth of EventSource (b2b unit), launch of Broadway.com in 2000
and also the acquisition of two businesses in 2000 that sell theater tickets.
Revenues decreased $1,020,405 or 9% in 1999 as compared to 1998 because the
Company began to phase-out of the retail business during 1999 and ultimately
closed all its retail operations in December 1999. This decrease in retail
revenues was offset from revenues generated in its business to business and
advertising sales divisions which were acquired in 1999. In 2000, revenues are
derived 42% from ticketing, 30% from advertising sales, 18% from business to
business, 7% intellectual properties and 3% from e-commerce.
Internet ad sales revenue increased to $8,777,397 for 2000 from $3,950,931 for
1999, an increase of $4,826,466 or 122%. The Company began to generate Internet
ad sales in May 1999 with the acquisition of Hollywood.com. Therefore, there was
no Internet ad sales revenue recognized in 1998. Internet ad sales revenue is
derived from the sale of banner advertisements and sponsorships on
Hollywood.com, Broadway.com and the international versions of the Hollywood.com
web site.
Barter transactions that generate non-cash advertising revenue (included in
Internet as sales revenues), in which the Company received advertising or other
services in exchange for content advertising on its web site was $956,181 for
2000 and $480,100 for 1999 and accounted for 3% and 5% of the Company's total
net revenue for 2000 and 1999 respectively. The Company records barter revenue
and an equal amount of expense based on the fair value of similar cash
transactions that the company has entered into. In future periods, management
intends to maximize cash advertising revenue, although the Company will continue
to enter into barter relationships when deemed appropriate as a cashless method
for the Company to market its business.
The Company also records barter revenue and an equal amount of expense earned
under a contract with the National Association of Theater Owners ("NATO"), which
the Company acquired through its acquisition of hollywood.com on May 20, 1999.
This income is included in Internet ad sales revenue. Through the NATO contract,
the Company promotes its web site to movie audiences by airing movie trailers
about Hollywood.com, 40 out of 52 weeks per year, before the feature films that
play in most NATO-member theaters. In exchange, the Company provides web site
and movie showtimes for the exhibiting NATO members, promotional materials and
movie information and editorial content. The Company recorded $2,981,750 and
$1,913,290 in promotional non-cash revenue and non-cash expense included in
selling and marketing expense under the NATO contract for 2000 and 1999
respectively. Barter revenue from NATO recorded accounted for 10% and 19% of the
Company's total net revenue for 2000 and 1999 respectively.
Business to business (b2b) revenue increased to $5,442,309 for 2000 from
$1,765,732 for 1999, an increase of $3,676,577 or 208%. Business to business
revenue is generated by the licensing of movie, event and theater showtimes and
other content information to other Internet and media outlets including
newspapers such as The New York Times and Newsday, Internet companies including
AOL's Digital City, Yahoo!, Lycos, Excite, Ticketmaster/City Search, NBCi, and
wireless providers such as AT&T Wireless, Sprint PCS and Verizon. The Company
acquired the business to business (b2b) operations of CinemaSource and Baseline
on May 18, 1999 and August 31, 1999, respectively. Revenues have increased
predominately from revenues generated from the EventSource division which
launched in 2000 as an expansion of the CinemaSource business. EventSource
entered into a contract with AOL's Digital City in April 2000 to provide event
listing for up to 200 cities nationwide.
26
Ticketing revenue for 2000 was $12,278,008. Ticketing revenue is generated from
the sales of live theater tickets for Broadway, off-Broadway and London both
online and offline to domestic and international travel professionals, traveling
consumers and New York area theater patrons. The Company acquired
BroadwayTheater.com on May 1, 2000 and TDI on September 15, 2000, respectively.
E-commerce revenue increased $63,083 or 7% from $924,098 for 1999 to $987,181
for 2000. Revenues were consistent in 2000 as compared to 1999. The Company
exited the e-commerce business in January 2001.
Revenues from the Company's intellectual properties segment increased $109,223
or 6% to $1,998,091 for 2000 from $1,888,868 for 1999 and decreased $448,151 or
19% from $2,337,019 for 1998 to $1,888,868 for 1999. The increase in revenues is
attributable to a greater number of manuscripts being delivered in 2000 as
compared to 1999. The decrease in revenues from 1998 to 1999 is primarily a
reflection of the timing of revenue recognition under the various book licensing
and packaging agreements. The intellectual properties division generates
revenues from several different activities including book development and
licensing, intellectual property licensing and publishing Mystery Scene
Magazine. Revenues vary quarter to quarter depending on the timing of delivery
of manuscripts to the publishers. Revenues are recognized when the earnings
process is complete and ultimate collection of such revenues is no longer
subject to contingencies.
Gross Profit
Gross profit for the year ended December 31, 2000 was $15,253,503
compared to $6,533,279 for the year ended December 31, 1999 and $5,139,133 for
the year ended December 31, 1998. As a percentage of sales the gross profit
percentage in 2000 was 52% as compared to 65% in 1999 and 46% in 1998. The
variances in gross profits are attributable to changes in our revenue mix. From
1998 to 1999 we began to phase out of our retail operations which generally
generated a gross profit of 45% and acquired an ad sales operation and business
to business operation that generates gross profit percentages of 90%, thereby
increasing the gross profit percentage from 46% in 1998 to 65% in 1999. In 2000,
the Company acquired two ticketing businesses which comprised 42% of our
revenues and generates gross profits of 13%, thus reducing the overall gross
profit percentage in 2000 to 52% from 65% in 1999.
Equity in Earnings of Investments
Equity in net earnings of investments consists of the Company's 50%
interest in NetCo Partners and 31.67% in MovieTickets.com, Inc.
2000 1999 1998
---- ---- ----
NetCo Partners (a) $ 2,300,418 $ 1,188,142 $ 877,549
MovieTickets.com(b) (394,286) -- --
----------------- --------------- --------------
$ 1,906,132 $ 1,188,142 $ 877,549
=============== ============== =============
27
(a) NetCo Partners:
NetCo Partners recognizes revenues when the earnings process has been
completed based on the terms of the various agreements and the manuscript has
been delivered to the publisher. When advances are received prior to completion
of the earnings process, NetCo Partners defers recognition of revenue until the
earnings process has been completed. The Company's 50% share in the earnings of
NetCo Partners amounted to $2,300,418 for 2000, an increase of 94% or $1,112,276
as compared to $1,188,142 for 1999. Revenues were $877,549 for 1998. Revenues
increased from 1999 to 2000 because two adult novels were delivered to the
publisher in 2000 as compared to only one adult novel being delivered in 1999.
In addition, NetCo Partners received net royalties of $404,253 for the home
video distribution of the ABC mini-series; as described more fully below. On
book projects, revenues are typically recognized upon delivery of the
manuscripts to the publishers. Costs related to acquisition, development and
sales of the intellectual properties and their licensed products are expensed in
proportion to the revenues that have been recognized.
The licensing arrangement between NetCo Partners and ABC was modified
during 1998. The mini-series arrangement originally provided for a payment to
NetCo Partners of $1.6 million should the NetForce mini-series not air by May
1999 and a minimum guaranteed license fee in excess of $1.6 million if it aired.
NetCo Partners accrued the $1.6 million payment in 1997, as this represented the
minimum amount to be received by NetCo Partners under the ABC mini-series
agreement. Under the new arrangement with ABC, NetCo Partners receives a
$400,000 rights' fee, which was collected in 1998, and a profit participation in
the mini-series in lieu of the original license fee. The mini-series aired on
ABC during February 1999. Accordingly, the previously accrued payment was
reversed during 1998, the rights' fee was recorded as revenues, and any future
revenues from the mini-series will be based on a profit-sharing arrangement with
ABC.
In April 1997, NetCo Partners entered into an agreement with The
Berkley Publishing Group ("Berkley"), a division of Penguin Putnam Inc., which
is part of the international media group Pearson plc, to publish a series of six
original NetForce novels. The contract, with total maximum advances of $22
million, calls for initial publication of the first book to coincide with the
airing of the ABC mini-series referred to above. The first book and second book
were published in 1999. Additional revenues under the Berkley Books contract
will be recognized as manuscripts on the remaining four adult books are
delivered and accepted by the publisher. NetCo Partners receives advances under
this contract based on specific milestones throughout the publication process
for each of the six books. This contract calls for royalties on paperback sales
to be earned by NetCo Partners at 15% of the publisher's suggested retail price.
In April 1997, NetCo Partners also entered into a second agreement with
Berkley to publish up to 18 young adult novels based on NetForce. The contract
calls for total maximum advances of $900,000 in addition to royalties earned.
Both of the Berkley contracts grant to Berkley only the North American
publishing rights to publish NetForce books. NetCo Partners has also licensed
the publication rights to NetForce in various countries throughout the world in
eight foreign languages. Acceptance of the manuscripts by Berkley, the North
American publisher, is deemed acceptance of the manuscripts by the foreign
publishers.
28
(b) MovieTickets.com. Inc.
The Company entered into a joint venture agreement on February 29, 2000
with the movie theater chains AMC Entertainment Inc. and National Amusements,
Inc. to form MovieTickets.com, Inc. ("MovieTickets.com"). In August 2000 the
joint venture entered into an agreement with Viacom Inc. to acquire a five
percent interest in the joint venture for $25 million of advertising over 5
years. The company owned 31.67% of the MovieTickets.com, Inc. joint venture at
December 31, 2000. The Company records its investment under the equity method of
accounting, recognizing 31.67% of MovieTickets.com income or loss as equity in
net earnings - investments. For the twelve months ended December 31, 2000, the
Company recorded a loss of $394,286 in its investment in MovieTickets.com. At
December 31, 2000, the Company contributed $500,000 in cash to MovieTickets.com
and issued warrants to acquire 90,573 shares of common stock at an exercise
price of $17.875 per share valued at $1,000,000. The fair market value of the
warrant was recorded as goodwill and is being amortized over a life of ten
years.
The MovieTickets.com web site launched in May 2000. The
MovieTickets.com web site allows users to purchase movie tickets and retrieve
them at "will call" windows or kiosks at theaters. The web site also features
movie content from Hollywood.com for all current and future release movies,
movie reviews and synopses, digitized movie trailers and photos, and box office
results. We expect the web site to generate revenues from service fees charged
to users for the purchase of tickets and the sale of advertising. Service fees
on ticket sales were introduced in November 2000. MovieTickets.com is promoted
through on-screen advertising in each participating exhibitor's movie screens
and through $25 million of Viacom advertising and promotion over the next five
years. MovieTickets.com's current participating exhibitors include AMC
Entertainment Inc., National Amusements, Inc, Famous Players, Inc., Marcus
Theaters, Muvico Entertainment and several regional exhibitors. These exhibitors
operate theaters located in all of the top twenty markets and approximately 70%
of the top 50 markets in the United States and Canada and represent
approximately 50% of the top 100 grossing theaters in North America. AMC
Entertainment Inc. is the largest movie theater operator in the United States
based on box office sales and Famous Players generates approximately half of all
box office sales in Canada.
In early 2001, America Online, Inc. purchased a 3% equity interest in
MovieTickets.com for $8.5 million in cash. In connection with the transaction,
MovieTickets.com's ticket inventory will be promoted throughout America Online's
interactive properties and ticket inventory of AOL Moviefone will be featured on
MovieTickets.com.
Operating Expenses
General and administrative expenses consists of production costs,
technical and customer support, human resources and administrative functions as
well as professional and consulting service fees, telecommunications costs,
general insurance costs and occupancy costs. General and administrative expenses
for the year ended December 31, 2000 was $11,220,529 as compared to $8,227,022
and $5,196,364 for the years ended December 31, 1999 and 1998, respectively. The
increase is attributable to the completion of five acquisitions between 1999 and
2000. A full fiscal year of general and administrative expenses is not recorded
in both years with regard to the acquisition made.
29
Salaries and benefits for the year ended December 31, 2000 were
$11,810,803 as compared to $5,916,024 and $4,151,725 for the years ended
December 31, 1999 and 1998, respectively. The increase in salaries is primarily
attributable to the acquisitions of two ticketing businesses in 2000 and the
impact of an entire fiscal year of salaries in 2000 for the businesses acquired
in 1999. In 1999 salaries and benefits for the Internet ad sales and syndication
businesses acquired includes expenses only from the date of acquisition to the
end of the year.
The consolidation of the Hollywood.com web site technology and
production into its corporate offices in South Florida began in 2000 and was
completed in January 2001 and resulted in the Company being able to eliminate
considerable duplication of resources with savings to exceed $4.0 million in
2001 in the general and administrative and salaries and benefits areas. In
addition, the company closed its e-commerce division in January 2001 which had
generated operating losses of $2.5 million in 2000.
Selling and marketing expenses includes advertising, marketing,
promotional, business development, public relations expenses and costs to
produce movie trailers. Also included is the non-cash expense portion of barter
advertising. Selling and marketing expense for the year ended December 31, 2000
was $9,593,871 as compared to $5,074,568 and $2,566,702 for the years ended
December 31, 1999 and 1998 respectively. Non-cash barter expense included in
selling and marketing was $3,937,931, $2,613,390 and $2,130,112 for years ended
December 31, 2000, 1999 and 1998, respectively. The increase of $4,519,303 from
1999 to 2000 is attributable to an increase of $1,324,541 of non-cash barter
advertising expense and increased advertising on radio, television, online and
outdoor for the Company's Internet ad sales divisions and additional advertising
related to the launch of Broadway.com on May 1, 2000. In addition, in 2000 the
Company incurred up front production costs associated with advertising on CBS's
media properties.
Amortization of goodwill and intangibles for the year ended December
31, 2000 was $6,775,206 compared to $3,704,011 and $31,428 in 1999 and 1998,
respectively. The increase of $3,071,195 from 1999 to 2000 is attributable to
goodwill and intangibles recorded in accordance with various acquisitions during
1999 and 2000. (See note 3 to the consolidated financial statements.) In
addition, a amortization expense in 2000 includes a full year of amortization on
the companies acquired in 1999.
Depreciation expense, which consists of the depreciation of property
and equipment, furniture and fixtures, web development, leasehold improvements
and capital leases, for the year ended December 31, 2000 was $4,323,331 compared
to $1,627,056 and $1,076,983 for the years ended December 31, 1999 and 1998,
respectively. The increase in depreciation expense from 1999 to 2000 is
primarily attributable to the write-off in 2000 of the carrying value of the AOL
Latin America Services agreement of $3.2 million in 2000. The increase in
depreciation expense from 1998 to 1999 was primarily due to the acquisitions in
1999 and the additional equipment purchased to handle the increased traffic on
Hollywood.com.
Provision for Closed Stores and Lease Termination Costs
Reserve for closed stores and lease termination costs are $233,763 for
2000 as compared to $4,551,094 and $1,121,028 in 1999 and 1998, respectively.
The Company's retail operations were closed in December 1999. The remaining
carrying value of the fixed assets, inventory and other assets related to retail
operations were written off to provision for closed stores in 1999. A liability
was recorded for estimated cost of early lease terminations of $798,362 and
$2,366,432 at December 31, 2000 and 1999 respectively. See Note 9 to the
consolidated financial statements.
30
Interest Expense, Net
Net interest expense was $339,522 for the year ended December 31, 2000,
as compared to $563,909 and $818,849 for the years ended December 31, 1999 and
1998, respectively. The decrease in interest expense from 2000 to 1999 is
attributable to a decrease in our outstanding obligations under capital leases.
The decrease from 1998 to 1999 is also attributable to a reduction in the
inventory line of credit and a reduction in outstanding capital obligations,
offset by an increase in interest income.
Deferred Tax Expense Benefit
During 1997, the Company recognized $1,407,600 of deferred tax benefit
as the Company believed that realization of a portion of its net operating loss
carryforward was likely to occur based on the Company's projections of taxable
income that would have been generated upon consummation of a planned
transaction. In 1998, the Company decided not to proceed with the transaction,
and accordingly recorded a valuation allowance for the deferred tax benefit.
Net Loss
The Company's net loss for 2000 totaled $51,847,500 as compared to a
net loss of $24,657,024 for fiscal 1999. The loss for fiscal 1998 was
$10,658,089. The net loss increased by $27,190,476 for 2000 as compared to 1999
primarily because of an increase in amortization of CBS non-cash advertising of
$21,899,697, amortization of goodwill and intangibles of $3,071,195 and
operating losses incurred by the e-commerce division which was closed in January
2001 of $2,521,911. Net loss per share for fiscal 2000 was $2.23 as compared to
a net loss of $2.01 for fiscal 1999, representing an increase of $.22 loss per
share. The net loss per share for 1998 was $1.47. The per share impact of
depreciation, CBS non-cash advertising, amortization of goodwill and intangibles
on the 2000 and 1999 loss per share is $1.52 and $.62, respectively.
The net loss increased from $10,658,089 in 1998 to $24,657,024 in 1999
primarily because of the amortization of CBS non-cash advertising of $2,344,950,
increase in provision for closed stores and lease termination costs of
$3,430,066, amortization of goodwill and intangibles of $3,672,583, and
operating losses incurred by the retail operations of approximately $3.0
million.
The Company has taken several steps to substantially cut its cash
losses, the benefits of which are expected to materialize in 2001. During 2000,
the Company began a two step approach to consolidate Hollywood.com web site
technology and production into its corporate office in South Florida. Completed
in January 2001, the Company eliminated considerable duplication of resource
with savings expected to exceed $4,000,000 in 2001. Further, during the fourth
quarter of 2000, the Company, as part of its operational evaluation process,
determined that profitability in the e-commerce business could not be reached
due to tight margins and high fulfillment costs. The Company closed this
business in January 2001 which incurred a loss of $2,511,911 in 2000.
The Company continues to focus its resources on the expansion of its
business to business, ticketing and Internet operations. Ticketing has become a
significant revenue source for the Company, most notably through the acquisition
of Theater Direct International in September 2000 and the launch of Broadway.com
in May 2000.
31
While the Company believes that the acquisitions made during 2000
together with economies of scale introduced and closure of unprofitable business
will lead the Company to a positive operating cash flow for the year 2001, there
can be no assurances that the revenues generated will be sufficient to offset
the associated expenses incurred.
Liquidity and Capital Resources
At December 31, 2000, the Company had cash and cash equivalents of
$1,911,224 compared to cash and cash equivalents of $2,475,345 at December 31,
1999. Working capital at December 31, 2000, which includes $19,131,714 in
deferred advertising with CBS, was $14,871,414, as compared to a deficit of
$4,817,879 at December 31, 1999. Net cash used in operating activities during
fiscal 2000 was $13,017,504, primarily representing cash used to fund the
Company's pre-tax loss, net of non-cash expenses including depreciation and
amortization, reserve for closed stores and lease termination costs, CBS
advertising and the inventory reserve. Net cash used in investing activities was
$3,652,461, representing capital expenditures, acquisitions of web addresses and
other investments, and distributions to minority interests. Net cash provided by
financing activities amounted to $16,105,844 during 2000, primarily representing
proceeds from issuance of common stock and proceeds from exercise of stock
options and warrants. The combined effect of the above was a net decrease in
cash and cash equivalents of $564,121 during 2000.
The Company's Board of Directors approved the repurchase of $4.0
million of the Company's common stock. Pursuant to the plan, during the twelve
months ended December 31, 2000 the Company repurchased 335,150 shares of common
stock for an aggregate consideration of $2,661,924, and an average purchase
price of $7.94 per share. In the aggregate, the Company has repurchased 417,500
shares of common stock for an aggregate consideration of $3,433,618 at an
average price of $8.22 per share.
During 2000 the Company issued 1,480,872 shares of common stock upon
the exercise of outstanding stock options and warrants for which the Company
received $7,022,412 in cash exercise proceeds and $5,468,501 in additional
promotional advertising from CBS.
The success of the Company's operations in future years is dependent on
its ability to generate adequate revenue to offset operating expenses. Unless
otherwise noted, the proceeds from the financing transactions in 2000 and 1999
were used to complete the acquisitions of five businesses in 2000 and 1999 and
for general corporate purposes. The Company's management expects to require
additional financing for the expansion of its businesses, and to support working
capital requirements in future years.
The Company is currently exploring additional financing alternatives,
including a bank line of credit to allow the Company to finance such expansion,
although there can be no assurance that such financing alternatives will be
available to the Company or can be obtained on terms favorable to the Company.
In the event that the Company requires additional funding and cannot
secure additional funding, the Company's Chairman of the Board and Chief
Executive Officer and the Company's Vice Chairman and President, have indicated
their intention to provide the Company, if required, with an amount not to
exceed $6 million in order to enable the Company to meet its working capital
requirements during 2001; provided, however, that the commitment will terminate
to the extent that the Company raises no less than $6 million from other sources
and such additional funding is not expended on acquisitions.
Inflation and Seasonality
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal and expects net revenues to be generally higher during the second and
fourth quarters of each fiscal year for its Tekno Books book licensing and
packaging operation as a result of the general publishing industry practice of
paying royalties semi-annually. 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 a regular periodic basis.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Not applicable.
