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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to _________________
COMMISSION FILE NO. 0-22908
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HOLLYWOOD MEDIA CORP.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0385686
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2255 GLADES ROAD, SUITE 221A
BOCA RATON, FLORIDA 33431
(Address of principal executive offices) (zip code)
(561) 998-8000
(Registrant's telephone number)
Indicate by check whether the registrant: (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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of August 14, 2003, the number of shares outstanding of the issuer's
common stock, $.01 par value, was 21,044,452.
HOLLYWOOD MEDIA CORP.
TABLE OF CONTENTS
PAGE(S)
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PART I FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002 ........................................... 2
Condensed Consolidated Statements of Operations (unaudited) for the Three and Six
Months ended June 30, 2003 and 2002 .......................................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months
Months ended June 30, 2003.................................................... 4
Condensed Consolidated Statement of Shareholders' Equity (unaudited) for the Six
Months ended June 30, 2003.................................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited) ............ 6-19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................... 19-36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................................. 36-37
ITEM 4. CONTROLS AND PROCEDURES ..................................................... 37
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ........................................................... 38
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ................................... 39
ITEM 5. OTHER INFORMATION ........................................................... 40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................ 40
Signatures ............................................................................... 41
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HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,517,700 $ 2,342,238
Receivables, net 1,271,804 1,845,063
Inventories, net 6,170,908 7,144,311
Prepaid expenses 1,474,675 1,026,454
Other receivables 784,952 510,532
Other current assets 324,393 247,532
Deferred advertising - CBS 418,051 924,780
------------- -------------
Total current assets 11,962,483 14,040,910
PROPERTY AND EQUIPMENT, net 2,912,640 3,563,569
INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES 858,022 610,172
IDENTIFIABLE INTANGIBLE ASSETS, net 1,988,896 2,342,807
GOODWILL, net 40,813,683 40,773,968
OTHER ASSETS 516,702 737,231
------------- -------------
TOTAL ASSETS $ 59,052,426 $ 62,068,657
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,953,626 $ 1,354,663
Accrued expenses and other 4,778,351 3,854,881
Notes payable 250,000 250,000
Loan from shareholder/officer 400,000 --
Accrued exit and retail closure costs -- 27,500
Deferred revenue 7,996,711 8,890,002
Current portion of capital lease obligations 242,479 340,083
------------- -------------
Total current liabilities 15,621,167 14,717,129
CAPITAL LEASE OBLIGATIONS, less current portion 152,678 238,546
DEFERRED REVENUE 299,511 214,626
MINORITY INTEREST 48,149 --
OTHER DEFERRED LIABILITY 2,307,616 2,381,863
CONVERTIBLE DEBENTURES, NET 3,596,008 3,223,988
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized; 20,634,115
and 20,253,863 shares issued and outstanding at June 30, 2003 and
December 31, 2002, respectively 206,342 202,539
Additional paid-in capital 277,735,143 277,261,293
Accumulated deficit (240,914,188) (236,171,327)
------------- -------------
Total shareholders' equity 37,027,297 41,292,505
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 59,052,426 $ 62,068,657
============= =============
The accompanying notes to condensed consolidated financial statements are
an integral part of these financial statements.