32
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants........................................................34
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999.................................35
Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999
and 1998...............................................................................................36
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998.................................................................37
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
1999 and 1998..........................................................................................38
Notes to Consolidated Financial Statements................................................................39
33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To Hollywood Media Corp.:
We have audited the accompanying consolidated balance sheets of Hollywood Media
Corp. (formerly Hollywood.com, Inc.) (a Florida corporation) and subsidiaries as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hollywood Media Corp. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 2 to the financial statements, effective January 20, 2000,
the Company adopted the consensus of Emerging Issues Task Force Issue No. 99-17,
"Accounting For Advertising Barter Transactions" for advertising barter
transactions entered into after January 20, 2000.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 30, 2001.
34
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,911,224 $ 2,475,345
Receivables, net 1,866,565 1,155,999
Inventories 106,700 1,246,733
Prepaid expenses 687,028 1,687,347
Other receivables 298,751 18,037
Other current assets 240,450 67,541
Deferred advertising - CBS 19,131,714 --
------------- -------------
Total current assets 24,242,432 6,651,002
PROPERTY AND EQUIPMENT, net 2,802,840 1,877,959
INVESTMENTS 872,545 549,975
NONCURRENT DEFERRED ADVERTISING - CBS 91,714,019 --
INTANGIBLE ASSETS, net 3,745,579 4,370,590
GOODWILL, net 45,173,047 46,483,647
OTHER ASSETS 727,620 2,549,652
------------- -------------
TOTAL ASSETS $ 169,278,082 $ 62,482,825
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,194,105 $ 2,181,089
Accrued professional fees 166,182 199,514
Other accrued expenses (Note 10) 2,277,931 1,579,682
Deferred advertising - CBS -- 2,344,950
Accrued reserve for closed stores 798,362 2,366,432
Deferred revenue 1,556,841 308,061
Notes payable 750,000 1,928,138
Current portion of capital lease obligations 627,597 561,015
------------- -------------
Total current liabilities 9,371,018 11,468,881
------------- -------------
CAPITAL LEASE OBLIGATIONS, less current portion 721,521 995,213
------------- -------------
DEFERRED REVENUE 331,559 249,117
------------- -------------
MINORITY INTEREST 160,094 270,828
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 15)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized; 24,730,968 and
15,143,216 shares issued at December 31, 2000 and 1999, respectively 247,309 151,432
Warrants outstanding 7,007,013 5,096,704
Deferred compensation (102,067) (306,200)
Additional paid-in capital 264,332,941 105,500,656
Accumulated deficit (112,791,306) (60,943,806)
------------- -------------
Total shareholders' equity 158,693,890 49,498,786
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 169,278,082 $ 62,482,825
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
35
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
------------ ------------- -------------
NET REVENUES
Ticketing $ 12,278,008 $ -- $ --
Other 17,239,497 10,106,111 11,126,516
------------ ------------ ------------
29,517,505 10,106,111 11,126,516
------------ ------------ ------------
COST OF SALES
Ticketing 10,663,913 -- --
Other 3,600,089 3,572,832 5,987,383
------------ ------------ ------------
14,264,002 3,572,832 5,897,383
------------ ------------ ------------
Gross profit 15,253,503 6,533,279 5,139,133
------------ ------------ ------------
OPERATING EXPENSES:
General and administrative 11,220,529 8,227,022 5,196,364
Selling and marketing 9,593,871 5,074,568 2,566,702
Salaries and benefits 11,810,803 5,916,024 4,151,725
Amortization of CBS advertising - non-cash 24,244,647 2,344,950 --
Amortization of goodwill and intangibles 6,775,206 3,704,011 31,428
Depreciation and amortization 4,323,331 1,627,056 1,076,983
Provision for closed stores and lease termination costs 233,763 4,551,094 1,121,028
------------ ------------ ------------
Total operating expenses 68,202,150 31,444,725 14,144,230
------------ ------------ ------------
Operating loss (52,948,647) (24,911,446) (9,005,097)
EQUITY IN EARNINGS OF INVESTMENTS 1,906,132 1,188,142 877,549
OTHER INCOME (EXPENSE):
Interest, net (339,522) (563,909) (818,849)
Other, net (54,434) (3,440) 42,989
------------ ------------ ------------
Loss before minority interest and deferred tax expense (51,436,471) (24,290,653) (8,903,408)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (411,029) (366,371) (347,081)
------------ ------------ ------------
Loss before deferred tax expense (51,847,500) (24,657,024) (9,250,489)
DEFERRED TAX EXPENSE -- -- (1,407,600)
------------ ------------ ------------
Net loss $(51,847,500) $(24,657,024) $(10,658,089)
============ ============ ============
Basic and diluted loss per common share $ (2.23) $ (2.01) $ (1.47)
============ ============ ============
Weighted average common and common equivalent shares
outstanding - Basic and diluted 23,270,862 12,310,195 7,456,651
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
36
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred
Common Stock Stock, Series Warrants
Shares Amount A, B, C, D & D-2 Outstanding
------------ --------- ------------- -----------
Balance - December 31,1997 6,896,340 $ 68,963 $ 4,000,000 $ 586,600
Non-cash dividend - preferred stock 37,050 371 -- --
Cash dividend on preferred stock Series C -- -- -- --
Conversion of convertible debentures into
common stock 173,568 1,736 -- --
Issuance of stock options and warrants for
services rendered -- -- -- --
Employee stock bonuses 236,230 2,362 -- --
Issuance of preferred stock and warrants
in private placement -- -- 2,152,261 497,583
Issuance of common stock in private
placements 453,095 4,531 -- --
Issuance of common stock to the members
of the Company's Board of Directors
in a private placement 187,442 1,874 -- --
Shares repurchased and retired (42,850) (429) -- --
Stock options and warrants exercised 220,454 2,205 -- (249,600)
Net loss -- -- -- --
------------- ------------- ------------- -------------
Balance - December 31,1998 8,161,329 81,613 6,152,261 834,583
Dividends - preferred stock 6,675 67 -- --
Stock options and warrants exercised 908,784 9,088 -- (497,583)
Issuance of common stock in private
placements 989,297 9,893 -- 2,866,071
Issuance of stock options and warrants for
services rendered 184,018 1,840 -- 1,350,045
Conversion of Series A,B,C,D,D-2 Preferred Stock 1,580,490 15,805 (6,152,261) --
Employee stock bonus 2,500 25 -- --
Amortization of employee stock bonuses -- -- -- --
Issuance of stock for acquisitions 3,317,623 33,176 -- 543,588
Issuance of stock to satisfy capital
lease obligation 32,000 320 -- --
Shares repurchased and retired (39,500) (395) -- --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Balance - December 31,1999 15,143,216 151,432 -- 5,096,704
Issuance of common stock and common stock
warrants pursuant to CBS agreement 6,672,031 66,720 -- 7,114,781
Warrant exercised by CBS 1,178,892 11,789 -- (7,114,781)
Stock options and warrants exercised 301,980 3,020 -- --
Issuance of common stock - acquisitions 345,379 3,454 -- --
Issuance of common stock - private
placement 1,157,561 11,576 -- 650,080
Common stock warrants issued in connection
with investment in Movietickets.com -- -- -- 1,000,000
Issuance of common stock, stock options and warrants
for services rendered 9,511 95 -- 260,229
Issuance of common stock - payment of
note payable 152,548 1,525 -- --
Non-cash issuance of common stock - franchise
agreement 100,000 1,000 -- --
Employee stock bonus 5,000 50 -- --
Amortization of employee stock bonuses -- -- -- --
Shares repurchased and retired (335,150) (3,352) -- --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Balance - December 31, 2000 24,730,968 $ 247,309 $ -- $ 7,007,013
============= ============= ============= =============
[RESTUBBED]
Additional
Deferred Paid-in Accumulated
Compensation Capital Deficit Total
------------ ------------- ------------- ------------
Balance - December 31,1997 -- $ 25,671,900 $ (25,223,610) $ 5,103,853
Non-cash dividend - preferred stock -- 169,629 (233,329) (63,329)
Cash dividend on preferred stock Series C -- -- (60,000) (60,000)
Conversion of convertible debentures into
common stock -- 663,953 -- 665,689
Issuance of stock options and warrants for
services rendered -- 73,587 -- 73,587
Employee stock bonuses (510,333) 793,863 -- 285,892
Issuance of preferred stock and warrants
in private placement -- -- -- 2,649,844
Issuance of common stock in private
placements -- 1,895,614 -- 1,900,145
Issuance of common stock to the members
of the Company's Board of Directors
in a private placement -- 935,336 -- 937,210
Shares repurchased and retired -- (102,599) -- (103,028)
Stock options and warrants exercised -- 1,039,056 -- 791,661
Net loss -- -- (10,658,089) (10,658,089)
------------- ------------- ------------- -------------
Balance - December 31,1998 (510,333) 31,140,339 (36,175,028) 1,523,435
Dividends - preferred stock -- 79,741 (111,754) (31,946)
Stock options and warrants exercised -- 5,416,165 -- 4,927,670
Issuance of common stock in private
placements -- 14,201,370 -- 17,077,334
Issuance of stock options and warrants for
services rendered -- 2,298,793 -- 3,650,678
Conversion of Series A,B,C,D,D-2 Preferred Stock -- 6,136,456 -- --
Employee stock bonus -- 46,225 -- 46,250
Amortization of employee stock bonuses 204,133 -- -- 204,133
Issuance of stock for acquisitions -- 46,310,570 -- 46,887,334
Issuance of stock to satisfy capital
lease obligation -- 539,331 -- 539,651
Shares repurchased and retired -- (668,334) -- (668,729)
Net loss -- -- (24,657,024) (24,657,024)
------------- ------------- ------------- -------------
Balance - December 31,1999 (306,200) 105,500,656 (60,943,806) 49,498,786
Issuance of common stock and common stock
warrants pursuant to CBS agreement -- 130,037,885 -- 137,219,386
Warrant exercised by CBS -- 12,571,493 -- 5,468,501
Stock options and warrants exercised -- 7,019,392 -- 7,022,412
Issuance of common stock - acquisitions -- 1,796,014 -- 1,799,468
Issuance of common stock - private
placement -- 6,293,053 -- 6,954,709
Common stock warrants issued in connection
with investment in Movietickets.com -- -- -- 1,000,000
Issuance of common stock, stock options and warrants
for services rendered -- 168,392 -- 428,716
Issuance of common stock - payment of
note payable -- 1,926,613 -- 1,928,138
Non-cash issuance of common stock - franchise
agreement -- 1,649,000 -- 1,650,000
Employee stock bonus -- 29,015 -- 29,065
Amortization of employee stock bonuses 204,133 -- -- 204,133
Shares repurchased and retired -- (2,658,572) -- (2,661,924)
Net loss -- -- (51,847,500) (51,847,500)
------------- ------------- ------------- -------------
Balance - December 31, 2000 $ (102,067) $ 264,332,941 $(112,791,306) $ 158,693,890
============= ============= ============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
37
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (51,847,500) (24,657,024) $(10,658,089)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 11,098,537 5,331,067 1,108,411
Equity in earnings of Investments, net of return of invested capital 244,930 454,698 528,894
Issuance of compensatory stock options and warrants for services rendered 457,781 322,568 73,587
Amortization of deferred compensation costs 204,133 204,133 285,892
Recognition of deferred gain -- (9,062) (42,988)
Loss on sale of equipment 110,662 -- --
Deferred tax expense -- -- 1,407,600
Amortization of deferred financing costs 10,623 295,644 164,474
Amortization of discount on convertible debentures -- -- 107,750
Provision for bad debts 504,539 82,237 --
Provision for inventory obsolescence 569,946 283,950 232,383
Provision for closed stores and lease termination costs 233,763 4,551,094 1,121,028
Minority interest 411,029 366,371 347,081
Return of capital from Tekno Books to minority partner (521,763) (330,610) (202,125)
Amortization of CBS advertising - non-cash 24,244,647 2,344,950 --
Changes in assets and liabilities:
Receivables (803,298) 283,832 (225,611)
Prepaid expenses 407,675 (286,262) 46,705
Inventories 29,024 (382,132) 1,008,485
Other current assets (183,607) 150,305 (10,240)
Other assets (106,466) 259,164 (205,350)
Accounts payable 296,968 384,269 (611,826)
Accrued professional fees (33,332) (17,637) (13,162)
Deferred revenue 1,280,750 43,548 (318,472)
Other accrued expenses 373,455 717,009 567,446
------------ ------------ ------------
Net cash used in operating activities (13,017,504) (9,607,888) (5,288,127)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (297,295) (7,424,929) --
Acquisitions of investments (567,500) -- --
Capital expenditures (1,705,166) (514,319) (965,801)
Investment in trademarks and url's (1,082,500) (600,000) --
------------ ------------ ------------
Net cash used in investing activities (3,652,461) (8,539,248) (965,801)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments on) proceeds from revolving line of credit -- (758,917) 223,917
Proceeds from shareholder/officer loan 2,050,000 711,000 3,794,500
Payments of shareholder/officer loan (2,050,000) (811,000) (3,779,500)
Net proceeds from the issuance of preferred stock and warrants -- -- 2,649,844
Net proceeds from issuance of common stock 12,257,739 17,077,334 2,837,355
Proceeds from exercise of stock options and warrants 7,022,412 4,927,670 791,661
Dividends on preferred stock -- (28,097) (60,000)
Payments to repurchase common stock (2,661,924) (668,729) (103,028)
Proceeds under sale leasebacks -- 56,068 691,255
Payments under capital lease obligations (512,383) (612,182) (949,895)
------------ ------------ ------------
Net cash provided by financing activities 16,105,844 19,893,147 6,096,109
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (564,121) 1,746,011 (157,819)
CASH AND CASH EQUIVALENTS, beginning of year 2,475,345 729,334 887,153
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,911,224 $ 2,475,345 $ 729,334
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 409,095 $ 374,867 $ 539,687
============ ============ ============
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
38
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 2000 AND 1999
--------------------------
(1) BACKGROUND:
- --------------
Hollywood Media Corp. (the "Company") F/K/A Hollywood.com, Inc., was
incorporated in the State of Florida on January 22, 1993. The Company is an
entertainment-focused media and Internet provider of widely recognized brands
and a broad collection of entertainment content data and related information in
the industry. The Company also owns an extensive ticketing network and is
engaged in the development and licensing of intellectual properties and the
licensing of books. The Company generates revenues through the sale of
advertising on its web site, the business-to-business syndication of
entertainment-related content, sale of live theater tickets, and from advances
paid by publishers and royalties received from the Company's library of book
titles.
The Company's main web sites on the World Wide Web ("web") are Hollywood.com.
and Broadway.com. Hollywood.com, was acquired in May 1999 and features movie
showtime listings, movie descriptions and reviews, digitized trailers and
photos, entertainment news, box office results, interactive games, movie
soundtracks, celebrity profiles and biographies, coverage of entertainment
awards shows and film festivals and video coverage of movie premiers. The
Company launched the Broadway.com web site on May 1, 2000. Broadway.com features
theater showtimes for live theater venues in the United States as well as in
London; the ability to purchase Broadway, off-Broadway and London theater
tickets online; theater news; interviews with stage actors and playwrights;
opening-night coverage; theater reviews and video excerpts from selected shows.
The Company generates revenues through the sale of advertising on these web
sites and the sale of live theater tickets online.
The Company's syndication business began in May 1999 with the acquisition of
CinemaSource, Inc., a supplier of movie showtimes and related content in the
United States and Canada to Internet sites and media outlets. The Company
expanded its syndication business with the acquisition of Baseline in August
1999. Baseline is a pay-per-use subscription web site geared to movie
professionals.
The Company acquired Theatre Direct NY, Inc. ("TDI") effective September 15,
2000. TDI is a ticketing wholesaler to the travel industry that provides groups
and individuals with access to theater tickets and knowledgeable service
covering shows on Broadway, off-Broadway and in London.
In December 1999, the Company closed all if its retail store operations and has
written off the assets relating to such operations (Note 9).
In January 2001, the Company closed its online movie studio store,
shopping.hollywood.com, which the Company opened in November 1998.
The intellectual properties division owns or controls the exclusive rights to
certain original characters and concepts created by best-selling authors and
media celebrities, which it licenses across all media, including books, films
and television, multimedia software, and other products. The Company acquires
the rights to its intellectual properties pursuant to agreements that grant it
39
exclusive rights in the intellectual property itself, as well as the right to
use the creator's name in the title of the intellectual property. The
intellectual properties division also includes a 51%-owned book licensing and
packaging operation named Tekno Books which focuses on developing and executing
book projects, typically with best-selling authors, which books are then
licensed for publication to book publishers. Tekno Books generates revenues from
new book projects in the form of non-refundable advances paid by publishers and
from royalties from its library of book titles.
The Company is a 50% partner in NetCo Partners. NetCo Partners was formed in
June 1995 as a joint venture between the Company and C.P. Group, Inc., a company
in which best-selling author Tom Clancy is a shareholder. NetCo Partners is
engaged in the development and licensing of entertainment properties.
In 2000, the Company acquired an interest in MovieTickets.com, a joint venture
with AMC Entertainment Inc. (AMC), National Amusements, Inc. (NAI) and Viacom
Inc. As of December 31, 2000, the Company, AMC and NAI each own 31.67% of
MovieTickets.com and Viacom Inc. owned 5%. The MovieTickets.com web site, which
launched in May 2000, allows users to purchase movie tickets online and retrieve
them at "will call" windows or kiosks at the theaters. The web site also
features movie content from Hollywood.com for all current and future release
movies, movie reviews and synopses, digitized movie trailers and photos and box
office results. MovieTickets.com generates revenue from the sale of advertising
and from service fees charged to users for the purchase of tickets. These
revenues are not included in the Company's revenues. The Company records its
share of the earnings or loss in MovieTickets.com as equity in earnings (loss)
of investments.
The Company has expended significant funds developing its business to business,
ticketing, Internet ad sales, intellectual property, e-commerce, and other
businesses. Operating losses since inception have contributed to an accumulated
deficit of $112,791,306 at December 31, 2000. The success of the Company's
operations in future years is dependent on its ability to generate adequate
revenues to offset operating expenses. The Company expects to incur additional
losses during the next several years while it continues to grow its businesses.
The Company's operating plans and assumptions indicate that anticipated cash
flows, when combined with other potential sources of capital, will be sufficient
to meet working capital requirements for the year 2001. There can be no
assurances that the Company will be able to generate sufficient revenues from
these activities to cover its costs and therefore, the Company may continue to
incur losses and negative cash flows from opeations. To the extent that the
Company does not generate sufficient revenues to offset expenses the Company
will require further financing to fund ongoing operations.
In the event that the Company requires additional funding and cannot secure such
additional funding, the Company's Chairman of the Board and Chief Executive
Officer and the Company's Vice Chairman and President, have indicated their
intention to provide the Company, if required, with an amount not to exceed $6
million in order to enable the Company to meet its working capital requirements
during 2001; provided, however, that the commitment will terminate to the extent
the Company raises no less than $6 million from other sources and such
additional funding is not expended on acquisitions.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ------------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, and its 51% and 50.5% owned subsidiaries, Tekno Books
and Fedora, Inc., respectively. All significant intercompany balances and
transactions have been eliminated in consolidation and a minority interest has
been established to reflect the outside ownership of Tekno Books and Fedora,
Inc. The Company's 50% and 31.67% ownership interests in NetCo Partners and
MovieTickets.com, respectively, are accounted for under the equity method of
accounting.
40
Accounting Estimates
--------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant estimates and assumptions embodied in the accompanying financial
statements include the adequacy of reserves for accounts receivables and closed
stores and the Company's ability to realize the carrying value of goodwill,
intangible assets, investments in less than 50% owned companies and other
long-lived assets, including the remaining carrying value of deferred
advertising received from CBS in 2000 in exchange for shares of the Company's
common stock.
Cash and Equivalents
--------------------
The Company considers all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents. Interest bearing amounts
included in cash and cash equivalents were $1,549,731 and $2,084,156, at
December 31, 2000 and 1999, respectively.
Receivables
-----------
Receivables consist of amounts due from customers who have advertised on the
Company's web sites, have purchased content from the Company's syndication
businesses, have purchased live theater tickets and amounts due from publishers
relating to signed contracts, to the extent that the earnings process is
complete and amounts are realizable. Trade receivables are net of an allowance
for doubtful accounts of $567,702 and $131,029 at December 31, 2000 and 1999,
respectively.
Inventories
-----------
Inventories consist of theater ticket inventory sold to groups, individuals and
travel agencies, merchandise sold over the Internet and book inventory, and are
stated at the lower of cost or market value. Theater ticket inventory was added
in 2000 with the acquisition of TDI. Inventory is carried at cost. Provision has
been made to reduce excess or obsolete inventories to net realizable value.
Property and Equipment
----------------------
Property and equipment are carried at cost. Depreciation is provided in amounts
sufficient to allocate the cost of depreciable assets to operations over their
estimated service lives, which range from three to five years, on a
straight-line basis. Leasehold improvements are amortized over the lesser of the
terms of the respective leases or the service lives of the improvements.
41
Intangible Assets and Goodwill
------------------------------
Purchase price allocations for all of the Company's acquisitions have been made
in accordance with Accounting Principles Board Opinion No. ("APB") 16. Pursuant
to APB 16, acquired tangible assets and liabilities have been recorded at
estimated fair value. The excess of the purchase price, including liabilities
assumed, over the value assigned to net tangible assets acquired has been
allocated first to any specifically identified intangibles then to goodwill.
Intangible Assets, net consist of the following:
December 31,
2000 1999
----------- -----------
NATO contract acquired with hollywood.com $ 4,567,513 $ 4,567,513
Patents and trademarks 203,368 203,368
Web addresses 1,682,500 600,000
----------- -----------
6,453,381 5,370,881
Less accumulated amortization (2,707,802) (1,000,291)
----------- -----------
$ 3,745,579 $ 4,370,590
=========== ===========
The National Association of Theatre Owners ("NATO") contract is being amortized
on a straight-line basis over 3 years. Patents and trademarks are being
amortized on a straight-line basis over 17 years. Web addresses are amortized
over 7 years.
Goodwill , net consists of the following:
December 31,
2000 1999
------------ ------------
Hollywood.com acquisition $ 27,990,480 $ 27,911,309
CinemaSource acquisition 12,670,172 12,570,172
Baseline acquisition 8,457,133 8,451,296
BroadwayTheater.com acquisition 1,405,617 --
TDI acquisition 1,163,646 --
MovieTickets.com investment 1,000,000 --
Tekno Books and Fedora 391,211 388,783
------------ ------------
53,078,259 49,321,560
Less accumulated amortization (7,905,212) (2,837,913)
------------ ------------
$ 45,173,047 $ 46,483,647
============ ============
Goodwill relating to the acquisition of Tekno Books and Fedora, Inc., is being
amortized on a straight-line basis over 20 years. Goodwill relating to all other
acquisitions and investments is being amortized on a straight-line basis over 10
years.
42
Impairment of Long-Lived Assets
-------------------------------
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". Under the provisions of this
statement, the Company has evaluated its long-lived assets for financial
impairment, and will continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable.
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying values of such
assets, the assets are adjusted to their fair values. The Company determines
fair value as the net present value of future cash flows. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 2000, 1999 or 1998.
Revenue Recognition
-------------------
Revenue recognition policies for advertising, syndication, ticketing,
e-commerce, book packaging and licensing, and retail are set forth below.
Advertising Revenue. Advertising revenue is derived from the sale of
advertising on the Company's web sites. Advertising revenue is recognized over
the period that the advertisement is displayed, provided that no significant
Company obligations remain and collection is reasonably assured. Company
obligations typically include guarantees of a minimum number of impressions or
times that an advertisement is viewed by users of the Company's web sites.
Revenue is recognized based on the number of impressions delivered to the
customer.
Syndication. Syndication revenue is derived from the sale of
entertainment related content to other businesses. Revenue is recorded after the
information has been delivered and collection of the resulting receivable is
reasonably assured. Royalty income is recognized pursuant to contract terms when
the proceeds have been collected.
Ticketing. Ticket revenue is derived from the sale of live theater
tickets for Broadway, off-Broadway and London shows to individuals, groups,
travel agencies, tour groups and educational facilities. Revenue from ticket
sales is recognized upon delivery of the tickets to the customer. For large
orders where credit is extended, revenue is recognized when the performance
takes place. The Company purchases the tickets from the theaters for resale to
its customers, accordingly revenue and costs are recorded on a gross basis in
the accompanying statements of operations.
43
E-commerce. E-commerce revenue is derived from the sale of
entertainment-related merchandise over the web. E-commerce revenue is recognized
once the product has been shipped and payment is reasonably assured. The Company
purchases the merchandise for resale to its customers. Accordingly, revenue and
cost of sales are recorded on a gross basis in the accompanying statements of
operations. The e-commerce division was closed in January 2001.
Book Packaging and Licenses. Licensing revenues in the form of
non-refundable advances and other guaranteed royalty payments are recognized
when the earnings process has been completed, which is generally upon the
achievement of milestones in the development/publishing of the property.
Non-guaranteed royalties based on sales of licensed products and on sales of
books published directly by the Company are recognized as revenues when earned
based on royalty statements or other notification of such amounts from the
publishers.
Revenue relating to the Company's book packaging and licensing
operation is recognized when the earnings process is complete, typically when a
publisher accepts a book for publishing. Advances received from publishers are
recorded as deferred revenues until the book is accepted by the publisher.
Revenues are recorded net of agents' fees. In the book packaging and licensing
division, expenditures for co-editors and permission payments are also deferred
and recorded as prepaid expenses until the book is accepted by the publisher, at
which time such costs are expensed.
Retail. Revenue relating to sales at the Company's retail stores is
recognized at the time of sale. All retail locations were closed in December
1999.
Franchise fees. Franchise fee revenue was recognized in 1998 when all
material services or conditions relating to a franchise agreement had been
substantially performed or satisfied.
Pre-Opening Expenses
--------------------
Pre-opening expenses related to new retail store openings in 1998 were expensed
as incurred.
Barter Transactions
-------------------
The Company periodically enters into barter arrangements with other Internet
companies to exchange advertising on each other's web sites. Prior to January
20, 2000, the Company reported revenue and expense from internet advertising
barter transactions on a "gross" basis, and valued the transactions using an
average rate per thousand impressions earned on similar sales of advertising for
cash. In January 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached consensus on EITF Issue No. 99-17,
"Accounting for Advertising Barter Transactions." As permitted under EIFT 99-17
the Company adopted the consensus prospectively for transactions occurring after
January 20, 2000. EITF 99-17 allows gross reporting of advertising barter
transactions only where barter transactions can be supported by an equivalent
quantity of similar cash transactions. Total internet barter advertising in 1999
was $480,100. The Company has not determined what portion of this revenue would
have been disallowed under EITF 99-17, but management believes the impact would
not be material to 1999 revenues. Under EITF No. 99-17 the Company would not
have recognized $220,000 and $2,130,112 in barter revenue and expense in 1999
and 1998, respectively, associated with the ABC programming agreement. See b.
Retail Operations.
a. Internet Operations. The Company recorded $956,181, $480,100, and
$0 in 2000, 1999 and 1998, respectively, in barter revenue and expense
relating to Internet advertising.
The Company records barter revenue and expense under the NATO contract,
which the Company acquired through its acquisition of hollywood.com. in 1999. In
connection with the NATO contract, the Company also acquired rights and
obligations under ancillary agreements with individual theaters that participate
in the NATO organization. Pursuant to these agreements, the Company hosts web
sites for each of the theaters. In addition, the Company provides ongoing web
site maintenance services for each of the theaters including providing
promotional materials, movie and theater information, advertising and editorial
content. In exchange, the theaters promote the hollyood.com web site to movie
audiences by airing movie trailers about Hollywood.com, 40 out of 52 weeks per
year, before feature films that play in most NATO-member theaters. The Company
records revenue and expense from these activities measured at the fair value of
the services exchanged. In 2000 and 1999 the Company recorded $2,981,750 and
$1,913,290, respectively, in revenue and expense under the NATO
contract.
44
b. Retail Operations. In 1999 and 1998 the Company recorded the
exchange of air time given on the television monitors in its retail stores and
promotional space given on its web site for advertising air time received on
local ABC affiliate television stations at the estimated fair value of the air
time received from the American Broadcastiang Company ("ABC") affiliates. The
income and expense are recorded in equal amounts at the time when the
advertising air time is received from ABC. The Company recorded revenues and
selling and marketing expenses of $220,000 and $2,130,112 in 1999 and 1998
respectively, relating to the ABC programming agreement. This agreement was
terminated in 1999.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income" requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. Adoption
of this statement did not impact the Company's consolidated financial
statements. For all periods presented, there were no differences between
reported net income (loss) and comprehensive income (loss).
Segment Information
-------------------
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting of selected information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Disclosure
regarding the Company's business segments is contained in Note 17.
Loss Per Common Share
----------------------
SFAS No. 128 "Earnings Per Share" requires companies to present basic and
diluted earnings per share ("EPS"). Loss per common share is computed by
dividing net loss after deducting dividends applicable to preferred stock, by
the weighted average number of common and common equivalent shares outstanding
as follows:
45
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net Loss $(51,847,500) $(24,657,024) $(10,658,089)
Preferred Stock Dividends -- (111,754) (293,329)
------------ ------------ ------------
Net Loss Available to Common Shareholders (51,847,500) (24,768,778) (10,951,418)
============ ============ ============
Weighted Average Shares Outstanding 23,270,862 12,310,195 7,456,651
------------ ------------ ------------
Loss per Share, Basic and Diluted $ (2.23) $ (2.01) $ (1.47)
============ ============ ============
Common shares issuable upon conversion of convertible securities and
upon exercise of outstanding options and warrants of 4,107,587, 4,041,927 and
2,204,208 were excluded from the calculation of diluted loss per share in 2000,
1999 and 1998, respectively, because their impact was anti-dilutive.
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," allows either adoption
of a fair value method of accounting for stock-based compensation plans or
continuation of accounting under APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations with supplemental disclosures.
The Company has chosen to account for all stock-based arrangements under which
employees receive shares of the Company's stock accounted for under APB 25 and
make the related disclosures under SFAS No. 123. Pro forma loss per share, as if
the fair value method had been adopted, is presented in Note 12. Stock options
and warrants granted to non-employees are accounted for under the fair value
method prescribed by SFAS No. 123 and related interpretations.
Advertising Costs
-----------------
The Company expenses the cost of advertising as incurred or when such
advertising initially takes place. As further described in Note 11, in the first
quarter of 2000, the Company issued common stock and warrants to CBS with a fair
value of approximately $137 million in exchange for approximately $105 million
of advertising on CBS properties to be received over a period of seven years.
The Company is entitled to utilize a specified portion of this advertising each
contract year. The deferred advertising is carried on the Company's balance
sheet as a deferred asset and is being amortized ratably over the contract
period; except in 2000 where the Company utilized an additional $5.2 million of
CBS advertising for the launch of Broadway.com. Advertising expense recorded
related to CBS advertising for 2000 and 1999 was $24,244,647 and $2,344,950,
respectively, and is separately reported in the accompanying consolidated
statements of operations under the caption "Amortization of CBS advertising -
non-cash." All other advertising costs are reported as selling and marketing
expenses in the accompanying consolidated statements of operations and include
non-cash advertising expense for barter transactions of $3,937,931, $2,613,390,
and $2,130,112 for 2000, 1999 and 1998; respectively.
Post-Retirement Employment Benefits, Other Than Pensions
--------------------------------------------------------
The Company does not currently provide post-retirement employment benefits for
its employees.
401(K) Plan
-----------
The Company established a 401(K) Plan (the "Plan") effective January 1, 2001.
All employees of the Company meeting certain eligibility requirements, are
eligible to participate in the Plan. The Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (but not greater
than a statutorily prescribed annual limit). All amounts contributed by employee
participants in conformance with Plan requirements and earnings on such
contributions are fully vested at all times. The Company will match 50% of the
first 8% of the employee's deferral in common stock on December 31, 2001. Only
those employed on the last day of the Plan year will be eligible for a Company
match.
Reclassifications
-----------------
Certain reclassifications were made to prior year statements to conform with the
current year's presentation.
46
(3) 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. 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.
(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 ("Times Mirror"). The aggregate consideration paid to Times
Mirror by the Company consisted of a one-year unsecured promissory note for
$1,928,138 which was paid in 2000 with 152,548 shares of common stock 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 valued at $19.94 per share. Hollywood.com owns and operates the
Hollywood.com web site 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.
(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 web site (now called Baseline.hollywood.com), several
publications, including the Motion Picture Investor newsletter, and a consumer
oriented movie web site. The aggregate purchase price paid for the Baseline
assets consisted of 492,611 shares of common stock valued at $17.81 per share
and warrants to purchase an aggregate of 54,735 shares of common stock at an
exercise price of $18.27 per share valued at $543,588. The shares of common
stock issued in the transaction cannot be transferred by the holders for a
period of 24 months following the closing of the transaction.
The 1999 acquisitions of CinemaSource, hollywood.com and Baseline II were
accounted for under the purchase method of accounting and accordingly, the
operating results of CinemaSource, hollywood.com and Baseline have been included
in the Company's consolidated financial statements since the respective dates of
acquisition. The excess of the aggregate purchase prices over the fair value of
net assets acquired in 1999 of $49.1 million is being amortized over 10 years.
(d) BroadwayTheater.com, Inc.:
On May 1, 2000, the Company acquired substantially all of the assets of
BroadwayTheater.com, Inc. ("BroadwayTheater.com"), a privately held company, for
$135,000 in cash and 83,214 shares of the Company's common stock valued at
$14.00 per share and options valued at $128,752 to purchase 12,500 shares of
common stock at $9.75 per share. The seller of BroadwayTheater.com, Inc. has the
right to earn up to a maximum of 85,714 additional shares of the Company's
common stock if the business meets specified gross profit targets during the
three years following the closing of the acquisition. BroadwayTheater.com sells
live theater tickets online predominately for Broadway, off-Broadway and
London's theater performances, through the Broadway.com web site which is owned
by the Company.
47
(e) Theatre Direct NY, Inc. (D/B/A Theatre Direct
International):
On September 15, 2000, the Company acquired Theatre Direct NY, Inc. ("TDI") from
Cameron Mackintosh for 66,291 shares of common stock valued at $505,719 and
assumed $750,000 in promissory notes. In addition, the Company placed 195,874
shares in escrow. These shares will be delivered to the seller if certain
conditions are satisfied at the end of the twelve month period. TDI is a
ticketing wholesaler primarily to the travel industry (including travel agencies
and tour operators) and educational institutions for live theater productions
running on Broadway, off-Broadway and in London.
The acquisitions in 2000 of BroadwayTheater.com and TDI were accounted for under
the purchase method of accounting and, accordingly, the operating results of
BroadwayTheater.com and TDI have been included in the Company's consolidated
financial statements since the respective dates of acquisition. The excess of
the aggregate purchase price over the fair value of net assets acquired of
approximately $2.6 million is being amortized over 10 years.
The purchase price of CinemaSource (a), hollywood.com (b), Baseline II, Inc.
(c), BroadwayTheater.com (d) and TDI (e) was allocated to assets and liabilities
acquired as follows:
2000(d)(e) 1999(a)(b)(c)
------------ ------------
Tangible assets $ 981,500 $ 2,729,844
Intangible assets -- 4,567,513
Goodwill 2,754,271 48,932,777
Liabilities assumed ( 889,008) (586,877)
------------ ------------
Total purchase price 2,846,763 55,643,257
Less value of common stock
and warrants issued (1,799,468) (46,290,190)
Less value of note issued (750,000) (1,928,138)
------------ ------------
Subtotal $ 297,295 $ 7,424,929
============ ============
Paid in cash - purchase price, net of cash
Acquired $ (143,505) $ 6,534,190
Paid in cash - acquisition costs 440,800 890,739
------------ ------------
Total cash paid, net of cash acquired $ 297,295 $ 7,424,929
============ ============
In 2000, the Company recorded $185,008 in purchase price adjustments relating to
acquisitions in 1999 which have been included in Goodwill.
The following are unaudited pro forma combined results of operations of the
Company, hollywood.com, CinemaSource, Baseline and TDI for the years ended
December 31, 2000 and 1999, as if the acquisitions of hollywood.com,
CinemaSource, Baseline and TDI had occurred at the beginning of each period:
48
Year Ended December 31,
--------------------------------
2000 1999 1998
------------- ------------- -------------
Net Revenues $ 48,019,715 $ 30,472,655 $ 13,994,091
============= ============ ============
Net Loss $ (51,708,630) $(32,144,680) $(20,316,273)
============= ============ ============
Pro Forma Diluted Loss Per Share $ (2.22) $ (2.35) $ (1.90)
============= ============ ============
Weighted Average Shares Outstanding 23,319,536 13,742,734 10,685,528
============= ============ ============
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.
The pre-acquisition results of operations of BroadwayTheater.com are not
material to the Company's consolidated results of operations and therefore have
been excluded from the pro forma combined results of operations.
In January 2000 the Company acquired the web address Broadway.com for
a purchase price of $1.6 million, paid with $1.0 million in cash and 35,294
shares of common stock valued at $17 per share. The common stock was issued in
1999 and delivered in anticipation of the 2000 closing. The $1.6 million is
reflected in the accompanying consolidated balance sheet as an intangible asset
at December 31, 2000. Acquisition costs incurred amounted to $2,856 and were
charged to additional paid-in capital in 1999. The Broadway.com web site offers
a comprehensive database of professional theater showtimes listings, with
listings for more than 2,400 venues around the country and in London, as well as
show synopses, cast and crew credits and biographies, digitized show previews
and showtunes, a community chat area, interviews and the ability to purchase
Broadway, off-Broadway and London theater tickets online.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS:
- ----------------------------------------
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, and accrued expenses approximate fair value due to the short maturity
of the instruments. The carrying value of notes payable approximates fair value
because the interest rates approximate the market rates.
(5) RECENTLY ISSUED ACCOUNTING STANDARDS:
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 -
"Accounting for Derivative Instruments and Hedging Activities", which
establishes standards of accounting for derivative instruments including
specific hedge accounting criteria. SFAS No. 133, as amended by SFAS No. 137 and
138, is effective for fiscal years beginning after June 15, 2000. The Company
will adopt SFAS No. 133 effective January 1, 2001. The Company believes that the
adoption of SFAS No. 133 will not have a material impact on its consolidated
financial statements, as the Company currently has no derivatives.
In December 1999, the U.S. Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
49
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The Company adopted SAB 101 in 1999.
The Company's revenue recognition practices conform with the guidelines
prescribed in SAB 101.
The EITF of the FASB reached a consensus on EITF Issue 00-2 "Accounting for Web
Site Development Costs." This consensus provides guidance on what types of costs
incurred to develop web site should be capitalized or expensed. The Company
adopted this consensus in 2000. Such adoption did not have a material effect on
the Company's consolidated financial position or results of operations.
In January 2000, the EITF reached consensus on EITF Issue No. 99-17, "Accounting
for Advertising Barter Transactions." EITF 99-17 establishes guidelines for
reporting revenue and expense from non-monetary transactions involving exchange
of advertising. The consensus stipulates that revenue and expense should be
recognized from an advertising barter transaction only if the fair value of the
advertising surrendered in the transaction is determinable based on the entity's
own historical practice of receiving cash for similar advertising sold to
parties unrelated to the party in the barter transaction. The Company adopted
EITF 99-17 prospectively for transactions occurring after January 20, 2000 (See
Note 2).
In July 2000, the EITF reached a consensus on EITF Issue No. 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." This consensus provides
guidance concerning under what circumstances a company should report revenue
based on (a) the gross amount billed to a customer because it has earned revenue
from the sale of goods or services or (b) the net amount retained (that is, the
amount billed to the customer less the amount paid to a supplier) because it has
earned a commission or fee. The Company's existing accounting policies conform
to the EITF consensus.
50
(6) PROPERTY AND EQUIPMENT, NET:
- ---------------------------------
Property and equipment consists of:
December 31,
-----------------------------
2000 1999
----------- -----------
Furniture and Fixtures $ 593,758 $ 467,590
Equipment 2,962,002 1,942,898
Web Development 430,645 --
Equipment Under Capital Leases 565,623 260,350
Leasehold Improvements 70,752 6,940
----------- -----------
4,622,780 2,677,778
Less: Accumulated Depreciation and Amortization (1,819,940) (799,819)
----------- -----------
$ 2,802,840 $ 1,877,959
=========== -----------
Depreciation and amortization expense of property and equipment was $1,089,569,
$1,486,458 and $1,076,983 for the years ended December 31, 2000, 1999 and 1998,
respectively.
(7) CAPITAL LEASE OBLIGATIONS:
- -------------------------------
Future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of December 31, 2000 are as follows:
Year Amount
- ---- ---------
2001 $ 853,134
2002 641,661
2003 163,157
2004 1,704
---------
Minimum lease payments 1,659,656
Less amount representing interest (310,538)
---------
Present value of net minimum lease payments 1,349,118
Less: current portion (627,597)
---------
$ 721,521
=========
In May 1998, the Company entered into a sale and leaseback transaction for 17
kiosks. The terms of the 1998 sale-leaseback were an aggregate sales price of
$600,674, which approximated 75% of the original invoice cost of the units, a
42-month lease term, monthly payments of approximately $18,300, and a $1 buy-out
at the end of the lease term. As additional consideration for the 1998
Sale-Leaseback, the Company issued to the lessor five-year warrants to purchase
5,203 shares of common stock at an exercise price of $5.775 per share. As
security collateral for these leases, the Company issued an aggregate of 433,061
shares of its common stock which were placed in escrow (the "Escrow Shares"). In
December 1999, 32,000 shares with a fair value of $539,651 were issued in order
to satisfy the outstanding lease obligation, and the remaining escrow shares
were returned to the Company and cancelled.