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HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET REVENUES $ 31,539,930 $ 28,821,158 $ 16,977,115 $ 16,115,716
COST OF REVENUES 23,596,143 19,297,233 13,027,598 11,061,072
------------ ------------ ------------ ------------
Gross margin 7,943,787 9,523,925 3,949,517 5,054,644
------------ ------------ ------------ ------------
OPERATING EXPENSES:
General and administrative 3,558,810 3,097,661 1,667,578 1,245,679
Selling and marketing 468,232 1,787,711 190,836 861,779
Salaries and benefits 6,649,876 7,053,087 3,370,248 3,489,967
Amortization of CBS advertising 506,729 9,602,743 316,706 5,025,145
Depreciation and amortization 1,254,393 1,847,736 614,517 942,681
------------ ------------ ------------ ------------
Total operating expenses 12,438,040 23,388,938 6,159,885 11,565,251
------------ ------------ ------------ ------------
Operating loss (4,494,253) (13,865,013) (2,210,368) (6,510,607)
EQUITY IN EARNINGS - INVESTMENTS 806,126 230,958 801,721 14,575
OTHER INCOME (EXPENSE):
Interest expense (675,687) (455,328) (333,026) (237,705)
Interest income 11,647 10,231 9,354 7,209
Other, net 8,894 2,400 57,985 (18,446)
------------ ------------ ------------ ------------
Loss before minority interest (4,343,273) (14,076,752) (1,674,334) (6,744,974)
MINORITY INTEREST (399,588) (393,411) (179,015) (189,411)
------------ ------------ ------------ ------------
NET LOSS $ (4,742,861) $(14,470,163) $ (1,853,349) $ (6,934,385)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.23) $ (0.51) $ (0.09) $ (0.25)
============ ============ ============ ============
Weighted average shares outstanding 20,509,155 28,197,227 20,615,978 28,276,884
============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements are
an integral part of these financial statements.
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HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,742,861) $(14,470,163)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,254,393 1,847,736
Interest- non-cash 527,593 285,617
Equity in earnings of investments, net of return of invested capital (247,850) 533,834
Issuance of compensatory stock, stock options and warrants for services rendered 282,366 437,739
Amortization of deferred compensation costs -- 1,140,294
Amortization of deferred financing costs 64,848 7,434
Provision for bad debts 124,328 186,840
Amortization of CBS advertising 506,729 9,602,743
Minority interest 399,588 393,411
Return of capital from Tekno Books to minority partner (272,729) (321,397)
Change in fair value of put/call option (107,000) --
Changes in assets and liabilities:
Receivables 448,931 (295,965)
Prepaid expenses (448,221) (702,013)
Inventories 973,403 442,894
Other current assets (76,861) (184,993)
Other assets 155,671 914
Other receivables (274,420) 37,375
Accounts payable 598,969 216,815
Deferred revenue (808,406) (1,122,880)
Accrued liabilities 1,035,022 92,840
Other deferred liabilities 32,753 --
------------ ------------
Net cash used in operating activities (573,754) (1,870,925)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (249,550) (1,050,709)
------------ ------------
Net cash used in investing activities (249,550) (1,050,709)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder/officer loan 400,000 1,651,000
Payments of shareholder/officer loan -- (2,101,000)
Payments under note payable -- (100,000)
Net advances from factor (217,762) (1,525)
Payments to repurchase common stock -- (329,531)
Proceeds from issuance of convertible debentures and warrants, less issuance costs -- 5,419,713
Cash paid for acquisition -- (10,000)
Payments under capital lease obligations (183,472) (424,538)
------------ ------------
Net cash (used in) provided by financing activities (1,234) 4,104,119
------------ ------------
Net (decrease) increase in cash and cash equivalents (824,538) 1,182,485
CASH AND CASH EQUIVALENTS, beginning of period 2,342,238 1,980,966
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,517,700 $ 3,163,451
============ ============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 69,960 $ 116,347
============ ============
The accompanying notes to condensed consolidated financial statements are
an integral part of these financial statements.
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HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------------- ------------- ------------- ------------- -------------
Balance - December 31, 2002 20,253,863 $ 202,539 $ 277,261,293 $(236,171,327) $ 41,292,505
Isssuance of stock options and warrants for services -- -- 123,583 -- 123,583
Common stock adjustment 3,000 30 2,970 -- 3,000
Issuance of stock - 401(k) employer match 155,783 1,558 154,225 -- 155,783
Interest payment to convertible debenture holders 192,898 1,929 153,644 -- 155,573
Broadway theater earnout 28,571 286 39,428 -- 39,714
Net loss -- -- -- (4,742,861) (4,742,861)
------------- ------------- ------------- ------------- -------------
Balance - June 30, 2003 20,634,115 $ 206,342 $ 277,735,143 $(240,914,188) $ 37,027,297
============= ============= ============= ============= =============
The accompanying notes to condensed consolidated financial statements are
an integral part of these financial statements.