51
(8) DEBT:
- ---------
In association with the TDI acquisition, the Company signed two promissory notes
payable to the former owner. The notes payable have a face value of $500,000 and
$250,000 and are due on March 26, 2001 (which date has been extended due to
closing related adjustments which are expected to reduce the amount of the note)
and September 26, 2001, respectively. The $500,000 note bears interest at
Citibank, N.A. prime plus 1% ( 9.5% at December 31, 2000) and the $250,000 note
is non-interest bearing.
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. This note was paid on June 16, 2000
by issuing 152,548 shares of the Company's common stock valued at $12.64 per
share.
In 1999, the Company's Chairman and Chief Executive Officer and the Company's
Vice Chairman and President extended a $1.1 million unsecured line of credit
facility to the Company. The line of credit bears interest at the JP Morgan Bank
prime rate of interest, is prepayable at any time without penalty by the
Company, and is payable on demand of the holders. This line of credit was
cancelled in connection with Viacom's exercise of warrants in the
amount of $5.5 million during March 2000. During the second quarter of 2000,
$2,050,000 was advanced under an unsecured line of credit facility to the
Company. The Company drew upon this line of credit to enable the Company to meet
its obligation to lend to a former shareholder of CinemaSource funds to pay a
portion of the shareholder's taxes resulting from the sale of CinemaSource to
the Company. The loan was repaid in full in 2000. There were no outstanding
balances under this line of credit at December 31, 2000 and 1999, respectively.
Interest expense on this line of credit amounted to $30,176 and $2,049 for 2000
and 1999, respectively.
In August 1997, the Company issued a $650,000 4% convertible debenture to a
single institutional investor. The debenture was convertible by the holder into
shares of the Company's common stock. During 1998, the debenture holder
converted the entire $650,000 debenture plus accrued interest into a total of
173,568 shares of common stock. In conjunction with issuance of the debenture,
the investor received warrants to buy 32,499 shares of common stock at exercise
prices ranging from $6.00 to $6.53 per share. The warrants expire March 2, 2003.
The Company recorded the convertible debenture net of a discount of $215,500
attributable to the intrinsic value of the nondetachable conversion feature. The
discount was amortized as interest expense from the date of issuance through
April 1998. Interest expense related to this discount was $107,750 in 1998.
(9) ACCRUED RESERVE FOR CLOSED STORES:
- ----------------------------------------
In 1998, the Company aggressively pursued closure of its retail kiosk locations.
Fifteen of 29 mall leases were terminated. In 1999, the Company decided to exit
its brick and mortar retail operation altogether and closed its remaining
stores. The company recorded a provisions of $ 1,121,028 and $4,551,094 in 1998
and 1999, respectively, for asset impairments, inventory write-downs, and the
estimated cost of early lease terminations. The 1999 provision also includes the
cost of reacquiring certain territorial franchise rights sold to a third party,
and other costs related to the closure of the Company's brick and mortar retail
operations. During 2000, $1,650,000 of the liability was satisfied (Note 11) by
issuing common stock and approximately $152,000 in cash was paid in lease
settlements. In 2000, the Company recorded additional charges of $233,763
related to increasing the provision for legal costs, lease termination costs and
establishing a general provision. The reserve for closed stores of $2,366,432 at
December 31, 1999 consists mainly of the liability to reacquire territorial
rights and continuing lease obligations for exited locations. The balance at
December 31, 2000 of $798,362 consists primarily of estimated liabilities
remaining on lease obligations.
52
(10) OTHER ACCRUED EXPENSES:
- --------------------------------
Other Accrued Expenses consist of the following:
December 31,
-----------------------------
2000 1999
---------- ----------
Compensation and benefits $ 496,032 $ 371,285
Insurance 152,978 98,396
Acquisition costs 190,330 --
Licensing fees 91,800 --
Interest 57,159 46,051
Royalties 39,480 31,633
Other 1,250,152 1,032,317
---------- ----------
$2,277,931 $1,579,682
========== ==========
(11) OFFERINGS OF SECURITIES:
- ------------------------------
In March and April 1998, the Company sold 248,053 shares of its common stock to
five accredited investors for gross proceeds of $1,037,500. In conjunction with
the sale of these shares, the Company issued five-year warrants to three
investors to purchase 55,000 shares of the Company's common stock at $4.66 per
share. Costs related to the issuance of these securities totaling $37,500 were
charged to additional paid-in capital.
On June 30, 1998, the Company entered into a private equity line of credit
agreement with two accredited investors and on January 7, 1999, this agreement
was amended to increase the number of shares that could be issued under the
equity line of credit. Pursuant to this agreement, as amended, these investors
issued irrevocable commitments to purchase 433,334 shares of common stock of the
Company over a one-year period. In conjunction with establishment of the equity
line of credit, the Company issued three-year warrants to these investors to
purchase 45,000 shares of the Company's common stock for an average price of
$2.89 per share. The exercise price of the warrants for 20,000 of the shares is
subject to reduction depending on the number of initial shares of the Company's
common stock that the investors still own six months subsequent to their initial
purchase. On June 30, 1998, these investors purchased an initial 100,000 shares
of the Company's common stock at the market price of $5.00 per share. On
November 24, 1998, the Company sold an additional 77,042 shares of common stock
to these investors for $6.49 per share. Gross proceeds of $1,000,000 from the
sale of these securities were received during 1998. Costs related to
establishment of the equity line of credit and for the issuance of the
securities pursuant to this line of credit totaling $99,855 were charged to
additional paid-in capital. In addition, the Company issued 28,000 shares of
common stock to the placement agent as part of this transaction. During 1999,
these investors purchased an additional 256,292 shares of the Company's common
stock, for net proceeds of $2,468,659.
In July 1998, six members of the Company's Board of Directors (including the
Company's Chairman of the Board and Chief Executive Officer, the Company's Vice
Chairman and President, and the Chief Executive Officer of Tekno Books, the
Company's 51%-owned subsidiary) purchased an aggregate of 187,442 shares of the
Company's common stock for $5.00 per share, the then market price of the stock.
In conjunction with the private placement of these shares, the investors
received five-year warrants to purchase an aggregate of 93,721 shares of the
Company's Common stock at $5.00 per share.
53
In September and November 1998, the Company sold 250 shares of its 7% Series D
Convertible Preferred Stock (the "Series D Preferred Stock") to two accredited
investors. The Company realized gross proceeds of $2,500,000 from this private
placement, less expenses and placement fees of $281,917. In connection with this
transaction, the Company also issued two five-year warrants to each investor.
The two warrants entitle the investors to purchase the number of shares of
common stock equal to the aggregate purchase price of shares of Series D
Preferred Stock acquired divided by the closing price of the common stock on the
trading date immediately before the date of purchase, multiplied by 20% and 30%,
respectively, at exercise prices equal to 150% and 125%, respectively, of such
closing price, subject to certain adjustments. The value of the warrants on the
dates of issuance of $414,372, less expenses of $33,730, has been deducted from
the stated value of the Series D Preferred Stock and is reflected as warrants
outstanding. Commissions and cost of issuance have been prorated between the
Series D Preferred Stock and the warrants. The stock purchase agreement also
provides for the potential issuance of adjustment shares of the Company's common
stock to the holders of the Series D Preferred Stock under certain limited
conditions. During 1999 the holders of Series D Preferred stock converted all of
the outstanding shares into 679,859 shares of common stock.
In November 1998, the Company sold 50 shares of its 7% Series D-2 Convertible
Preferred Stock (the "Series D-2 Preferred Stock") to an accredited investor.
The Company realized gross proceeds of $500,000 from this private placement,
less expenses and placement fees of $68,239. In connection with this
transaction, the Company also issued two five-year warrants to the investor. The
warrants entitle the investor to purchase 25,000 shares of the Company's common
stock for $5.175 per share and 16,667 shares for $6.26 per share, both of which
were above market exercise prices at the time the warrants were issued. The
value of the warrants on the date of issuance of $116,941 has been deducted from
the stated value of the Series D-2 Preferred Stock and is reflected as warrants
outstanding. During 1999 the holders of Series D-2 Preferred Stock converted all
of the outstanding shares into 100,000 shares of the Company's common stock.
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 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 for $1,928,138
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 valued at $1,063,315. In addition,
the Company issued warrants to purchase 175,000 shares of common stock with a
fair value of $1,379,283 to placement agents in the transaction.
54
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 $17.81 per share. The Company also issued to the former
owner 163,185 shares of common stock for an aggregate purchase price of $2.5
million.
In October 1999 the Company issued 135,000 shares of stock to AOL Latin America
S.L. plus a ten-year warrant to purchase 100,000 shares of common stock at an
exercise price of $21.42 in exchange for a four-year Interactive Services
agreement pursuant to which the Company or its subsidiaries produced versions of
the Hollywood.com web site in Portuguese and Spanish to be distributed and
promoted on AOL proprietary and web services in Brazil, Mexico and Argentina.
This contract was valued at $3,374,360 in 1999 and was being amortized over the
four-year term of the agreement. Amortization expense of $140,598 is included in
the accompanying 1999 consolidated statement of operations. This asset is used
to generate advertising revenue on the Company's web sites targeted to users in
Latin America. Based on advertising revenue generated on these Latin American
web sites through December 31, 2000, the Company believes that it is unlikely
that it will recover the full carrying value of this asset over the remaining
contract term. As a result, the Company wrote off the remaining carrying value
of the asset during the fourth quarter of 2000. Amortization expense in the
accompanying 2000 consolidated statement of operations includes $3,233,762,
representing amortization recorded in the first three quarters of 2000 and the
write off of the remaining carrying value in the fourth quarter related to this
agreement.
In December 1999 the Company issued 35,294 shares of stock to Broadway
Technologies Group, Inc. to acquire with the web address Broadway.com. The stock
is valued at $600,000. This transaction closed in January 2000 at which time the
Company paid the balance of the $1.0 million purchase price in cash. The stock
was held in escrow by legal counsel in 1999 prior to closing. The Company
incurred $2,856 in acquisition costs in 1999 that were charged to additional
paid-in capital.
On January 3, 2000, the Company issued 6,672,031 shares of common stock valued
at $19.50 per share and a warrant to purchase 1,178,892 shares of common stock
valued at $7,114,781, with an exercise price of $10,937,002, as consideration
for CBS advertising, promotion and content over a seven year period and
$5,303,030 in cash. In March 2000, Viacom exercised the warrant to acquire an
additional approximate 5% equity interest in the Company. The exercise price of
these warrants was $10,937,002, consisting of $5,468,501 in cash and $5,468,501
in additional CBS promotional advertising from Viacom. The value of common stock
and warrants issued to Viacom has been recorded in the balance sheet as deferred
advertising and is being amortized over each related contract year. The Company
amortized $24.2 million and $2.3 million in Viacom non-cash advertising for 2000
and 1999, respectively. Viacom will conduct the advertising and promotion across
its full range of CBS 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
Viacom to sell advertisements on the Hollywood.com web site generating
advertising revenues of up to $1.5 million per year and will pay an 8%
commission on any additional advertising revenues generated by Viacom for the
Company. In September 2000, Viacom prepaid the $1.5 million in advertising
revenue for the contract period October 2000 to September 2001. The Company
issued CBS warrants to purchase 100,000 shares of stock at an exercise price of
$7.82 per share in connection with certain marketing commitments of the Company.
These warrants have been valued at $201,892. At December 31, 2000, $973,582 is
included in the accompanying consolidated balance sheet as deferred revenue
related to the prepayment from Viacom.
55
On February 8, 2000, the Company issued 100,000 shares of common stock valued at
$1,650,000 in order to reacquire territorial rights as per a franchise
agreement. The Company closed its retail operations in December 1999 and
included this amount in the accompanying December 31, 1999 consolidated
balance sheet as part of accrued reserve for closed stores.
On May 1, 2000, the Company acquired substantially all the assets of
BroadwayTheater.com for $135,000 in cash, 83,214 shares of common stock valued
at $14.00 per share and options to purchase 12,500 shares of common stock at an
exercise price of $9.75 per share. These stock options are valued at $128,752.
On June 16, 2000, the Company issued 152,548 shares of common stock valued at
approximately $12.64 per share in order to pay-off an unsecured promissory note
payable to the Times Mirror Company.
On August 22, 2000, the Company issued 358,423 shares of common stock in a
private placement at a purchase price of $8.37 per share. In addition, the
Company issued to the same investors warrants to purchase an aggregate of 60,000
shares of common stock at a price of $10 per share. These warrants have been
valued at $358,016. The Company incurred $93,977 in transaction costs and issued
7,168 shares of common stock as a fee to the placement agent. The Company also
issued adjustment warrants to these investors. The right to purchase additional
shares under the adjustment warrants will be determined at the conclusion of ten
adjustment periods in accordance with the terms of those adjustment warrants. If
the average of the five lowest volume weighted average prices of the common
stock during the final fifteen days of an adjustment period is below $9.63, the
Company will be obligated to issue additional shares to those selling
shareholders for no additional consideration. The precise number of shares of
common stock, if any, which will be issued will be determined in accordance with
a formula set forth in the adjustment warrants. The Company issued 30,760 shares
of common stock as adjustment shares to the investors in December 2000. The
adjustment shares were recorded as additional paid-in capital.
On September 15, 2000, the Company acquired TDI for 66,291 shares of common
stock valued at $505,719. In addition, the Company placed 195,874 shares of
common stock in escrow for a period of twelve months which will be delivered
to the seller if certain conditions are satisfied at the end of the twelve month
period.
During November 2000, the Company issued 733,696 shares of common stock in a
private placement to accredited investors for an aggregate consideration of
$4,250,002. The shares issued and aggregate proceeds include 125,001 shares of
the Company's common stock purchased by the Company's Chairman and Chief
Executive Officer at a purchase price of $6 per share. The Company incurred
$201,316 in transaction costs, issued 27,514 shares of common stock, and
warrants to purchase 55,000 shares of common stock valued at $292,064 as fees to
the placement agents.
During 2000 the Company issued 9,511 shares of common stock and options and
warrants valued at $428,716 for services rendered.
56
The Company's Board of Directors approved a plan for the repurchase of $4.0
million of the Company's common stock. Pursuant to the plan, during the twelve
months ended December 31, 2000 the Company repurchased 335,150 shares of common
stock for an aggregate consideration of $2,661,924, at an average purchase price
of $7.94 per share. In the aggregate, the Company has repurchased 417,500 shares
of common stock for an aggregate consideration of $3,433,681 at an average price
of $8.22.
In 2000, the Company issued 1,480,872 shares of common stock upon the exercise
of outstanding stock options and warrants for which the Company received
$7,022,412 in cash exercise proceeds and $5,468,501 in additional promotional
advertising from CBS.
(12) STOCK OPTION PLANS
- ------------------------
1993 Stock Option Plan
----------------------
Under the Company's 1993 Stock Option Plan (the "1993 Plan"), 3,000,000 shares
of the Company's common stock are reserved for issuance upon exercise of
options. In addition, the 1993 Plan provides that the number of shares reserved
for issuance thereunder will automatically be increased on the first day of each
fiscal quarter of the Company so that such number equals 12.5% of the Company's
outstanding shares of common stock. The 1993 Plan is designed to serve as an
incentive for retaining qualified and competent consultants and employees. The
Stock Option Committee of the Company's Board of Directors (the "Committee")
administers and interprets the 1993 Plan and is authorized to grant options
thereunder to all eligible consultants, employees and officers of the Company.
The 1993 Plan provides for the granting of both "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code of 1986, as amended) and
nonqualified stock options. Options are granted under the 1993 Plan on such
terms and at such prices as determined by the Committee. Each option is
exercisable after the period or periods specified in the option agreement, but
no option can be exercised until six months after the date of grant, or after
the expiration of 10 years from the date of grant. Options granted under the
1993 Plan are not transferable other than by will or by the laws of descent and
distribution. The 1993 Plan also authorizes the Company to make loans to
employees to enable them to exercise their options. Such loans must (i) provide
for recourse to the optionee, (ii) bear interest at a rate no less than the rate
of interest payable by the Company to its principal lender at the time the loan
is made, and (iii) be secured by the shares of common stock purchased. No such
loans were made in 2000, 1999 or 1998.
2000 Stock Option Plan
----------------------
In December 2000, the Board of Directors and the Company's shareholders approved
the Company's 2000 Stock Incentive Plan (the "2000 Plan"). The purpose of the
2000 Plan is to advance the interests of the Company by providing an additional
incentive to attract, retain and motivate highly competent persons as officers
and key employees of, and consultants to, the Company and its subsidiaries and
affiliates and to encourage stock ownership in the Company by such persons by
providing them opportunities to acquire shares of the Company's common stock, or
to receive monetary payments based on the value of such shares pursuant to the
Benefits described therein. Additionally, the 2000 Plan is intended to assist in
further aligning the interests of the Company's officers, key employees and
consultants to those of its other stockholders.
57
Under the 2000 Plan, 1,000,000 shares of common stock are reserved for
issuance upon exercise of Benefits granted under the 2000 Plan. In addition, the
2000 Plan provides that the number of shares reserved for issuance thereunder
are automatically increased on the first day of each fiscal quarter of the
Company beginning on January 1, 2001, so that such number shall equal the lesser
of 2,000,000 shares of Common Stock (which number is subject to adjustment in
accordance with Section 13 thereof) or five percent (5%) of the Company's
outstanding common stock. The maximum number of shares of Common Stock with
respect to which Benefits may be granted or measured to any individual
participant under the Plan during the term of the Plan shall not exceed 750,000;
provided, however, that the maximum number of shares of Common Stock with
respect to which Stock Options and Stock Appreciation Rights may be granted to
an individual participant under the Plan during the term of the Plan shall not
exceed 750,000 (in each case subject to adjustments made in accordance with
Section 13 thereof). If any Benefit granted pursuant to the 2000 Plan
terminates, expires, or is canceled or surrendered, in whole or in part, shares
subject to the unexercised portion may again be issued pursuant to the 2000
Plan. The shares acquired upon exercise of Benefits granted under 2000 Plan will
be authorized and unissued shares of common stock. The Company's shareholders do
not have any preemptive rights to purchase or subscribe for the shares reserved
for issuance under the 2000 Plan.
The 2000 Plan is administered by the Stock Option Committee, which has
the right to determine, among other things, the persons to whom options are
granted, the number of shares of common stock subject to options, the exercise
price of options and the other terms and conditions thereof. The 2000 Plan
provides for the issuance of Incentive Stock Options and Nonqualified Stock
Options. An Incentive Stock Option is an option to purchase common stock that
meets the definition of "incentive stock option" set forth in Section 422 of the
Internal Revenue Code of 1986. A Nonqualified Stock Option is an option to
purchase common stock that meets certain requirements in the plan but does not
meet the definition of an "incentive stock option" set forth in Section 422 of
the Code. In addition, the Benefits under the Plan may be granted in any one or
a combination of Options, Stock Appreciation Rights, Stock Awards, Performance
Awards and Stock Units. Upon receiving grants of Benefits, each holder of a
Benefit must enter into a benefit agreement with the Company that contains the
appropriate terms and conditions as determined by the Stock Option Committee.
As of March 15, 2001, options to purchase 550,000 shares of common
stock were outstanding under the 2000 Plan and no options issued under the 2000
Plan had been exercised.
Directors Stock Option Plan
---------------------------
The Company has established the Directors Stock Option Plan for directors, which
provides for automatic grants to each director of options to purchase shares of
the Company's common stock having a market value at the time of grant equal to
$25,000 (i) upon a person's election as a director and (ii) each year thereafter
upon such person's reelection as a director of the Company, in both instances at
an exercise price equal to the fair market value of the common stock on the date
of the grant. A total of 150,000 shares of common stock have been reserved for
issuance upon exercise of options granted under the Directors Stock Option Plan.
Options granted under the Directors Stock Option Plan become exercisable in full
six months after the date of grant and expire five years after the date of
grant. The Board of Directors, at its discretion, may cancel all options granted
under the Directors Stock Option Plan that remain unexercised on the date of
consummation of certain corporate transactions described in the Directors Stock
Option Plan.
58
A summary of stock option and warrant transactions for the years ended December
31, 2000, 1999 and 1998 is as follows:
Stock Options Warrants
---------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at December 31, 1997 904,341 $ 6.34 840,242 $ 7.76
Granted 138,780 5.55 760,148 5.05
Exercised (14,954) 5.81 (205,500) 3.43
Cancelled (98,849) 6.52 (120,000) 13.20
--------- ----------
Outstanding at December 31, 1998 929,318 6.17 1,274,890 5.99
Granted 2,276,157 16.65 737,398 16.10
Exercised (191,826) 6.91 (716,958) 5.67
Cancelled (223,498) 11.90 (13,554) 9.68
Expired -- 13.20 (30,000) 13.20
--------- ----------
Outstanding at December 31, 1999 2,790,151 14.10 1,251,776 12.06
Granted 771,808 11.36 1,505,427 5.91
Exercised (128,123) 6.06 (1,352,749) 4.94
Cancelled (713,346) 15.58 (17,357) 5.31
Expired -- -- -- --
--------- ----------
Outstanding at December 31, 2000 2,720,490 $ 13.70 1,387,097 $ 12.03
========= ==========
At December 31, 2000, a total of 367,757 and 21,243 options were available for
future grant under the 1993 Plan and Directors Stock Option Plan, respectively.
At December 31, 2000 there were 1,000,000 options available for future grant
under the 2000 Plan. Additionally, at December 31, 2000, 1999, and 1998 998,616,
1,162,540, 782,729 stock options and 560,227, 637,211, 1,224,890 warrants were
exercisable, respectively.
The weighted average fair value of all options and warrants granted in 2000,
1999, and 1998 was $7.76, $16.80 and $1.76 per share, respectively.
The exercise prices of some options differ from the market price of the stock on
the grant date. The following table summarizes weighted average exercise prices
and fair value of options and warrants granted whose exercise price equals,
exceeds or is less than the market price of the stock on the grant date:
59
2000 1999 1998
---- ---- ----
Exercise Price Equals Market Price
Weighted average exercise price $11.96 $17.28 $ 5.66
Weighted average fair value 10.01 17.28 2.40
Exercise Price Exceeds Market Price
Weighted average exercise price 10.16 17.48 5.26
Weighted average fair value 8.77 16.96 1.44
Exercise Price is Less Than Market Price
Weighted average exercise price 19.10 15.62 4.06
Weighted average fair value 16.24 18.18 2.84
The following table summarizes information about stock options and warrants
outstanding at December 31, 2000:
OPTIONS AND WARRANTS OUTSTANDING EXERCISABLE
--------------------------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
----- ----------- ------------ ----- ----------- -----
$ .01 15,764 4.49 $ .01 15,764 $ .01
3.12 - 5.99 485,887 3.55 5.09 309,953 5.13
6.00 - 7.99 631,497 2.23 6.80 357,604 6.60
8.00 - 14.75 1,163,745 4.35 11.15 245,771 8.71
14.76 - 17.75 840,273 3.63 16.94 25,604 17.12
17.76 - 23.00 970,421 3.52 20.58 604,147 21.14
------- -------
4,107,587 3.65 13.14 1,588,843 12.38
Had compensation cost for the 1993 Plan and the Directors Stock Option Plan been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have increased to the following pro forma amounts:
2000 1999 1998
------------ ------------ ------------
Net loss As Reported $ (51,847,500) $(24,657,024) $(10,658,089)
Pro Forma (53,228,309) (29,001,525) (10,989,891)
Basic and diluted As Reported $ (2.23) $ (2.01) $ (1.47)
loss per share Pro Forma (2.29) (2.36) (1.51)
The fair value of each option grant is estimated on the date of the grant using
an option pricing model with the following weighted average assumptions used for
grants in 2000, 1999 and 1998: risk free interest rate of 6.25%, 6.65% and 4.9%,
respectively; expected lives of 2 years for two year options, 3 years for four
year options and 4 years for five and ten year options; and expected volatility
ranging from 147.7% to 173.2% in 2000, 70.7% to 129.94% in 1999 and 36.3% to
70.7% in 1998.
60
In 2000, 1999 and 1998, the Company recorded an expense of $428,716, $276,318
and $73,587, respectively, related to stock options granted on various dates to
non-employees of the Company.
(13) INCOME TAXES:
- -------------------
The Company is in a loss position for both financial and tax reporting purposes.
The Company follows SFAS No. 109, "Accounting for Income Taxes" which requires,
among other things, recognition of future tax benefits measured at enacted rates
attributable to deductible temporary differences between financial statement and
income tax bases of assets and liabilities and to tax net operating loss
carryforwards to the extent that realization of said benefits is "more likely
than not". The primary item giving rise to such deferred tax asset is a loss
carryforward of approximately $92,820,000 as a result of the operating losses
incurred for the period from inception (January 22, 1993) to December 31, 2000.
However, due to the uncertainty of the Company's ability to generate taxable
income in the future, and, to the extent taxable income is generated in the
future, the uncertainty as to the Company's ability to utilize its loss
carryforwards subject to the "ownership change" provisions of Section 382 of the
U.S. Internal Revenue Code, the Company had established a valuation allowance
for the full amount of the deferred tax asset in 1996. During 1997, based
primarily on taxable income that was expected to be generated upon consummation
of a specific planned transaction, the Company decreased the valuation
allowance by $1,407,600. The Company re-established the valuation allowance
to the full amount of the deferred tax asset in 1998, because management no
longer expected, that the transaction would be consummated.
The loss carryforwards expire as follows:
2008 $ 528,000
2009 5,065,000
2010 7,990,000
2011 6,211,000
2012 5,771,000
2018 7,950,000
2019 18,527,000
2020 40,778,000
--------------
$ 92,820,000
==============
The components of the Company's deferred tax assets and
liabilities consist of the following at December 31:
2000 1999
Net tax basis in excess of book basis
for certain assets and liabilities $ 3,100,000 $ 1,400,000
Net operating loss carryforwards 32,487,000 18,215,000
----------- -----------
35,587,000 19,615,000
Valuation allowance (35,587,000) (19,615,000)
----------- -----------
Net deferred tax asset/liability $ -- $ --
=========== ===========
(14) INVESTMENTS:
- ------------------
Investments consist of the following:
December 31,
--------------------------------
2000 1999
-------------- -------------
NetCo Partners (a) $ 699,331 $ 549,975
MovieTickets.com (b) 105,714 --
Beach Wrestling LLC (c) 67,500 --
-------------- -------------
$ 872,545 $ 549,975
=============== =============
61
(a) Netco Partners:
In June 1995, the Company and C.P. Group, Inc. ("C.P. Group"), a company in
which Tom Clancy is a shareholder, entered into an agreement to form NetCo
Partners (the "NetCo Joint Venture Agreement"). NetCo Partners is engaged in the
development and licensing of Tom Clancy's NetForce.
The Company and C.P. Group are each 50% partners in NetCo Partners. C.P. Group
contributed to NetCo Partners all rights to Tom Clancy's NetForce, and the
Company contributed to NetCo Partners all rights to Tad Williams' MirrorWorld,
Arthur C. Clarke's Worlds of Alexander, 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.
NetCo Partners has signed several significant licensing agreements for Tom
Clancy's NetForce. These agreements include two book licensing agreements for
North American rights to a series of adult and young adult books with the
Berkley Publishing Group, an audio book agreement with Random House Audio
Publishing, and licensing agreements with various foreign publishers for rights
to publish Tom Clancy's NetForce books in eight different languages. These
contracts typically provide for payment of non-refundable advances to NetCo
Partners upon achievement of specific milestones, and for additional royalties
based on sales of the various products at levels in excess of the levels
implicit in the non-refundable advances. NetCo Partners recognizes revenue
pursuant to these contracts when the earnings process has been completed based
on performance of all services and delivery of completed manuscript.
The Company accounts for its investment in NetCo Partners under the equity
method of accounting, recognizing 50% of NetCo Partners' income or loss as
Equity in Earnings of Investments. Since NetCo Partners is a partnership, any
income tax payable is passed through to the partners. The revenues, gross profit
and net income of NetCo Partners for the fiscal years ended December 31, 2000,
1999 and 1998 are presented below:
Year Ended December 31,
----------------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues $5,658,803 $3,028,748 $2,685,928
Gross Profit $4,642,968 $2,474,026 $2,052,907
Net Income $4,600,835 $2,376,284 $1,755,098
Company's share
on Net Income $2,300,418 $1,188,142 $ 877,549
During 1998, NetCo Partners and ABC modified their arrangement, which resulted
in a modification of revenues previously accrued in 1997 under the ABC
mini-series arrangement for NetForce. The mini-series arrangement originally
provided for a payment to NetCo Partners of $1.6 million should the NetForce
mini-series not air by May 1999 and a minimum guaranteed license fee if it
aired. ABC substantially completed production of the mini-series during 1998,
and the mini-series aired on ABC for four hours over two nights in February
1999. Under the new arrangement, NetCo Partners received a $400,000 rights fee
during 1998 and future profit participation in the mini-series in lieu of the
original guaranteed license fee. Accordingly, in 1998 NetCo Partners reversed
the $1.6 million fee recorded in 1997 and recognized the $400,000 rights fee.
Future revenues under the ABC mini-series arrangement will be based on profit
participation. In 2000 NetCo Partners received net royalties of $404,253 for the
home video distribution of the mini-series.
62
As of December 31, 2000 NetCo Partners has $1,598,998 in accounts receivable.
Management of NetCo Partners believes that the receivables will be collected in
full and no reserves have been established.
NetCo Partners' deferred revenues, consisting of advances received but not yet
recognized as income, amounted to $888,263 as of December 31, 2000.
As of December 31, 2000, the Company has received cumulative profit
distributions from NetCo Partners since its formation totaling $5,658,049, in
addition to reimbursement of substantially all amounts advanced by the Company
to fund the operations of NetCo Partners.
(b) MovieTickets.com. Inc.
The Company entered into a joint venture agreement on February 29, 2000 with the
movie theater chains AMC Entertainment Inc. and National Amusements, Inc. to
form MovieTickets.com, Inc. ("MovieTickets.com"), in which each venture partner
initially acquired a 33.33% interest in the joint venture. In August 2000 the
joint venture entered into an agreement with Viacom Inc. to acquire a five
percent interest in the joint venture for $25 million of advertising over 5
years. The Company owned 31.67% of the MovieTickets.com, Inc. joint venture at
December 31, 2000. The Company accounts for its investment under the equity
method of accounting, recognizing 31.67% of MovieTickets.com income or loss as
equity in earnings of investments. For 2000, the Company recorded a loss of
$394,286 from its investment in MovieTickets.com. At December 31, 2000, the
Company contributed $500,000 in cash to MovieTickets.com and issued warrants to
acquire 90,573 shares of common stock at an exercise price of $17.875 per share
valued at $1,000,000. The fair value of the warrant was recorded as goodwill and
is being amortized over a period of ten years. The MovieTickets.com web site
launched in May 2000.
(c) Beach Wrestling LLC
On November 10, 2000 an indirect wholly-owned subsidiary of the Company entered
into an agreement with Cisnernos Television Group (CTG) and Siegel Partners to
form Beach Wrestling LLC. Each partner owns one-third. Beach Wrestling LLC was
formed to develop, market and distribute wrestling events via the Internet and
Television under the "Beach Wrestling" and "Beachwrestling.com" brands. These
events will be held in exotic beach locations and resort venues worldwide. At
December 31, 2000 the Company had invested $67,500 in Beach Wrestling LLC.
(15) COMMITMENTS AND CONTINGENCIES:
- -----------------------------------
Operating Leases-
-----------------
The Company conducts its operations in various leased facilities, under leases
that are classified as operating leases for financial statement purposes.
Certain leases provide for payment of real estate taxes, common area
maintenance, insurance, and certain other expenses. Lease terms expire at
various dates through the year 2010. Also, certain equipment used in the
Company's operations is leased under operating leases. Operating lease
commitments at December 31, 2000 are as follows:
63
Year Amount
------ --------------
2001 $ 1,419,372
2002 1,089,870
2003 868,469
2004 875,331
2005 883,762
Thereafter 2,960,541
--------------
Total $ 8,097,345
==============
The fixed operating lease commitments detailed above assume that the Company
continues the leases through their initial lease terms. As a result of the
decision to exit the brick and mortar retail business, the Company is currently
negotiating the early termination of various operating leases with an aggregate
total commitment of approximately $2.9 million included above. The Company
expects to negotiate termination and release from these leases for $798,362,
which has been accrued at December 31, 2000 as part of the reserve for closed
stores and lease termination costs. Rent expense, including equipment rentals,
was $1,340,747, $1,405,620 and $1,804,734 during 2000, 1999 and 1998,
respectively, and is included in general and administrative expenses in the
accompanying consolidated statements of operations.
Employment Agreements-
----------------------
Effective July 1, 1998, the Company extended its employment agreements with each
of Mitchell Rubenstein, to serve as Chairman of the Board and Chief Executive
Officer, and Laurie Silvers, to serve as Vice Chairman of the Board and
President for an additional five-year term. Mitchell Rubenstein and Laurie
Silvers are also shareholders in the Company. The terms of each of the
employment agreements will automatically be extended for successive one-year
terms unless the Company or the executive gives written notice to the other at
least 90 days prior to the then scheduled expiration date. Each of the
employment agreements provides for an annual salary currently set at $242,195
(subject to cost-of-living increases), an annual bonus of an amount determined
by the Board of Directors (but not less than $25,000), and an automobile
allowance of $650 per month. Each employment agreement generally provides that
the executive will continue to receive his or her salary until the expiration of
the terms of the employment agreements if the executive's employment is
terminated by the Company for any reason other than death, disability or cause
(as defined in the employment agreements), or for a period of 12 months after
termination of the employment agreement as a result of the executive's
disability, and that the executive's estate will receive a lump-sum payment
equal to one year's base salary plus a pro rata portion of any bonus to which
the executive is entitled upon termination of the employment agreement by reason
of the executive's death. A termination by the Company of the employment of one
of the executives will constitute a termination without cause of the other
executive for purposes of the employment agreements. Each employment agreement
also prohibits the executive from directly or indirectly competing with the
Company for one year after termination of the employment agreement for any
reason except the Company's termination of the executive's employment without
cause. If a Change of Control (as defined in the employment agreements) occurs,
the employment agreements provide for the continued employment of the executives
until the earlier of two years following the Change of Control or the then
scheduled expiration date of the term of employment. In addition, following a
Change of Control, if the executive's employment is terminated by the Company
other than for cause or by reason of the executive's death or disability, or by
the executive for certain specified reasons (such as a reduction of the
executive's compensation or diminution of the executive's duties), the executive
will receive a lump-sum cash payment equal to three times the executive's then
existing base salary and most recent annual bonus. Mitchell Rubenstein and
Laurie Silvers each received compensation for the years ended December 31, 2000,
1999 and 1998 of $285,660, $270,562, and $303,365, respectively, which is
included in salaries and benefits in the accompanying consolidated statements of
operations. Compensation in 2000 and 1998 includes a portion of wages that were
deferred in the prior year and paid in 2000 and 1998.
64
Effective May 31, 1999, the Company entered into a four-year employment
agreement with W. Robert Shearer, the Company's Senior Vice President and
General Counsel. The agreement provides for an annual base salary currently set
at $160,000, increasing by 10% each year, and a minimum annual bonus of $25,000.
The agreement also provides for the issuance of 75,000 options to purchase
common stock of the Company upon the effective date of the agreement and the
issuance of at least 50,000 options to purchase common stock of the Company on
each one-year anniversary of the effective date. If the executive's employment
is terminated without cause at any time during the term, the Company is required
to pay to the executive an amount equal to the greater of (a) the aggregate base
salary that the executive would have received for the remaining term of the
agreement and (b) six months of executive's then current salary. The term
"cause" is defined in the agreement as (a) any act or omission of the executive
that constitutes a willful and material breach of the agreement that is uncured
at least 30 days' after notice thereof; (b) fraud, embezzlement or
misappropriation against the Company; or (c) conviction of any criminal act that
is a felony.
Shareholder/Director Consulting Agreement-
------------------------------------------
The Company is obligated under a ten-year consulting agreement, which expires
November 2003, to pay Martin Greenberg, the Chief Executive Officer of Tekno
Books (who is also one of its shareholders/directors), $30,000 per year for
services. The agreement can be terminated by either the Company or the
shareholder/director beginning in January 1998 or under certain other
conditions.
The Company is also obligated to pay Greenberg a fee as the exclusive packager
of all books based on the Company's intellectual properties. This packaging fee,
which is typically equal to 25% of the revenues from the books, is paid for the
procurement and delivery of all new text required by the publisher for the
books. During 2000, the Company accrued $218,911 in packaging fees pursuant to
this contract, of which $28,824 was paid with 3,603 shares of common stock and
$190,087 remains payable at December 31, 2000.
Litigation-
-----------
The Company is a party to various legal proceedings arising in the ordinary
course of business, including the proceedings described below and litigation
related to four separate leases that were terminated by the Company upon the
closing of its retail business. The Company does not expect any of these legal
proceedings to have a material adverse impact on the Company's financial
condition or results of operations.
Steven B. Katinsky v. The Times Mirror Company, Hollywood.com, Inc. and
Hollywood Online Inc. filed on September 8, 2000 in Superior Court of the State
of California for the County of Los Angeles. Claim against Tribune Company
(formerly The Times Mirror Company) and the Company seeking a performance cycle
bonus allegedly owing to the plaintiff by Tribune Company in connection with the
sale of Hollywood Online Inc. from Tribune Company to the Company. The plaintiff
is seeking monetary damages in excess of $19.8 million for alleged fraud by the
defendants in connection with the sale of Hollywood Online Inc. to the Company.
The lawsuit was dismissed in December 2000 and the parties were ordered to
arbitrate the dispute. The Company is indemnified by Tribune Company for the
amount of any such performance cycle bonus payable to the plaintiff. The Company
believes that all claims by the plaintiff against the Company are without merit
and intends to defend them vigorously.
65
Interviews.com v. Hollywood Online, Inc. filed on August 17, 2000 in Superior
Court of the State of California for the County of Los Angeles. The lawsuit was
dismissed in January 2001 and the parties were given the right to arbitrate the
dispute. The parties have not commenced an arbitration proceeding. This dispute
involves a claim by Interviews.com that the Company's wholly owned subsidiary,
hollywood.com, Inc. (formerly known as Hollywood Online, Inc.), did not timely
perform its obligations with respect to the transfer of several domain names
under an Assignment Agreement dated December 17, 1997. Interviews.com is owned
and controlled by Steven Katinsky, the claimant in the matter described above.
All matters related to this claim occurred prior to the Company's acquisition of
Hollywood Online, Inc. in May 1999 and all domain names subject to the dispute
have been transferred to the claimant. The domain names transferred were not
being utilized by the Company and were not related to the Company's business.
The claimant is seeking monetary damages in excess of $5 million. The Company
believes that this claim is without merit and intends to defend it vigorously.
(16) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------
For the Twelve Months ended December 31, 2000:
o The Company issued 100,000 shares of common stock, valued at
$1,650,000. This amount was accrued for at December 31, 1999 in accrued
reserve for closed stores.
o Warrants to acquire 90,573 shares of common stock at an exercise price
of $17.875 valued at $1.0 million were issued in connection with the
Company's investment in MovieTickets.com, Inc.
o The Company issued common stock with a fair value of $137,219,386 for
CBS non-cash advertising and promotion.
o The Company recorded $5,468,501 in deferred advertising in connection
with the exercise of warrants by Viacom.
o Capital lease transactions totaled $305,273.
o A note payable for $1,928,138 was paid by issuing 152,548 shares of
common stock valued at approximately $12.64 per share.
o Merchandise inventory with a fair market value of $655,500 was
exchanged for barter trade credits in October 2000.
o The Company issued 5,000 shares of restricted stock valued at $29,065
as an incentive stock bonus.
o The Company issued $345,379 shares of common stock for acquisitions
in 2000.
For the Twelve Months ended December 31, 1999:
o The Company recorded the conversion of $6,152,261 of Series A, B, C, D,
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,
$111,754 of which was paid through the issuance of 6,675 shares of
common stock.
o The Company issued 2,500 shares of restricted stock valued at $46,250
as an incentive stock bonus to an officer.
o The Company entered into a services agreement whereby warrants and
135,000 shares of common stock valued at $3,374,360 were recorded.
Other options issued for consulting services rendered were valued at
$276,318.
o Capital lease transactions totaled $150,589.
o The Company issued 32,000 shares of stock to satisfy lease obligations
of $539,651.
o The Company issued 3,317,623 shares of common stock for acquisitions
in 1999.
66
For the Twelve Months ended December 31, 1998:
o The Company recorded non-cash dividends on its Series A, B, C, D and
D-2 Convertible Preferred Stock in the amount of $233,329, of which
$170,000 was paid through the issuance of 37,100 shares of common stock
and $63,329 was accrued as dividends payable.
o The Company recorded the conversion of $650,000 of convertible
debentures, plus accrued interest of $15,689, into 173,568 shares of
common stock.
o The Company issued 236,230 shares of restricted common stock valued at
$796,225 at the time of issuance to officers and employees of the
Company as an incentive stock bonus, including 100,000 shares that vest
evenly over 36 months granted to each of Mitchell Rubenstein, Chairman
and Chief Executive Officer, and Laurie S. Silvers, Vice Chairman and
President.
o Capital lease transactions totaled $309,829.