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HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared by Hollywood Media Corp.
("Hollywood Media") in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to those rules and
regulations. However, management believes that the disclosures contained herein
are adequate to make the information presented not misleading. The financial
statements reflect, in the opinion of management, all material adjustments
(which include only normal recurring adjustments) necessary to present fairly
Hollywood Media's financial position and results of operations. The results of
operations for the three and six months ended June 30, 2003 and cash flows for
the six months ended June 30, 2003 are not necessarily indicative of the results
of operations or cash flows which may result for the remainder of 2003. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto included in Hollywood Media's Annual Report on Form 10-K for the year
ended December 31, 2002, as filed with the Securities and Exchange Commission.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Per Share Amounts
Basic loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. There
were 4,668,004 and 5,034,983 options and warrants to purchase common shares
outstanding at June 30, 2003 and 2002, respectively, that could potentially
dilute earnings per share in the future. In addition, the convertible debentures
(Note 4) are convertible into 1,647,399 shares of common stock at a conversion
price of $3.46 per share. The common shares equivalent underlying the options,
warrants and convertible debentures have been excluded from the weighted average
number of common shares outstanding for the three and six months ended June 30,
2003 and 2002 because to do so would have been antidilutive for all periods
presented.
Accounting Estimates
The preparation of the 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
unaudited financial statements include the adequacy of allowances relating to
accounts receivables and litigation matters and Hollywood Media's ability to
realize the carrying value of goodwill, intangible assets, investments in less
than 50% owned companies and other long-lived assets.
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Receivables
Receivables consist of amounts due from customers who (i) have
advertised on Hollywood Media's web sites, (ii) have licensed data from
Hollywood Media's syndication businesses and, (iii) have purchased live theater
tickets and publishers relating to signed contracts, to the extent that the
earnings process is complete and amounts are realizable. Receivables are net of
an allowance for doubtful accounts of $206,984 and $307,398 at June 30, 2003 and
December 31, 2002, respectively.
During 2001, Hollywood Media entered into an agreement with a third
party whereby a certain portion of its accounts receivable was monetized.
Hollywood Media receives an initial advance of 85% of the invoice amount, with
the remaining 15%, less fees, transferred to Hollywood Media upon payment by the
customer to the third party. At June 30, 2003 and December 31, 2002, included in
"accrued expenses and other" in the accompanying balance sheets is a liability
of $119,716 and $337,478, respectively, which was recorded for advances that had
been paid to Hollywood Media but remain payable by Hollywood Media's customers
to the third party.
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123" ("SFAS No. 148"). This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123), to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, this Statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The statement is effective for
fiscal years ending after December 15, 2002. As permitted the Company has
retained the accounting provisions of APB No. 25 and adopted the disclosures
provisions of SFAS No. 123 in December 31, 2002. Pursuant to the provisions of
SFAS No. 148, the Company has added the required disclosures to the "Stock-Based
Compensation" subsection in the "Critical Accounting Policies" section below and
Note 7 to these interim financial statements.
In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. Statement No. 149 clarifies under what circumstances a contract with
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an initial net investment meets the characteristic of a derivative as discussed
in Statement 133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. Statement 149 amends certain other existing pronouncements. Those changes
are designed to result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. Statement 149 is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. This statement is not expected to
have a material impact on the Company's financial position or results of
operations for the periods presented.
In August 2002, the FASB Emerging Issue Task Force issued EITF Issue
No. 02-16, "Accounting by a Reseller for Cash Consideration Received from a
Vendor" (EITF 02-16), which addresses the accounting by a vendor for
consideration given to a customer, including both a reseller of the vendor's
products and an entity that purchases the vendor's products from a reseller.
Hollywood Media early adopted EITF Issue No. 02-16 on December 31, 2002. The
impact on reported results of operations was a reduction in net revenues and a
corresponding decrease in cost of sales resulting in no net impact on operating
results.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
No. 150). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. In accordance with SFAS No. 150, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. SFAS
No. 150 shall be effective for financial instruments entered into or modified
after May 31, 2003, and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003. Hollywood Media is in
process of evaluating the impact the adoption will have on its financial
position, results of operations or cash flows.
Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities," ("FIN No. 46") is effective
immediately for all enterprises with variable interests in variable interest
entities created after January 31, 2003. The provisions of FIN No. 46 must be
applied to variable interests in variable interest entities created before
February 1, 2003 from the beginning of the third quarter of 2003. If an entity
is determined to be a variable interest entity, it must be consolidated by the
enterprise that absorbs the majority of the entity's expected losses, if they
occur, receives a majority of the entity's expected residual returns if they
occur, or both. Where it is reasonably possible that the company will
consolidate or disclose information about a variable interest entity, the
company must disclose the nature, purpose, size and activity of the variable
interest entity and the company's maximum exposure to loss as a result of its
involvement with the variable interest entity in all financial statements issued
after January 31, 2003. Hollywood Media is in the process of evaluating the
impact the adoption of FIN No. 46 will have on its financial position, results
of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a company to
recognize an initial liability for the fair value of an obligation it assumes
under a guarantee, as well as its ongoing obligation over the term of the
guarantee. The offsetting entry of recognizing a liability depends on the
circumstances in which the guarantee was issued. Additionally, FIN 45 elaborates
on and clarifies existing disclosure requirements for most guarantees. The
initial recognition provisions of FIN 45 apply to guarantees issued or modified
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after December 31, 2002. The adoption of FIN 45's initial recognition and
measurement provisions has not had a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002, and have been incorporated into the Company's disclosures of guarantees in
its financial statements.
(3) ACQUISITIONS AND OTHER CAPITAL TRANSACTIONS:
On January 14, 2002, Fountainhead Media Services ("FMS"), FilmTracker's
parent company, acquired a 20% equity interest in our subsidiary that owns
Baseline, Inc. ("Baseline"), a wholly owned subsidiary of Hollywood Media, for
$4 million. Consideration consisted of a $2 million promissory note payable to
Hollywood Media in installments over a five-year period with a final payment of
approximately $1.2 million, and the contribution of the FilmTracker database,
intellectual property rights, and all existing contracts with a stated value of
$2 million. As of June 30, 2003, the amount of principal and interest due
Hollywood Media, but unpaid is $134,828. The promissory note is secured by the
20% equity interest in Baseline held by FMS. FMS will have the right to convert
its 20% equity interest in Baseline into common stock of Hollywood Media at any
time during the two-year period following the payment in full of the promissory
note based upon a multiple of Baseline's EBITDA (earnings before interest,
taxes, depreciation and amortization) for the year preceding the conversion. For
purposes of any such conversion, Hollywood Media's stock will be valued at the
greater of (i) $7.50 per share, and (ii) the average closing price of the stock
on the Nasdaq Stock Market for the 15 trading days preceding the notice of
conversion. Hollywood Media will also have the right to cause the conversion of
the equity interest in Baseline to Hollywood Media common stock at any time
after the earlier of the payment in full of the promissory note and January 14,
2006. For accounting purposes this transaction is treated as an acquisition of
the FilmTracker assets in exchange for:
o an issuance of a five year option on Baseline stock with a $2 million
exercise price and
o the issuance of a put and call option on Hollywood Media common stock.
Pursuant to an appraisal by a third party completed in the third quarter of
2002, the value of the option in Baseline stock and the put and call options in
Hollywood Media was determined to be $2,254,070 and was assigned to the
FilmTracker assets. The purchase price of $2,254,070 was allocated as follows:
1) $1,072,000 to fixed assets (equipment, software, etc.) and 2) $1,182,070 to
intangible assets (amortization period 5 years). During the quarter ended June
30, 2003, the value of the option was reduced by $107,000 and marked to market
through earnings.