(17) SEGMENT REPORTING:
- ------------------------
The Company has six reportable segments: Internet ad sales, business to business
(b2b), ticketing, e-commerce, retail and intellectual properties. The Internet
ad sales segment sells advertising on the Hollywood.com, Broadway.com and
Hollywood.com International web sites. The business to business segment (b2b)
licenses entertainment content and data and includes the divisions CinemaSource
(which licenses movie showtimes and other movie content), EventSource (which
licenses local event data), TheaterSource (which licenses live theater showtimes
and content) and ConcertSource (which licenses local listings of concerts and
music related events) to Internet, media and wireless companies. The ticketing
segment sells tickets to live theater events for Broadway, off-Broadway and
London on the Internet and to domestic and international travel professionals
including travel agencies and tour operators, educational institutions and
traveling consumers. The e-commerce segment, closed in January 2001, sold
entertainment-related merchandise over the Internet. The retail segment operated
retail studio stores that sold entertainment-related merchandise and was closed
in December 1999. The intellectual properties segment owns or controls the
exclusive rights to certain intellectual properties created by best-selling
authors and media celebrities, which it licenses across all media, including
books.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on a comparison of actual profit or loss from operations before income
taxes, depreciation, interest, and nonrecurring gains and losses to budgeted
amounts.
The Company does not have intersegment sales or transfers. The following table
illustrates the financial information regarding the Company's reportable
segments.
67
For the Year Ended December 31,
---------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net Revenues:
Internet Ad Sales $ 8,777,397 $ 3,950,931 $ --
Business to Business (b2b) 5,442,309 1,765,732 --
Ticketing 12,278,008 -- --
E-Commerce 987,181 924,098 --
Retail 34,519 1,576,482 8,789,497
Intellectual Properties 1,998,091 1,888,868 2,337,019
------------ ------------ ------------
$ 29,517,505 $ 10,106,111 $ 11,126,516
============ ============ ============
Gross Profit:
Internet Ad Sales $ 7,985,627 $ 3,514,991 $ --
Business to Business (b2b) 5,171,503 1,643,236 --
Ticketing 1,614,095 -- --
E-Commerce (158,826) 246,589 --
Retail (231,172) 65,950 3,993,375
Intellectual Properties 872,276 1,062,513 1,145,758
------------ ------------ ------------
$ 15,253,503 $ 6,533,279 $ 5,139,133
============ ============ ============
Operating Income (Loss):
Internet Ad Sales (a) $(39,183,183) $ (7,095,248) $ --
Business to Business 189,555 104,257 --
Ticketing 186,833 -- --
E-Commerce (b) (2,521,911) (2,313,526) --
Retail (c) (512,160) (7,628,166) (6,302,280)
Intellectual Properties 480,105 460,761 702,104
Other (Corporate) (11,587,886) (8,439,524) (3,404,921)
------------ ------------ ------------
$(52,948,647) $(24,911,446) $ (9,005,097)
============ ============ ============
68
2000 1999 1998
------------- ------------- -------------
Capital Expenditures:
Internet Ad Sales $ 1,210,112 $ 415,292 $ --
Business to Business (b2b) 326,608 56,540 --
Ticketing 23,863 -- --
E-Commerce 13,347 42,487 --
Retail -- -- 935,811
Intellectual Properties 5,188 -- 29,990
Other 126,048 -- --
------------- ------------- -------------
$ 1,705,166 $ 514,319 $ 965,801
============= ============= =============
Depreciation and
Amortization Expense:
Internet Ad Sales $ 5,731,996 $ 1,384,522 $ --
Business to Business (b2b) 127,615 29,804 --
Ticketing 15,581 -- --
E-Commerce 17,483 12,478 --
Retail -- 935,034 902,753
Intellectual Properties 6,930 5,080 4,903
Other 5,198,932 2,964,149 200,755
------------- ------------- -------------
$ 11,098,537 $ 5,331,067 $ 1,108,411
============= ============= =============
December 31,
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Segment Assets:
Internet Ad Sales (d) $ 117,375,127 $ 6,061,188 $ --
Business to Business (b2b) 1,368,136 784,321 --
Ticketing 1,762,557 -- --
E-Commerce 45,828 1,146,905 --
Retail 17,504 404,086 5,334,664
Intellectual Properties 482,861 821,856 1,077,125
Other 48,226,069 53,264,469 2,158,032
------------- ------------- -------------
$ 169,278,082 $ 62,482,825 $ 8,569,821
============= ============= =============
(a) Includes $24,244,647 and $2,344,950 in amortization of non-cash CBS
advertising for the twelve months ended December 31, 2000 and 1999,
respectively.
(b) The e-commerce segment was closed in January 2001.
(c) The retail segment was closed on December 31, 1999.
(d) Includes $110,845,733 in deferred CBS advertising.
69
Item 9. Changes in and Disagreements with Accountants on Accounting
------------------------------------------------------------
and Financial Disclosure.
-------------------------
None.
70
PART III
Item 10. Directors and Executive Officers.
---------------------------------
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Mitchell Rubenstein (2)(3).............................. 47 Chairman of the Board and Chief Executive
Officer
Laurie S. Silvers (3)................................... 49 Vice Chairman of the Board, President and
Secretary
W. Robert Shearer ...................................... 31 Senior Vice President and General Counsel
Nicholas G. Hall......................................... 46 Chief Operating Officer
Dr. Martin H. Greenberg (3)............................. 59 Director
Harry T. Hoffman (1)(2)(4).............................. 73 Director
Russell I. Pillar (2)................................... 35 Director
Jules L. Plangere, Jr. (1)(4)........................... 79 Director
Mitchell Semel ......................................... 41 Director
Deborah J. Simon (1).................................... 44 Director
David D. Williams ...................................... 53 Director
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
(4) Member of the Stock Option Committee.
Mitchell Rubenstein is a founder of the Company and has served as its
Chairman of the Board and Chief Executive Officer since its inception in January
1993. Mr. Rubenstein was a founder of the Sci-Fi Channel, a 24-hour national
cable television network devoted to science fiction, fantasy and horror
programming that was acquired by USA Network in March 1992. Mr. Rubenstein
served as President of the Sci-Fi Channel from January 1989 to March 1992 and
served as Co-Vice Chairman of the Sci-Fi Channel from March 1992 to March 1994.
Prior to founding the Sci-Fi Channel, Mr. Rubenstein practiced law for 10 years,
including as a partner with Rubenstein & Silvers, a law firm that specialized in
entertainment, cable television and broadcasting law, from 1981 to 1989. Mr.
Rubenstein also co-owned and served as an executive officer of several cable
television systems (including Flagship Cable Partners, who owned a cable
71
television system serving Boynton Beach and portions of Palm Beach County,
Florida) from 1983 to 1989. Mr. Rubenstein received a J.D. degree from the
University of Virginia School of Law in 1977 and a Masters in Tax Law from New
York University School of Law in 1979. He currently serves on the NYU Tax Law
Advisory Board and is a member of the Founders Society, New York University, as
well as a member of the University of Virginia School of Law Business Advisory
Council. Together with Ms. Silvers, Mr. Rubenstein was named Co-Business Person
of the Year, City of Boca Raton, Florida in 1992. Mr. Rubenstein is married to
Laurie S. Silvers.
Laurie S. Silvers is a founder of the Company and has served as its
Vice Chairman, President and Secretary since its inception in January 1993. Ms.
Silvers was a founder of the Sci-Fi Channel, of which she served as Chief
Executive Officer from January 1989 to March 1992 and Co-Vice Chairman from
March 1992 to March 1994. Prior to founding the Sci-Fi Channel, Ms. Silvers
practiced law for 10 years, including as a partner with Rubenstein & Silvers, a
law firm that specialized in entertainment, cable television and broadcasting
law, from 1981 to 1989. Ms. Silvers also co-owned and served as an executive
officer of several cable television systems (including Flagship Cable Partners,
which owned a cable television system serving Boynton Beach and portions of Palm
Beach County, Florida) from 1983 to 1989 and co-owned a television station from
1990 to 1991. Ms. Silvers received a J.D. degree from University of Miami School
of Law in 1977. Ms. Silvers serves on the University of Miami International
Advisory Board and the University of Miami School of Law Visiting Committee. Ms.
Silvers served on the Board of Directors of the Pine Crest Preparatory School,
Inc. from 1993 to 1999. She has been a member of the Pine Crest Preparatory
School, Inc. Board of Advisors (Boca Raton Campus) since 1987, and served as its
Chairman from 1995-1997. Ms. Silvers has served as a member of the executive
advisory board of the School of Business of Florida Atlantic University, and has
been a member of the Economic Council of Palm Beach since 1995. Together with
Mr. Rubenstein, Ms. Silvers was named Co-Business Person of the Year, City of
Boca Raton, Florida in 1992 and has been a keynote speaker at various business
symposia, including one held at Harvard Business School. Ms. Silvers is married
to Mitchell Rubenstein.
W. Robert Shearer joined the Company as Senior Vice President and
General Counsel in June 1999. From 1994 to May 1999, Mr. Shearer practiced law
with Weil, Gotshal & Manges LLP with an emphasis on mergers and acquisitions and
securities law. Mr. Shearer received a Bachelor of Business Administration
degree from the University of Texas in 1991 with high honors and a J.D. degree
from the University of Houston Law Center in 1994, magna cum laude. Mr. Shearer
served as the Editor in Chief of the University of Houston Law Review during
1993 and 1994.
Nicholas G. Hall joined the Company in August 2000, and is responsible
for overseeing and coordinating the activities and strategic growth of the
Company and its businesses. Mr. Hall presently serves as the Company's Chief
Operating Officer. With over 25 years of experience in financial and operational
management, Mr. Hall was formerly Vice President and Chief Financial Officer of
The Hair Club For Men from 1997 to 2000, where he was instrumental in the
company achieving its goal of profitability. Prior to this, from 1994 to 1997
Mr. Hall was Vice President and Chief Financial Officer of Allders International
USA, Inc., the U.S. division of the second largest duty-free retailer in the
world. Mr. Hall is a graduate of the Institute of Chartered Secretaries and
Administrators in London, England.
72
Dr. Martin H. Greenberg has served as a director of the Company since
July 1993, and as a consultant to the Company since February 1993. Since
December 1994, Dr. Greenberg has served as Chief Executive Officer of Tekno
Books, 51% of which is owned by the Company and 49% of which is owned by Dr.
Greenberg. Dr. Greenberg was President and a principal shareholder of Tomorrow,
Inc., a company engaged in book licensing and packaging, from 1990 until its
acquisition by the Company in 1994. Dr. Greenberg is also co-publisher of
Mystery Scene Magazine, a mystery genre trade journal of which the Company owns
a majority interest. Dr. Greenberg is widely regarded as the leading anthologist
in trade publishing, and has served as editor or author of more than 700 books.
Dr. Greenberg also is the 1995 recipient of the Ellery Queen Award, presented by
the Mystery Writers of America for Lifetime Achievement. Dr. Greenberg is a
former Director of Graduate Studies at the University of Wisconsin - Green Bay.
Harry T. Hoffman has served as a director of the Company since July
1993. From 1979 to 1991, Mr. Hoffman served as President and Chief Executive
Officer of Waldenbooks, Inc., a leading national retailer of books, magazines
and related items. From 1968 to 1978, he served as President and Chief Executive
Officer of Ingram Book Company, a national book wholesaler.
Russell I. Pillar has served as a director of the Company since
September 2000. Mr. Pillar has served as President and Chief Executive Officer
of Viacom Interactive Ventures and its predecessor company CBS Internet Group,
managing the emerging technology investments and businesses of Viacom Inc.,
since the Group's formation in January 2000. Mr. Pillar also has served as
Managing Partner of Critical Mass Ventures LLC, an Internet-focused technology
incubator and venture capital firm, since October 1991. From November 1998 to
January 2000, Mr. Pillar served as President, Chief Executive Officer, and a
Director of Richard Branson's Virgin Entertainment Group, Inc., a diversified
international entertainment content retailer. From September 1997 to August
1998, Mr. Pillar served as President and Chief Executive Officer of Prodigy
Internet, an Internet service provider, and served as a member of Prodigy's
board of directors, including serving as its Vice Chairman, from October 1996 to
February 2000. From December 1993 to September 1996, Mr. Pillar served as
President, Chief Executive Officer, and a Director of Precision Systems, Inc., a
publicly-traded international telecommunications software provider. In addition
to his service on a number of private boards including iWon, Inc. and
Playboy.com, Inc., Mr. Pillar serves as a director of MarketWatch.com, Inc. and
Sportsline.com, Inc. Mr. Pillar graduated Phi Beta Kappa, cum laude with an A.B.
in East Asian Studies from Brown University.
Jules L. Plangere, Jr. has served as a director of the Company since
July 1993. Mr. Plangere is the former Chairman of the Board of New Jersey Press,
Inc. and its two subsidiary companies, Asbury Park Press and Press Broadcasting
Co. Mr. Plangere held various positions with Asbury Park Press in his 50-year
career, including Production Manager from 1954 to 1974, President and General
Manager from 1974 to 1977, and Publisher and Chief Executive Officer from 1977
to 1991. In addition, Mr. Plangere is a former member of the Board of Directors
of the New Jersey State Chamber of Commerce, a former member of the Board of
Directors of New Jersey Bell Telephone Co., the former Chairman of the Board of
Trustees of Monmouth University and a present Life Trustee, and the former
President of the New Jersey Press Association.
Mitchell Semel has served as a director of the Company since December
1999. Mr. Semel has served as Senior Vice President, Programming, East Coast for
CBS Entertainment since April 1996, where he has been involved in the production
of the Late Show with David Letterman, the Late Late Show with Tom Snyder and
the Late Late Show with Craig Kilborn. From 1994 to 1996 he worked with NBC
Productions, Inc. as a consulting producer and as an executive producer for
various shows. Mr. Semel was Senior Vice President, Programming, Comedy Central,
New York from 1992 to 1994, and from 1991 to 1992, he was Vice President,
Programming, Public Broadcasting Service, Washington, D.C.
73
Deborah J. Simon has served as a director of the Company since November
1995. Ms. Simon has held the position of Senior Vice President of Simon Property
Group, an Indianapolis-based real estate development and management firm that is
listed on the New York Stock Exchange, since 1991. Prior to that, Ms. Simon
served as Vice President -- Western Region Leasing of the Simon Property Group.
She also has been an independent producer, with several television credits to
her name. She currently serves on the Board of Directors of the Indianapolis
Children's Museum, Indiana Repertory Theater, Indianapolis Museum of Art and
Chairperson of Simon Youth Foundation and Mercerburg Academy Board of Regents.
David D. Williams has served as a director of the Company since
September 2000. Mr. Williams was named President and Chief Executive Officer of
Tribune Media Services in 1991. Tribune Media Services creates and markets a
wide range of editorial and advertising products and services for print, online
and on-screen distribution. Mr. Williams joined the Chicago Tribune Company in
1969, serving in various advertising and marketing capacities. In 1983, he was
appointed Director of classified advertising. Mr. Williams serves on the board
of directors for Knight Ridder/Tribune and the Newspaper Features Council. He
also is a marketing chairman for the Chicagoland United Way/Crusade of Mercy and
is on the board of advisors for Northwestern University's Masters and
Communications department. Mr. Williams holds a bachelor's degree in advertising
and marketing from Michigan State University.
See "Certain Relationships and Related Transactions" for a description
of the rights of each of Tribune Company, Viacom Inc. and Tekno Simon LLC to
nominate individuals to serve as directors of the Company.
The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board, subject to the terms and conditions of
such officers' employment agreements with the Company, if any. The Company's
directors hold office until the next annual meeting of shareholders and until
their successors have been duly elected and qualified.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's outstanding common stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of common stock. Such persons are required by SEC regulation to
furnish the Company with copies of all such reports they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company or written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10% beneficial owners for the
year ended December 31, 2000 have been complied with, except that each of
Mitchell Rubenstein, Laurie Silvers and W. Robert Shearer filed certain
information on a Form 5 that should have been filed earlier on a Form 4.
74
Item 11. Executive Compensation.
------------------------
Summary Compensation Table. The following table sets forth the
aggregate compensation paid in 2000, 1999 and 1998 to each of the executive
officers of the Company.
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------- ---------------------------
Other Restricted Sharesg
Annual Stock Underlying
Name and Salary Bonus Compensation Awards Options
Principal Position Year ($) ($) ($) ($) (#)
------------------- ---- ---- ---- ---- ---- ----
Mitchell Rubenstein, (7) 2000 260,670 25,000 7,800 (1) -- --
Chief Executive Officer 1999 237,763 25,000 7,800 (1) -- 450,000 (4)
1998 235,793 67,572 7,800 (1) 306,200 (2) --
Laurie S. Silvers, (7) 2000 260,670 25,000 7,800 (1) -- --
President 1999 237,763 25,000 7,800 (1) -- 450,000 (4)
1998 235,793 67,572 7,800 (1) 306,200 (2) 37,500 (4)
W. Robert Shearer 2000 126,293 25,000 -- 50,000 (4)
Senior Vice President and 1999 58,454 -- -- 46,250 (3) 87,500 (4)
General Counsel (5)
Nicholas G. Hall 2000 42,577 -- -- -- 25,000(4)
Chief Operating Officer(6)
(1) Represents a car allowance paid to the named executive officer.
(2) Represents the value on the issuance date of 100,000 shares of
restricted common stock granted to the named executive officers, which
vest equally over 36 months beginning July 1, 1998. The value of the
100,000 shares of restricted common stock as of December 31, 1998 was
$1,400,000.
(3) Represents the value on the issuance date of 2,500 shares of common
stock granted to Mr. Shearer. The value of the 2,500 shares of common
stock as of December 31, 1999 was $47,500.
(4) Represents options granted under the Company's 1993 Stock Option Plan
(the "1993 Plan").
(5) Mr. Shearer joined the Company on May 31, 1999.
(6) Mr. Hall joined the Company on August 23, 2000.
(7) Salaries in 2000 include salaries deferred in 1999 but paid in 2000.
Employment Agreements. Effective July 1, 1993, the Company entered into
five-year employment agreements with each of Mitchell Rubenstein, the Company's
Chairman and Chief Executive Officer, and Laurie S. Silvers, the Company's Vice
Chairman and President. Effective July 1, 1998, the Company extended each of
these employment agreements for an additional five-year term. The terms of each
75
of the employment agreements are automatically extended for successive one-year
terms unless the Company or the named executive officer gives written notice to
the other at least 90 days prior to the then-scheduled expiration date. Each of
the employment agreements provides for an annual salary currently set at
$237,000 (subject to automatic cost-of-living increases), an annual bonus in an
amount determined by the Board of Directors (but not less than $25,000) and an
automobile allowance of $650 per month. During 1997 each of Laurie S. Silvers
and Mitchell Rubenstein elected to waive a portion of their base salary.
Each employment agreement provides that each of Laurie S. Silvers and
Mitchell Rubenstein will continue to receive his or her salary until the
expiration of the term of the employment agreements if either of his or her
employment is terminated by the Company for any reason other than death,
disability or Cause (as defined in the employment agreements), or for a period
of 12 months after termination of the employment agreement as a result of the
disability of either Laurie S. Silvers or Mitchell Rubenstein, and that each of
their respective estate will receive a lump sum payment equal to one year's base
salary plus a pro rata portion of any bonus to which either Laurie S. Silvers or
Mitchell Rubenstein is entitled upon termination of the employment agreement by
reason of either of his or her death.
The term "Cause" is defined in the employment agreements to mean (a)
the named executive officer's act or omission which constitutes a willful and
material breach of such named executive officer's employment agreement which is
not cured within 30 days after such named executive officer's receipt of notice
of such breach, (b) a named executive officer's fraud, embezzlement or
misappropriation of the Company's assets or property, or (c) a named executive
officer's conviction for a criminal act that is a felony. A termination by the
Company of one of the named executive officer's employment without Cause will
constitute a termination without Cause of the other named executive officer for
purposes of the employment agreements. Each employment agreement also prohibits
the named executive officer from directly or indirectly competing with the
Company for one year after termination of the employment agreement for any
reason except the Company's termination of the named executive officer's
employment without Cause.
If a Change of Control (as defined in the employment agreements)
occurs, the employment agreements provide for the continued employment of the
named executive officers until the earlier of two years following the Change of
Control or the then-scheduled expiration date of the term of employment. The
term "Change of Control", as used in the employment agreements, is defined to
mean (a) any person's or group's acquisition of 20% or more of the combined
voting power of the Company's outstanding securities, or (b) in the event of any
cash tender or exchange offer, merger or other business combination, sale of
assets or contested election, the persons who were directors of the Company
prior to such transaction ceasing to constitute a majority of the Board of
Directors following the transaction. In addition, following a Change in Control,
if the named executive officer's employment is terminated by the Company other
than for Cause or by reason of the named executive officer's death or
disability, or by the named executive officer for certain specified reasons
(such as a reduction of the named executive officer's compensation or diminution
of the named executive officer's duties), the named executive officer will
receive a lump sum cash payment equal to three times the named executive
officer's then-existing base salary and most recent annual bonus. Mitchell
Rubenstein and Laurie S. Silvers agreed that the acquisition by CBS Corporation
of a 30% equity interest in the Company did not constitute a change of control
under the employment agreements.
Effective May 31, 1999, the Company entered into a four-year employment
agreement with W. Robert Shearer, the Company's Senior Vice President and
General Counsel. The agreement provides for an annual base salary currently set
at $160,000, increasing by 10% each year, and a minimum annual bonus of $25,000.
The agreement also provides for the issuance of 75,000 options to purchase
common stock of the Company upon the effective date of the agreement and the
issuance of at least 50,000 options to purchase common stock of the Company on
each one-year anniversary of the effective date. If the executive's employment
is terminated without cause at any time during the term, the Company is required
to pay to the executive an amount equal to the greater of (a) the aggregate base
salary that the executive would have received for the remaining term of the
agreement and (b) six months of executive's then current salary. The term
"cause" is defined in the agreement as (a) any act or omission of the executive
that constitutes a willful and material breach of the agreement that is uncured
at least 30 days' after notice thereof; (b) fraud, embezzlement or
misappropriation against the Company; or (c) conviction of any criminal act that
is a felony.
Option Grants in Last Fiscal Year. The following table sets forth
certain information with respect to grants of stock options under the Company's
1993 Stock Option Plan to each of the named executive officers of the Company.
In addition, there are shown hypothetical gains or "option spreads" that could
be realized for the respective options, based on arbitrarily assumed rates of
annual compound stock price appreciation of 0 percent, 5 percent, and 10 percent
from the date the options were granted over the full option terms.
OPTION GRANTS IN 2000
Individual Grants
-----------------------------------------------------------------------
Percent
Number of Of Total Potential Realizable Value at Assumed
shares Options Exercise Market Annual Rates of Stock Price Appreciation
Underlying Granted to or Price For Option Terms (1)
Options Employees Base Price on Date Expiration ------------------------------
Granted In 2000 Per Share of Grant Date 0% 5% 10%
-------- -------- -------- ----- ---- ----- --- ----
W. Robert Shearer
Incentive Stock Options 50,000 6.49% $9.25 $9.25 06/02/10 $0 $205,644 $652,070
Nicholas G. Hall
Incentive Stock Options 25,000 3.25% $7.813 $7.813 08/24/05 $0 $66,429 $150,705
(1) These amounts represent certain assumed rates of appreciation only.
There can be no assurances that the amounts reflected will be achieved.
76
Stock Option Exercises During 2000 and Stock Options Held at End of
2000. The following table indicates the total number of shares acquired on
exercise of stock options during 2000 and the value realized therefrom, as well
as the total number and value of exercisable and unexercisable stock options
held by each executive officer as of December 31, 2000:
Number of Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at Fiscal Year End at Fiscal Year End
on Value -------------------------- ------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------ --------- -------- ----------- ------------- ----------- -------------
Mitchell Rubenstein - $ - 447,500 187,500 - -
Laurie S. Silvers - $ - 447,500 187,500 - -
W. Robert Shearer - $ - 34,375 103,125 - -
Nicholas G. Hall - $ - - 25,000 - -
Stock Option Plans.
The 1993 Plan. Under the 1993 Plan, 3,000,000 shares of common stock
are reserved for issuance upon exercise of options. In addition, the 1993 Plan
provides that the number of shares reserved for issuance thereunder will
automatically be increased on the first day of each fiscal quarter of the
Company so that such number equals at least 12.5% of the Company's outstanding
Common Stock. The 1993 Plan is designed to serve as an incentive for retaining
qualified and competent consultants and employees. The Stock Option Committee of
the Company's Board of Directors (the "Committee") administers and interprets
the 1993 Plan and is authorized to grant options thereunder to all eligible
consultants and employees, including officers of the Company.
The 1993 Plan provides for the granting of both "incentive stock
options" (as defined in Section 422 of the Code) and nonqualified stock options.
Options are granted under the 1993 Plan on such terms and at such prices as
determined by the Committee. Each option is exercisable after the period or
periods specified in the option agreement, but no option can be exercised until
six months after the date of grant or more than 10 years from the date of grant.
Options granted under the 1993 Plan are not transferable other than by will or
by the laws of descent and distribution. The 1993 Plan also authorizes the
Company to make loans to optionees to enable them to exercise their options.
Such loans must provide for recourse to the optionee, be interest-bearing and be
secured by the shares of common stock purchased.
As of March 15, 2001, options to purchase 2,619,566 shares of common
stock were outstanding under the 1993 Plan and options to purchase 213,023
shares of common stock issued under the 1993 Plan had been exercised.
2000 Stock Incentive Plan. In December 2000, the Board of Directors and
the Company's shareholders approved the Company's 2000 Stock Incentive Plan (the
"2000 Plan"). The purpose of the 2000 Plan is to advance the interests of the
Company by providing an additional incentive to attract, retain and motivate
highly competent persons as officers and key employees of, and consultants to,
the Company and its subsidiaries and affiliates and to encourage stock ownership
in the Company by such persons by providing them opportunities to acquire shares
of the Company's common stock, or to receive monetary payments based on the
value of such shares pursuant to the Benefits described therein. Additionally,
the 2000 Plan is intended to assist in further aligning the interests of the
Company's officers, key employees and consultants to those of its other
stockholders.
77
Under the 2000 Plan, 1,000,000 shares of common stock are reserved for
issuance upon exercise of Benefits granted under the 2000 Plan. In addition, the
2000 Plan provides that the number of shares reserved for issuance thereunder
are automatically increased on the first day of each fiscal quarter of the
Company beginning on January 1, 2001, so that such number shall equal the lesser
of 2,000,000 shares of Common Stock (which number is subject to adjustment in
accordance with Section 13 thereof) or five percent (5%) of the Company's
outstanding common stock. The maximum number of shares of Common Stock with
respect to which Benefits may be granted or measured to any individual
participant under the Plan during the term of the Plan shall not exceed 750,000;
provided, however, that the maximum number of shares of Common Stock with
respect to which Stock Options and Stock Appreciation Rights may be granted to
an individual participant under the Plan during the term of the Plan shall not
exceed 750,000 (in each case subject to adjustments made in accordance with
Section 13 thereof). If any Benefit granted pursuant to the 2000 Plan
terminates, expires, or is canceled or surrendered, in whole or in part, shares
subject to the unexercised portion may again be issued pursuant to the 2000
Plan. The shares acquired upon exercise of Benefits granted under 2000 Plan will
be authorized and unissued shares of common stock. The Company's shareholders do
not have any preemptive rights to purchase or subscribe for the shares reserved
for issuance under the 2000 Plan.
The 2000 Plan is administered by the Stock Option Committee, which has
the right to determine, among other things, the persons to whom options are
granted, the number of shares of common stock subject to options, the exercise
price of options and the other terms and conditions thereof. The 2000 Plan
provides for the issuance of Incentive Stock Options and Nonqualified Stock
Options. An Incentive Stock Option is an option to purchase common stock that
meets the definition of "incentive stock option" set forth in Section 422 of the
Internal Revenue Code of 1986. A Nonqualified Stock Option is an option to
purchase common stock that meets certain requirements in the plan but does not
meet the definition of an "incentive stock option" set forth in Section 422 of
the Code. In addition, the Benefits under the Plan may be granted in any one or
a combination of Options, Stock Appreciation Rights, Stock Awards, Performance
Awards and Stock Units. Upon receiving grants of Benefits, each holder of a
Benefit must enter into a benefit agreement with the Company that contains the
appropriate terms and conditions as determined by the Stock Option Committee.
As of March 15, 2001, options to purchase 550,000 shares of common
stock were outstanding under the 2000 Plan and no options issued under the 2000
Plan had been exercised.
401(k) Plan. The Company established a 401(k) Plan effective January 1,
2001. All employees of the Company, meeting certain minimum eligibility
requirements, are eligible to participate in the 401(k) Plan. The 401(k) Plan
provides that each participant may contribute up to 15% of his or her pre-tax
gross compensation (but not greater than a statutorily prescribed annual limit).
The percentage elected by certain highly compensated participants may be
required to be lower. The 401(k) Plan permits, but does not require, additional
contributions to the 401(k) Plan by the Company. All amounts contributed by
employee participants in conformance with Plan requirements and earnings on such
contributions are fully vested at all times. The Board of Directors will
determine on an annual basis whether a matching contribution will be made and,
if so, at what level of contribution.
78
Long-Term Incentive and Pension Plans. The Company does not have any
other long-term incentive or pension plans.
Compensation of Directors. Directors of the Company who are neither
employees nor consultants ("non-employee directors") are compensated at the rate
of $1,000 for each meeting of the Board of Directors attended in person, and all
directors are reimbursed for travel and lodging expenses in connection with
their attendance at meetings. The Company has established for the non-employee
directors the Director's Stock Option Plan (the "Directors Plan"), which
provides for automatic grants to each non-employee director of options to
purchase shares of common stock having a market value at the time of grant equal
to $25,000 (i) upon a person's election as a director and (ii) each year
thereafter upon such person's reelection as a director of the Company, in both
instances at an exercise price equal to the fair market value of the common
stock on the date of the grant. A total of 100,000 shares of common stock have
been reserved for issuance upon exercise of options granted under the Directors
Plan. Options to issue 69,172 shares of common stock have been issued under the
Directors Plan. Options granted under the Directors Plan become exercisable six
months after the date of grant and, except as otherwise approved by the Board,
expire five years after the date of grant. The Board of Directors, in its
discretion, may cancel all options granted under the Directors Plan that remain
unexercised on the date of consummation of certain corporate transactions
described in the Directors Plan. The Directors Plan will terminate in July 2003
unless sooner terminated under the provisions thereof. As of March 15, 2000,
options to purchase shares of common stock have been issued to the Company's
current directors under the Directors Plan as follows:
Number of
Shares Subject Exercise Expiration
Name of Director to Options Price Grant Date Date
---------------- ---------- ----- ---------- ----
Harry T. Hoffman 3,125 $8.00 11/1/93 11/1/03
4,762 $5.25 8/23/96 8/23/01
4,107 $5.13 3/2/98 3/2/03
5,719 $5.0625 7/2/98 7/2/03
4,819 $5.188 12/15/00 12/15/10
Jules L. Plangere, Jr. 4,107 $5.13 3/2/98 3/2/03
5,719 $5.0625 7/2/98 7/2/03
4,819 $5.188 12/15/00 12/15/10
Deborah J. Simon 4,166 $6.00 11/8/95 11/8/05
4,762 $5.25 8/23/96 8/23/01
4,107 $5.13 3/2/98 3/2/03
5,719 $5.0625 7/2/98 7/2/03
4,819 $5.188 12/15/00 12/15/10
David D. Williams 3,603 $6.938 9/21/00 9/21/10
4,819 $5.188 12/15/00 12/15/10
79
See "Certain Relationships and Related Transactions -- Consulting
Agreement with Dr. Martin H. Greenberg" for a description of the consulting
agreement between the Company and Dr. Greenberg.
Compensation Committee Interlocks and Insider Participation. All
compensation decisions during 2000 were made by the Compensation Committee,
which consisted of Mitchell Rubenstein and Harry T. Hoffman, an independent
director. Harry T. Hoffman, Russell I. Pillar and Mitchell Rubenstein are the
current members of our Compensation Committee. Mr. Rubenstein is our Chairman
and Chief Executive Officer. Mr. Rubenstein does not participate in discussions
or decisions regarding his own compensation or performance appraisals.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following table sets forth certain information regarding the
beneficial ownership of the common stock of the Company as of March 26, 2001 by
(1) each person known to beneficially own more than 5% of the outstanding shares
of the common stock, (2) each director of the Company, (3) the Company's Chief
Executive Officer and four of the Company's other most highly compensated
executive officers whose total annualized salary and bonus in 2000 was $100,000
or more and (4) all directors and executive officers of the Company as a group.
Except as otherwise indicated, the Company believes that all beneficial owners
named in the table have sole voting and investment power with respect to all
shares of common stock beneficially owned by them. The Company is not aware of
any beneficial owner of more than five percent of the outstanding shares of
common stock of the Company other than as set forth in the following table.
Name and Address Number of Shares Percent of
of Beneficial Owner(1) Beneficially Owned Class
---------------------- ------------------ ----------
Viacom Inc. (2) 7,950,923 31.7%
Tribune Company 2,452,623 9.8%
Mitchell Rubenstein(3) 2,268,853 8.8%
Laurie S. Silvers(3) 2,268,853 8.8%
Dr. Martin H. Greenberg(4) 367,500 1.5%
Jules L. Plangere, Jr.(5) 112,743 *
Deborah J. Simon (6) 41,886 *
Harry T. Hoffman(7) 24,132 *
Russell I. Pillar -- *
Mitchell Semel -- *
80
David D. Williams(8) 8,422 *
W. Robert Shearer(9) 39,013 *
Nicholas G. Hall(10) 5,609 *
All directors and executive officers 2,869,158 11.0%
of the Company as a group
(11 persons) (11)
- ----------------
* Less than 1%
(1) Except as noted in this footnote, the address of each beneficial owner
is in care of the Company, 2255 Glades Road, Suite 237 West, Boca
Raton, Florida 33431. The business address of Viacom Inc. is 1515
Broadway, 52nd Floor, New York, NY 10036-5794 and the business address
of The Tribune Company is 435 N. Michigan Ave., 6th floor, Chicago,
Illinois 60611.
(2) Includes 100,000 shares of common stock issuable under a currently
exercisable warrant.
(3) Except for 100,000 shares owned individually by each of Mr. Rubenstein
and Ms. Silvers, all of such shares are held by Mr. Rubenstein and Ms.
Silvers jointly as tenants by the entireties. Includes an aggregate of
895,000 shares of common stock issuable pursuant to stock options
granted to, and 15,000 shares of common stock issuable pursuant to
warrants purchased by, Mr. Rubenstein and Ms. Silvers that are
currently exercisable.
(4) Includes 91,667 shares of common stock owned by Dr. Greenberg's spouse,
47,052 shares of common stock issuable pursuant to currently
exercisable stock options, and 15,221 shares of common stock issuable
under currently exercisable warrants.
(5) Includes 14,645 shares of common stock issuable pursuant to options
that are currently exercisable and 28,334 shares of common stock
issuable under currently exercisable warrants.
(6) Includes 23,573 shares of common stock issuable pursuant to options
that are currently exercisable.
(7) Includes 22,532 shares of common stock issuable pursuant to options
that are currently exercisable and 400 shares of common stock issuable
under a currently exercisable warrant.
(8) Includes 8,422 shares of common stock issuable pursuant to options that
are currently exercisable.
(9) Includes 34,375 shares of common stock issuable pursuant to options
that are currently exercisable.
(10) Represents 5,609 shares of common stock issuable pursuant to options
granted to Mr. Hall's spouse that are currently exercisable.
(11) Includes 1,052,208 shares of common stock issuable pursuant to options
that are currently exercisable and 58,955 shares of common stock
issuable under currently exercisable warrants.
81
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
Transaction with Viacom Inc.
We entered into a strategic, seven-year relationship with Viacom Inc.
in January 2000 that provides for extensive promotion of the Hollywood.com and
Broadway.com web site. In connection with our strategic relationship, Viacom
Inc. purchased 6,672,031 shares of our common stock, representing approximately
30% of our outstanding common stock, in exchange for $5,303,030 in cash and
$100,000,000 of advertising, promotion, content and advertising sales support
over a seven-year term pursuant to an Advertising and Promotion Agreement and a
Content Agreement. We also issued to Viacom a Warrant to purchase an additional
1,178,892 shares of our Common Stock for an aggregate exercise price of
$10,937,002. Viacom exercised the warrant in full during March 2000. Half of the
warrant exercise price was paid in cash and half is payable in additional
advertising and promotion under the Advertising and Promotion Agreement and will
be furnished to us during the 24-month period following the exercise of the
Warrant. We also entered into an Investor's Rights Agreement, a Registration
Rights Agreement and a Voting Agreement with Viacom, which contain, among other
things, transfer restrictions, standstill provisions, pre-emptive rights,
registration rights and voting rights.
Advertising and Promotion Agreement. Viacom has agreed to provide us an
aggregate of $70 million in advertising and promotion of the Hollywood.com and
Broadway.com web site over a seven-year term. In addition, we have the right to
allocate up to $30 million in value deliverable under the Content Agreement to
additional advertising and promotion under the Advertising and Promotion
Agreement for a total of up to $100 million in advertising and promotion. Viacom
Inc. conducts the advertising and promotion across its full range of CBS 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 programs. The advertising and promotion is provided pursuant to media
plans jointly developed each year by Viacom and us, which will provide
broad-based exposure for the Hollywood.com web site, including prominent
placements in conjunction with appropriate entertainment-related events and
programming. The value of all advertising and promotion furnished by Viacom to
us will be based on the average unit price paid to Viacom by third parties for
the particular media on which the advertising and promotion occurs.
Viacom has the right to terminate its obligation to deliver advertising
and promotion under the Advertising and Promotion Agreement under a number of
circumstances, including, among others, if the Hollywood.com web site contains,
or links to, content that violates specified CBS license guidelines and we fail
to remove such content or links, we violate the terms of our other agreements
with Viacom or if certain defined competitors of Viacom acquire a significant
equity stake in the Company.
Content License Agreement. Viacom has agreed to provide us an aggregate
of $30 million in value over a seven-year term to be allocated in our discretion
to the license of content, advertising sales or advertising and promotion. We
will receive $4.3 million in value during each of the first six years of the
term and $4.2 million in value during the last year of the term.
82
License of Content. Viacom granted to us a license to use, distribute
and otherwise make available on the Hollywood.com web site certain text,
graphics, photographs, video, audio and other information owned by Viacom and
related to the movie business or any particular motion picture. In addition,
subject to compliance by us with certain obligations, Viacom has the right to
archive the content on the Hollywood.com web site after expiration of the term
of the Content License Agreement.
Advertising Sales. We have the right to require Viacom to sell
advertisements on the Hollywood.com web site totaling gross advertising revenues
of up to $1.5 million per year and Viacom has agreed to include the
Hollywood.com web site in all advertising sales programs and presentations that
are appropriate for the sale of advertising on the web site. We have agreed to
pay to Viacom a commission of 8% of gross advertising revenues generated by
advertising sold by Viacom on the Hollywood.com web site in excess of the
portion of the $1.5 million guaranteed amount selected by us each year.
Advertising and Promotion. We have the right to allocate all or any
portion of the $30 million in value to additional advertising and promotion of
the Hollywood.com and Broadway.com web site to be furnished by Viacom under the
Advertising and Promotion Agreement.
Viacom Inc. has the right to terminate its obligations under the
Content Agreement upon the occurrence of any of the events that permit it to
terminate its obligations under the Advertising and Promotion Agreement.
Investor's Rights Agreement. The Investor's Rights Agreement between
the Company and Viacom Inc. sets forth various rights and obligations of the
Company and Viacom related to Viacom's ownership of the Company's common stock,
including Viacom's registration rights with respect to the common stock, the
Company's right of first refusal with respect to transfers by Viacom of the
common stock, standstill provisions to which Viacom is bound, and preemptive
rights of Viacom with respect to certain issuances of common stock and other
securities by the Company.
Registration Rights. Viacom has the right to initiate up to four
registrations under the Securities Act of 1933 of the common stock that it
acquired from the Company. The Investor's Rights Agreement contains various
restrictions on the timing of such registrations. In addition, Viacom has
"piggyback" registration rights allowing it to include the shares of common
stock that it acquires from the Company in registrations of the Company's common
stock initiated by the Company or other shareholders. The Company will pay all
expenses associated with any such registrations other than underwriters' fees or
commissions relating to the sale of the common stock.
Transfer Restrictions; Right of First Refusal. Viacom is not permitted
to transfer any shares of the Company's common stock prior to January 3, 2001,
except to certain affiliates of Viacom. If Viacom proposes to transfer any
shares of common stock during the six year period following the first year,
other than to certain affiliates or in a bona fide public distribution pursuant
to an effective registration statement, the Company has the right to purchase
the shares on the same terms on which Viacom proposes to transfer them to a
third party. The Company's right of first refusal will terminate (a) at such
time as Mitchell Rubenstein, the Company's Chairman of the Board and Chief
Executive Officer, and Laurie S. Silvers, the Company's Vice Chairman of the
Board and President, have sold more than 60% of the common stock owned by them
as of the closing of the transaction or (b) at any time after the second
anniversary of the closing if Viacom owns less than 15% of the Company's
outstanding common stock (other than as a result of transfers by Viacom of at
least half of the common stock acquired by it from the Company).