(4) DEBT:
In connection with the Theatre Direct NY, Inc. ("TDI") acquisition on
September 15, 2000, Hollywood Media signed two promissory notes payable to the
former owner. The first is an interest bearing note payable with a face value of
$500,000, principal payable monthly. The note bears interest at Citibank, N.A.
prime plus 1% per annum (4.00% at June 30, 2003). The second promissory note is
a one year non-interest bearing note with a face value of $250,000. The
outstanding balance due under these notes at June 30, 2003 is $250,000 plus
$70,000 in accrued interest. An agreement was reached on March 31, 2002 between
Hollywood Media and the former owner of TDI that the remaining notes payable
balance, plus interest, would be paid either in cash or in restricted common
stock of Hollywood Media. A guaranty was granted to the former owner in
connection with the sale of the former owner's shares obtained at acquisition.
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As a result of the guaranty, the company recorded a liability of $50,000 which
has been included in "Accrued expenses and other" on the condensed consolidated
balance sheet as of June 30, 2003.
In the event that Hollywood Media requires additional funding,
Hollywood Media's Chairman of the Board and Chief Executive Officer and
Hollywood Media's Vice Chairman and President, have indicated their intention to
provide Hollywood Media, if required, with an amount not to exceed $3.5 million
through January 1, 2004, if needed to enable Hollywood Media to meet its working
capital requirements; provided, however, that the commitment will be reduced
dollar for dollar to the extent Hollywood Media generates cash from financings,
operational cash flow or proceeds from a sale of a division or subsidiary of
Hollywood Media Corp. Advances bear interest at the JP Morgan prime rate. There
was $400,000 outstanding balance under this commitment at June 30, 2003, which
was collateralized by Broadway Ticketing inventory. Subsequent to June 30, 2003,
an additional $300,000, of which $200,000 is unsecured, was drawn under this
commitment.
On May 22, 2002, Hollywood Media issued an aggregate of $5.7 million in
principal amount of 6% Senior Convertible Debentures due May 22, 2005 (the
"Debentures") to a group of four institutional investors, including existing
shareholders of Hollywood Media. Mitchell Rubenstein, the Chairman of the Board
and Chief Executive Officer, and Laurie S. Silvers, the Vice Chairman and
President of Hollywood Media, participated in the financing with a $500,000 cash
investment upon the same terms as the other investors. The Debentures are
convertible at the option of the investors at any time through May 22, 2005 into
shares of Hollywood Media common stock, par value $0.01 per share, at a
conversion price of $3.46 per share. In addition, Hollywood Media can elect at
its option to convert up to 50% of the convertible debentures if the debentures
are still outstanding at maturity, subject to certain conditions. Prior to
conversion, the Debentures bear interest at 6% per annum, payable quarterly in
common stock or cash at the option of Hollywood Media. The investors also
received fully vested detachable warrants to acquire at any time through May 22,
2007 an aggregate of 576,590 shares of common stock at exercise prices ranging
from $3.78 to $3.91 per share. If on May 22, 2003, an investor held at least
seventy-five percent of such investor's shares of common stock issued or
issuable to such investor under the Debentures, then the exercise price of the
warrants held by such investor would decrease to $3.46 per share which equals
the conversion price of the debenture. The Debentures and Warrants contain
anti-dilution provisions as more fully described in the agreements. In addition,
the investors had the right to purchase an aggregate of $1 million in principal
amount of additional Debentures on the same terms at any time through May 22,
2003. The investors did not exercise the right and the option has expired. A
total of $389,095 in debt issuance costs were incurred for the convertible
debentures, including $161,695 in fees paid to a placement agent (including
$130,000 in cash and a warrant valued at $31,695, with substantially the same
terms as the warrants issued to the debenture holders.) During the three and six
months ended June 30, 2003, $32,423 and $64,848, respectively were recognized as
interest expense from the amortization of the debt issuance costs.
The warrants granted to these investors were recorded at their relative
fair value of $1,608,422 using a Black Scholes option valuation model. The
assumptions used to calculate the value of the warrants using Black Scholes are
as follows: a volatility of 83.7%, a 5 year expected life, exercise prices of
$3.91 and $3.78 per share, a stock price of $3.27 per share and a risk free
interest rate of 4%. The value of the beneficial conversion feature of the
Debenture was $1,295,416. The value of the warrants and the beneficial
conversion feature of the Debenture were recorded as a discount to the
convertible debenture and included in additional paid-in capital. The value of
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the warrants and the beneficial conversion feature will be amortized to interest
expense over 3 years, using the effective interest method. During the three and
six months ended June 30, 2003, Hollywood Media recorded $192,425 and $372,020,
respectively as interest expense for the accretion of the discount on the
convertible debentures.
In 1999, Hollywood Media loaned approximately $1.7 million to the
former owner ("borrower") of CinemaSource (currently an employee of
CinemaSource) so that he could pay a portion of the taxes due resulting from the
sale of CinemaSource to Hollywood Media. Hollywood Media was obligated to make
this loan as part of the original purchase agreement to acquire CinemaSource.
Hollywood Media sold the note to an independent third party in 2000 and
guaranteed payment of the note. In April 2003, Hollywood Media entered into an
agreement with the holder of the note to satisfy Hollywood Media's obligations
under its guaranty of the note. Pursuant to such agreement, Hollywood Media
agreed to pay the holder an aggregate of $462,269. The outstanding balance of
the loan at June 30, 2003 was approximately $412,269.
(5) GOODWILL AND OTHER INTANGIBLE ASSETS:
Effective January 1, 2002, Hollywood Media adopted SFAS No. 142,
"Goodwill and other Intangible Assets". As prescribed by SFAS No. 142, the
Company completed the transitional goodwill impairment test by the second
quarter of 2002. As result of this test, no impairment charge was taken as the
fair value of the reporting units exceeded the carrying amount. As of June 30,
2003, management believes there are no indicators that an impairment has
occurred.
(6) COMMON STOCK:
On January 3, 2003, Hollywood Media issued 101,062 shares of common
stock valued at $79,495 to the holders of the convertible debentures for
interest due for the period October 1, 2002 to January 1, 2003.
On March 4, 2003, Hollywood Media issued 155,783 shares of common
stock valued at $155,783 for payment of Hollywood Media's 401(k) employer match
for calendar year 2002.
On March 31, 2003, Hollywood Media booked an adjustment of 3,000 shares
in a reconciliation of the balance sheet to the stock transfer agent's records.
The adjustment did not have a material impact on the financial position or
results of operations.
On April 2, 2003, Hollywood Media issued 91,836 shares of common stock
valued at $76,078 to the holders of the convertible debentures for interest due
for the period January 2, 2003 to March 31, 2003.
On May 16, 2003, Hollywood Media issued 28,571 shares of common stock
valued at $39,714 to the previous owner of BroadwayTheater.com under the terms
of an earn-out provision in the Asset Purchase Agreement. Pursuant to this
provision the previous owner is entitled to additional consideration if
specified gross profit targets are attained in each of the three years following
the acquisition. This stock issuance represents the final pay-out under this
provision. The value of the shares was recorded as additional goodwill.
During the six months ended June 30, 2003, Hollywood Media issued
97,500 warrants to independent third parties for services to be rendered. These
warrants were issued with a performance based vesting requirement. As a result,
no compensation expense was recorded as of June 30, 2003 due to the low
probability of the vesting event occurring.
- 11 -
(7) STOCK-BASED COMPENSATION:
As permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123" ("SFAS No.
148"), which amended SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), Hollywood Media has chosen to account for its Stock Plan under
the intrinsic value method as allowed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations. Under APB No. 25, because the exercise price of Hollywood
Media's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense was recorded. SFAS No. 148
requires disclosure of the estimated fair value of employee stock options
granted and pro forma financial information assuming compensation expense was
recorded using these fair values.