83
Standstill Provisions. For a period of seven years ending in January
2007, Viacom agrees that, except as contemplated by the Investor's Rights
Agreement, it will not, directly or indirectly, do any of the following:
(1) acquire or propose to acquire any securities of the Company if, after
giving effect thereto, Viacom and its affiliates beneficially own in
excess of 34.8% of the Company's outstanding common stock;
(2) solicit proxies or become a participant in a solicitation of proxies or
consents with respect to any securities of the Company or initiate or
encourage the submission of any stockholder proposal or election
contest with respect to the Company;
(3) take any action for the purpose of convening a meeting of the
shareholders of the Company or initiate any process to solicit or
obtain consents of shareholders in lieu of a meeting;
(4) except as may be required by applicable law, make any public
announcement or disclosure in respect in respect of any plan, contract
or arrangement relating to the acquisition of capital stock of the
Company or a merger, sale of assets or other extraordinary corporate
transaction relating to the Company;
(5) deposit capital stock of the Company into a voting trust or subject
capital stock of the Company to voting agreements, or grant a proxy or
power-of-attorney with respect to any capital stock of the Company to
any person not designated by the Company who is not an officer,
director or employee of Viacom or its affiliates;
(6) form or in any participate in a group for the purpose of acquiring,
holding, voting or disposing of securities of the Company; or
(7) disclose publicly any intention or arrangement inconsistent with the
foregoing or enter into any discussions or understandings with any
third party with a view to encouraging any action prohibited with the
foregoing.
If the Company's Board of Directors approves or recommends to its
shareholders for approval any transaction in which a party (other than Company's
existing large shareholders) would acquire at least 50% of the Company's
outstanding common stock, then the restrictions described above would not apply
during the pendency of the transaction and would cease upon the consummation of
the transaction.
Voting Agreement. The Voting Agreement among the Company, Viacom and
certain shareholders of the Company contains agreements by such parties with
respect to nominating individuals to serve on the Company's Board of Directors
and the voting of the common stock owned by such parties in favor of such
nominees. Viacom has the right to nominate for election to the Company's Board
of Directors a number of individuals equal to the product of Viacom's percentage
ownership of the Company's common stock and the total number of members of the
84
Board of Directors (rounded down to the nearest whole number). In addition, as
long as the Promotion Agreement and the Content Agreement remain in effect,
Viacom shall have the right to designate at least one nominee to the Board of
Directors. In all elections for members of the Board of Directors, each of the
shareholders that is a party to the Voting Agreement agrees to vote all shares
beneficially owned by them in favor of the Viacom designees. Each of Tribune
Company, Mitchell Rubenstein, Laurie S. Silvers, Martin H. Greenberg and
Rosalind Greenberg are parties to the Voting Agreement. As of March 26, 2000,
those shareholders beneficially owned approximately 20.9% of the Company's
outstanding common stock. Viacom's current nominees to the Board of Directors
are Mitchell Semel and Russell I. Pillar.
In all elections for members of the Board of Directors, Viacom agrees
to vote all shares of common stock owned by it, or over which it has voting
control, in favor of (1) each individual nominated for election to the Board by
the Company, and (2) each individual nominated for election to the Board by
Tribune Company pursuant to the Shareholder Agreement between the Company and
Tribune Company.
Viacom's right to nominate directors for election to the Board will
terminate upon the acquisition by Viacom of an equity interest in excess of 15%
in any entity who owns, operates or controls a web site that is a competitor of
the Hollywood.com web site. The Voting Agreement contains a description of the
type of web site that will constitute a competitor of the Hollywood.com web
site.
Transactions with Tribune Company
In May 1999 the Company completed the acquisition of hollywood.com,
Inc. (formerly known as Hollywood Online Inc.) from Tribune Company. The Company
paid the purchase price for the acquisition by issuing to Tribune Company
2,300,075 shares of common stock and an unsecured promissory note for
$1,928,138. The promissory note was repaid in full by the issuance of 152,548
shares of common stock to Tribune Company.
The Company and Tribune Company entered into the following additional
agreements in connection with the Company's acquisition of hollywood.com, Inc.
Shareholder Agreement. The Company and Tribune Company entered into a
Shareholder Agreement containing various rights and obligations associated with
Tribune Company's ownership of the common stock. Pursuant to the Shareholder
Agreement, Tribune Company agreed to certain standstill provisions, including
that it will not acquire any additional equity securities of the Company or
solicit proxies or consents with respect to the securities of the Company or
initiate any shareholder proposal. In addition, Tribune Company agreed that it
will not transfer any common stock to any competitor of the Company, or to any
transferee or group of related transferees of the Company that would, after such
transfer, hold more than 2.5% of the voting securities of the Company.
Tribune Company also agreed pursuant to the Shareholder Agreement that
for a period of three years after the closing of the acquisition it will vote
all shares of common stock owned by it in favor of the nominees for election to
the Company's Board of Directors recommended to the Company's shareholders by
the Board of Directors. In addition, with respect to all other matters submitted
to a vote of the shareholders of the Company (other than certain transactions
that would dilute its ownership of Company common stock or result in a change of
control of the Company), Tribune Company agrees that for a period of three years
it will vote all shares of Company common stock owned by it in the same
proportion as all other shareholders of the Company vote on any such matter.
85
Tribune Company will be entitled to designate one person as a nominee
for election to the Company's Board of Directors as long as it beneficially owns
at least 5% of the voting securities of the Company. If the Company increases
the size of its Board of Directors from nine to ten members, Tribune Company
will be entitled to designate one additional person as a nominee for election to
the Company's Board of Directors. If the Company increases the size of its Board
of Directors to a number greater than ten, Tribune Company shall be entitled to
designate a number of nominees proportionate to its percentage ownership of
Company common stock. Tribune Company's current nominee to the Board of
Directors is David D. Williams.
The standstill provisions of the Shareholder Agreement terminate upon
the earlier to occur of January 10, 2004 and the date of a change of control (as
defined) of the Company. The other provisions of the Shareholder Agreement
terminate on the earliest of these dates and the date on which Tribune Company
beneficially owns less than 5% of the voting securities of the Company.
Registration Rights Agreement. The Company and Tribune Company entered
into a Registration Rights Agreement upon the closing of the acquisition, which
provides Tribune Company with the right to require the Company to register the
common stock acquired by Tribune Company in the acquisition under the Securities
Act under certain conditions. Tribune Company and its permitted transferees have
the right on four separate occasions to require the Company to effect a
registration under the Securities Act of at least 20% of the common stock
acquired by Tribune Company in the acquisition to be sold in a firm commitment
underwritten public offering for cash. In addition, at any time when the Company
proposes to register shares of common stock under the Securities Act, it will
give notice to Tribune Company and its permitted transferees of its intention to
do so and of the material terms of the proposed registration. The Company will
use its best efforts to include in the proposed registration all shares of
common stock that it is requested in writing by Tribune Company or its permitted
transferees to register. The permitted transferees of Tribune Company that are
entitled to the benefits of the Registration Rights Agreement include only
wholly owned subsidiaries of Tribune Company and certain charitable
organizations affiliated with Tribune Company.
Non-Competition Agreement. The Company and Tribune Company also entered
into a Non-Competition Agreement upon the closing of the acquisition. Tribune
Company agrees in the Non-Competition Agreement that for a period of three years
after the closing, it will not engage or participate in any business or venture
that operates as its primary focus a national- or international-targeted web
site dedicated to providing movie-going consumers with movie-related information
or offering for sale movie-themed merchandise or tickets for movies (a
"Competing Business"). In addition, Tribune Company agrees that for a period of
three years after the closing, it will not own, manage, operate, promote,
control, or be connected with as a stockholder (other than on a passive basis
with less than 5% of the equity of a publicly-traded company or less than 10% of
the equity of a privately-owned company), joint venturer or partner in, any
Competing Business. Notwithstanding the foregoing, certain business ventures and
activities of Tribune Company shall not be considered a Competing Business,
including, among others, the operation of the current web site operated by
newspapers owned by Tribune Company to the extent the web site provide primarily
local and regional movie information and movie-themed merchandise and the
licensing and syndication of movie information by the L.A. Times Syndicate to
third parties, which information is posted to such parties' web site.
86
Investments by Affiliate of the Simon Property Group
Pursuant to a 1995 stock purchase agreement with Tekno Simon, an
affiliate of the Simon Property Group, and its Co-Chairman, Melvin Simon, Tekno
Simon invested $2,000,000 in shares of the Company's Series A Preferred Stock
and Series B Preferred Stock and $1,000,000 in shares of the Company's common
stock.
Under the original Simon Stock Purchase Agreement, the Series A
Preferred Stock and the Series B Preferred Stock were convertible at the option
of the holder, at any time prior to November 28, 1997, into shares of common
stock on a one-for-one basis.
In May 1999 the Company agreed to extend the conversion option and
allow Tekno Simon to convert the Series A and Series B Preferred Stock into
common stock. In exchange, Tekno Simon agreed to waive certain accrued dividends
payable on the Series A and Series B Preferred Stock. In May 1999 Tekno Simon
converted all of the Series A and Series B Preferred Stock into 300,631 shares
of common stock.
Pursuant to the Simon Stock Purchase Agreement, Tekno Simon has the
right to designate one nominee to the Company's Board of Directors until such
time as Tekno Simon holds less than 25% of the sum of (i) the shares of common
stock issued upon conversion of the Series A Preferred Stock, and (ii) the
shares of common stock purchased by Tekno Simon in 1995. Certain principal
shareholders of the Company, including Mitchell Rubenstein, Laurie S. Silvers
and Dr. Martin H. Greenberg, have agreed to vote their shares of common stock in
favor of the election of Tekno Simon's nominee to the Board of Directors. Tekno
Simon's current nominee on the Board of Directors is Deborah J. Simon.
Investment by the Company's Directors
In September 2000, the Company entered into definitive agreements to
issue a total of 733,696 shares of the Company's common stock to investors for
an aggregate purchase price of $4,250,000 in cash. The transaction which closed
in November 2000, was structured as a private placement to accredited investors
and the Company agreed to register the shares for resale by the investors. As
part of the private placement, Mitchell Rubenstein, the Chairman and Chief
Executive Officer of the Company, purchased 125,001 shares of the Company's
common stock at a purchase price of $6.00 per share.
In May 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. Five
members of the Company's then current Board of Directors participated in the
private placement and purchased an aggregate of 35,700 shares of common stock
and received warrants to purchase an aggregate of 11,902 shares of common stock
on the same terms as the other investors in the private placement.
In July 1998, six members of the Company's then current Board of
Directors (including Mitchell Rubenstein, the Company's Chairman of the Board
and Chief Executive Officer, Laurie S. Silvers, the Company's Vice Chairman and
President, and Martin H. Greenberg, the Chief Executive Officer of Tekno Books,
the Company's 51%-owned subsidiary) purchased an aggregate of 187,442 shares of
the Company's common stock for $5.00 per share, the then market price of the
stock. In conjunction with the private placement of these shares, the investors
received five-year warrants to purchase an aggregate of 93,721 shares of the
Company's common stock at $5.00 per share.
87
Consulting Agreement with Dr. Martin H. Greenberg
In 1993 the Company entered into a consulting agreement with Dr. Martin
H. Greenberg pursuant to which Dr. Greenberg agreed to render advisory and
consulting services to the Company, including identifying best-selling authors
to create intellectual properties for the Company and negotiating agreements
with such authors, arranging for the publication of prose novels and anthologies
for children and adults based on the Company's characters, and attending trade
shows and conventions on the Company's behalf. The consulting agreement will
expire in November 2003, unless terminated earlier, which termination may take
place only under certain conditions. Pursuant to the consulting agreement, in
November 1993 Dr. Greenberg began receiving consulting fees of $30,000 per year
and was granted an option to purchase 6,250 shares of common stock at an
exercise price of $8.00 per share.
In connection with the acquisition of Tekno Books, the consulting
agreement was amended on December 9, 1994 (1) to provide that Dr. Greenberg will
have the exclusive right to package novelizations based on the Company's
entertainment properties, and (2) in lieu of future annual stock option grants
to which Dr. Greenberg was entitled under the original agreement, to grant Dr.
Greenberg options to purchase 17,778 shares of common stock at an exercise price
of $8.4375 per share (the then approximate market price of the common stock).
Mr. Greenberg received the stock options and receives the consulting fees in
lieu of a base salary. Mr. Greenberg does not receive a salary for serving as
the Chief Executive Officer of Tekno Books.
Line of Credit
During the first quarter of 1999, Mitchell Rubenstein, the Company's
Chairman of the Board and Chief Executive Officer, and Laurie S. Silvers, the
Company's Vice Chairman and President, agreed to increase their previously
extended $1.1 million unsecured line of credit facility to the Company to $5.5
million to enable the Company to meet its working capital requirements for the
balance of 1999. The interest rate on the line of credit was set at the JP
Morgan Bank prime rate of interest. This commitment terminated in accordance
with its terms during the second quarter of 1999 as a result of the Company
raising in excess of $5.5 million from other sources for working capital
purposes. In addition, during the second quarter of 2000, Mitchell Rubenstein
and Laurie S. Silvers, advanced a $2,050,000 unsecured line of credit facility
to the Company. The Company drew upon this line of credit in the second quarter
of 2000 to enable the Company to meet its obligation to lend to a former
shareholder of CinemaSource funds to pay a portion of the shareholder's taxes
resulting from the sale of CinemaSource to the Company, and again in the third
quarter of 2000. The loans were repaid in full and there are no borrowings by
the Company under the line of credit as of March 26, 2001.
88
Item 14. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits:
Incorporated by
Exhibit Description Reference From
- ------- --------------
3.1 Third Amended and Restated Articles of Incorporation *
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
Designation of Preferences, Rights and Limitations of 7% Series D-2
Convertible Preferred Stock (2)
3.4 Articles of Amendment to Articles of Incorporation of the Company
amending Designation of Preferences, Rights and Limitations of Series A
Variable Rate Convertible Preferred Stock (3)
3.5 Articles of Amendment to Articles of Incorporation of the Company
amending Designation of Preferences, Rights and Limitations of Series B
Variable Rate Convertible Preferred Stock (3)
3.6 Bylaws (4)
4.1 Form of Common Stock Certificate (4)
4.2 Rights Agreement dated as of August 23, 1996 between the Company and
American Stock Transfer & Trust Company, as Rights Agent
(5)
10.1 Executive Compensation Plans and Arrangements
(a) Employment Agreement between the Company and
Mitchell Rubenstein (11)
(b) Extension and Amendment Agreement between the Company and
Mitchell Rubenstein entered into as of July 1, 1998 (12)
(c) Employment Agreement between the Company and Laurie
S. Silvers (11)
(d) Extension and Amendment Agreement between the Company and Laurie
Silvers entered into as of July 1, 1998 (12)
89
(e) 1993 Stock Option Plan, as amended effective October 1, 1999 (14)
(f) Directors Stock Option Plan, as amended effective July 2, 1998 (12)
(g) Form of Indemnification Agreement between the Company and each
of its Directors and Officers (11)
(h) 2000 Stock Incentive Plan *
(i) 401(k) Plan *
10.2 Securities Purchase Agreement, dated July 28, 1999, between the Company
and AOL Latin America, S.L. (6)
10.3 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 (6)
10.4 Stock Purchase Agreement, dates as of August 26, 1999, between the
Company and Viacom Inc. (as sucessor to CBS Corporation) (7)
10.5 Asset Purchase Agreement, dated as of August 30, 199, by and among the
Company, Baseline II, Inc. Paul Kagan Associates, Inc., Cinema
Enterprises Group LLC and Paul Kagan (8)
10.6 Non-Competition Agreement, dated as of August 30, 1999, by and among the
Company, Baseline II, Inc. Paul Kagan Associates, Inc., Cinema
Enterprises Group LLC and Paul Kagan (8)
10.7 Warrant dated August 31, 1999, by the Company issued in the name of
Baseline 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) (8)
10.8 Employment Agreement, dated as of May 18, 1999, between Showtimes.com, Inc.
and Brett West (3)
10.9 Non-Competition Agreement, dated as May 18, 1999, by and among the Company,
CinemaSource, Inc., Brett West and Pamela West (3)
10.10 Unsecured Promissory Note, dated May 20, 1999, in favor of The Times Mirror
Company (3)
10.11 Registration Rights Agreement, dated as of May 20, 1999, between the Company
and The Times Mirror Company (9)
10.12 Non-Competition Agreement, dated as of May 20, 1999, between the Company and
The Times Mirror Company (9)
90
10.13 Employment Agreement, dated as of May 31, 1999, between the Company and W.
Robert Shearer (3)
10.14 Form of Subscription Agreement between the Company and each of the investors
in the Company's private placement of an aggregate of 569,820 shares of
Common Stock (3)
10.15 Modification Agreement dated March 28, 1999 between the Company and
BankBoston Retail Finance Inc. (10)
10.16 Second Modification Agreement dated March 26, 1999 between Tekno Comix,
Inc. and BankBoston Retail Finance Inc. (10)
10.17 Agreement and Plan of Merger dated as of January 10, 1999, by and among
The Times Mirror Company, Hollywood Online Inc., the Company and Big
Acquisition Corp. (9)
10.18 Asset Purchase Agreement dated March 29, 1999 by and among the Company,
CinemaSource, Inc., Brett West and Pamela West (13)
10.19 Common Stock Investment Agreement dated as of August 22, 2000 among the
Company, Elliott Associates L.P. and Westgate International, L.P. (15)
10.20 Registration Rights Agreement dated August 22, 2000 among the Company,
Elliott Associates, L.P. and Westgate International, L.P. (15)
10.21 Common Stock Adjustment Warrant dated August 22, 2000 between the Company
and Elliott Associates, L.P. (15)
10.22 Common Stock Adjustment Warrant dated August 22, 2000 between the Company
and Westgate International, L.P. (15)
10.23 Common Stock Purchase Warrant dated August 22, 2000 between the Company
and Elliott Associates, L.P. (15)
10.24 Common Stock Purchase Warrant dated August 22, 2000 between the Company
and Westgate International, L.P. (15)
10.25 Purchase Agreement effective as of September 29, 2000 among
Hollywood.com, Inc. and the Purchasers named therein. (16)
10.26 Agreement and Plan of Merger dated as of September 15, 2000 by and among
Cameron Mackintosh, Inc., Theatre Direct NY, Inc., Hollywood.com, Inc.
and Theater Acquisition Corp. (17)
91
21.1 Subsidiaries of the Company *
23.1 Consent of Arthur Andersen LLP *
- ------------------
* Filed as an exhibit to this Form 10-K.
(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 exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999.
(4) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 33-69294).
(5) Incorporated by reference from exhibit 1 to the Company's Current
Report on Form 8-K filed on October 20, 1999.
(6) Incorporated by reference from the exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1999.
(7) Incorporated by reference from exhibit 1 to the Company's Current
Report on Form 8-K filed on September 28, 1999.
(8) Incorporated by reference from exhibits 1, 2 and 3 to the Company's
Current Report on Form 8-K filed on September 15, 1999.
(9) Incorporated by reference from exhibit 2 to the Company's Current
Report on Form 8-K filed on January 20, 1999.
(10) Incorporated by reference from exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999.
(11) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 33-69294).
(12) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998.
(13) Incorporated by reference from the exhibit filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
(14) Incorporated by reference from the exhibit filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
(15) Incorporated by reference from the exhibits to the Company's Current
Report on Form 8-K filed on August 29,2000.
(16) Incorporated by reference from the exhibits to the Company's Current
Report on Form 8-K filed on October 5, 2000.
(17) Incorporated by reference from the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
92
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on October 5,
2000 disclosing that as of September 29, 2000, the Company entered into
definitive agreements to issue a total of 733,696 shares of the Company's common
stock, $0.01 par value, to investors for an aggregate purchase price of
$4,250,000 in cash.
93
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HOLLYWOOD MEDIA CORP.
Date: March 30, 2001 By: /s/ Mitchell Rubenstein
---------------------------------------------------
Mitchell Rubenstein, Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
Date: March 30, 2001 /s/ Mitchell Rubenstein
-------------------------------------------------------
Mitchell Rubenstein, Chairman of the Board and Chief
Executive Officer (Principal executive, financial and
accounting officer)
Date: March 30, 2001 /s/ Laurie S. Silvers
-------------------------------------------------------
Laurie S. Silvers, Vice Chairman of the Board,
President and Secretary
Date: March 30, 2001 /s/ Martin H. Greenberg
-------------------------------------------------------
Martin H. Greenberg, Director
Date: March 30, 2001 /s/ Harry T. Hoffman
-------------------------------------------------------
Harry T. Hoffman, Director
Date: March 30, 2001 /s/ Jules L. Plangere, Jr.
-------------------------------------------------------
Jules L. Plangere, Jr., Director
Date: March 30, 2001 /s/ Deborah J. Simon
-------------------------------------------------------
Deborah J. Simon, Director
Date: March 30, 2001 /s/ Mitchell Semel
-------------------------------------------------------
Mitchell Semel, Director
Date: March 30, 2001 /s/ Russell I. Pillar
-------------------------------------------------------
Russell I. Pillar, Director
94
EXHIBIT INDEX
EXHIBIT DESCRIPTION
3.1 Third Amended and Restated Articles of Incorporation
10.1(h) 2000 Stock Incentive Plan
10.1(i) 401(k) Plan
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
95