Six months ended June 30, Three months ended June 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------- ------------ ------------
Reported net loss $ (4,742,861) $ (14,470,163) $ (1,853,349) $ (6,934,385)
Stock-based employee compensation expense
under the fair value method (1,145,178) (2,022,962) (559,900) (1,011,481)
------------ ------------- ------------ ------------
Adjusted net loss $ (5,888,039) $ (16,493,125) $ (2,413,339) $ (7,945,866)
============ ============= ============ ============
Reported net loss basic and diluted per share $ (.23) $ (.51) $ (.09) $ (.25)
============ ============= ============ ============
Adjusted net loss basic and diluted per share $ (.29) $ (.58) $ (.12) $ (.28)
============ ============= ============ ============
Number of ordinary shares used in computation
basic and diluted 20,509,155 28,197,227 20,615,978 28,276,884
============ ============= ============ ============
The fair value of each option grant was determined using the
Black-Scholes option-pricing model. The Black-Scholes model was not developed
for use in valuing employee stock options, but was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, it requires the use of subjective
assumptions including expectations of future dividends and stock price
volatility. Such assumptions are only used for making the required fair value
estimate and should not be considered as indicators of future dividend policy or
stock price appreciation. Because changes in the subjective assumptions can
materially affect the fair value estimate and because employee stock options
have characteristics significantly different from those of traded options, the
use of the Black-Scholes option-pricing model may not provide a reliable
estimate of the fair value of employee stock options.
- 12 -
(8) INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES:
Investments in and advances to equity method investees consist of the
following:
JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
NetCo Partners (a) $ 862,997 $ 615,147
MovieTickets.com (b) (4,975) (4,975)
--------- ---------
$ 858,022 $ 610,172
========= =========
(A) NETCO PARTNERS
Hollywood Media owns a 50% interest in a joint venture called NetCo
Partners. NetCo Partners is engaged in the development and licensing of Tom
Clancy's Net Force. This investment is recorded under the equity method of
accounting, recognizing 50% of NetCo Partners' income or loss as Equity in
Earnings - Investments. The revenues, gross profit and net income of NetCo
Partners for the six and three months ended June 30, 2003 and 2002 are presented
below:
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues $2,030,925 $ 936,706 $2,004,222 $ 172,301
Gross Profit 1,737,956 715,132 1,728,795 136,810
Net Income 1,612,252 709,988 1,603,443 135,840
Hollywood Media's
share of net income 806,126 354,994 801,721 67,920
Hollywood Media and C.P. Group are each 50% partners in NetCo Partners.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement, Hollywood
Media 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 Hollywood Media to fund NetCo Partners' operations are
treated as capital contributions of Hollywood Media and Hollywood Media is
entitled to a return of such capital contributions before distributions of
profits are split equally between Hollywood Media and C.P. Group.
NetCo Partners has signed several significant licensing agreements for
Tom Clancy's NetForce. These agreements include book licensing agreements for
North American rights to a series of adult and young adult books, audio book
agreements and licensing agreements with various foreign publishers for rights
to publish Tom Clancy's NetForce books in 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 manuscripts.
As of June 30, 2003, NetCo Partners had $1,687,951 of accounts
receivable in comparison to $2,450,397 at December 31, 2002, and deferred
revenues, consisting of cash advances received but not yet recognized as
revenue, amounting to $203,052 as of June 30, 2003, compared to $1,510,936 at
December 31, 2002. These accounts receivable and deferred revenue balances are
not included in Hollywood Media's consolidated balance sheets.
- 13 -
As of June 30, 2003, Hollywood Media has received cumulative profit
distributions from NetCo Partners since its formation totaling $9,010,634, in
addition to reimbursement of substantially all amounts advanced by Hollywood
Media to fund the operations of NetCo Partners.
(B) MOVIETICKETS.COM
Hollywood Media entered into a joint venture agreement on February 29,
2000 with the movie theater chains AMC Entertainment Inc. ("AMC") and National
Amusements, Inc. to form MovieTickets.com, Inc. ("MovieTickets.com"). In August
2000, MovieTickets.com entered into an agreement in which the joint venture sold
a five percent interest in MovieTickets.com for $25 million of advertising over
5 years to Viacom Inc. In addition to the Viacom advertising and promotion,
MovieTickets.com is promoted through on-screen advertising on each participating
exhibitor's movie screens. In March 2001, America Online Inc. ("AOL") purchased
a non-interest bearing convertible preferred equity interest in MovieTickets.com
for $8.5 million in cash, which can be converted into approximately 3% of the
common stock of MovieTickets.com, Inc. In connection with this transaction,
MovieTickets.com's ticket inventory is promoted through AOL's interactive
properties and ticket inventory of AOL's Moviefone is available through
MovieTickets.com.
Hollywood Media owns 26.4% of the equity in MovieTickets.com, Inc. at
June 30, 2003. Excluding AOL's convertible preferred equity interest, Hollywood
Media shares in 27.1% of the income or losses generated by the joint venture.
This investment is recorded under the equity method of accounting, recognizing
27.1% of MovieTickets.com income or loss as Equity in Earnings - Investments.
Since the investment has been reduced to zero, Hollywood Media is currently
not providing for additional losses generated by MovieTickets.com as Hollywood
Media has not committed to fund future losses, if any, generated by
MovieTickets.com. Hollywood Media recorded income (losses) of $0 and $(124,036)
for the six months ended June 30, 2003 and 2002 and $0 and $(53,345) for the
three months ended June 30, 2003 and 2002, respectively in its investment in
MovieTickets.com.
(9) BARTER TRANSACTION:
Hollywood Media recorded barter revenue and expense under an agreement
with the National Association of Theater Owners ("NATO"), which agreement was
acquired through the acquisition of hollywood.com, Inc. in 1999. In connection
with the NATO contract, Hollywood Media also acquired rights and obligations
under ancillary agreements with individual theaters that participate in the NATO
organization. Pursuant to these agreements, Hollywood Media collected and
compiled movie showtimes data for NATO member theaters and hosted web sites for
certain theaters so as to display the movie showtimes and other information
about the theater. In addition, Hollywood Media provided ongoing web site
maintenance services for several of the theaters including providing promotional
materials, movie and theater information, advertising and editorial content. In
exchange, the theaters were obligated to promote the Hollywood.com web site to
movie audiences by airing movie trailers about Hollywood.com. Hollywood Media
- 14 -
recorded revenue and expense from these activities measured at the fair value of
the services exchanged in accordance with Accounting Principles Board Opinion
("APB") No. 29, "Accounting for Nonmonetary Transations." The NATO contract is
no longer in effect. Barter revenue recorded under the NATO agreement for the
six months ended June 30, 2003 and 2002, was $0 and $1,338,788 and $0 and
$593,350 for the three months ended June 30, 2003 and 2002, respectively.
(10) SEGMENT REPORTING:
Hollywood Media's reportable segments are Broadway Ticketing, Data
Business, Internet Ad Sales and Other, and Intellectual Properties. The Broadway
Ticketing segment sells tickets to live theater events for Broadway,
Off-Broadway and London, online and offline, and to domestic and international
travel professionals including travel agencies and tour operators, educational
institutions and consumers. The Data Business segment licenses entertainment
content and data and includes CinemaSource (which licenses movie showtimes and
other movie content), EventSource (which licenses local listings of events
around the country to media, wireless and Internet companies), AdSource (which
creates exhibitor paid directory ads for insertion in newspapers around the
country) and Baseline (a flat fee and pay-per-use subscription web site geared
towards professionals in the feature film and television industry). The Internet
Ad Sales and Other segment sells advertising on Hollywood.com and Broadway.com
and offers independent films to subscribers over the Internet. 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. This segment also includes a 51% interest in Tekno
Books, a book development business.
Management 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. There are no material intersegment sales
or transfers.
The following table illustrates financial information regarding
Hollywood Media's reportable segments.
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET REVENUES:
Broadway Ticketing $ 25,379,351 $ 21,591,085 $ 13,833,974 $ 12,756,241
Data Business 3,496,233 2,947,948 1,747,120 1,523,347
Internet Ad Sales and Other (A) 1,229,137 2,839,520 736,685 1,342,174
Intellectual Properties 1,435,209 1,442,605 659,336 493,954
------------ ------------ ------------ ------------
$ 31,539,930 $ 28,821,158 $ 16,977,115 $ 16,115,716
============ ============ ============ ============
GROSS MARGIN:
Broadway Ticketing $ 2,611,199 $ 3,147,614 $ 1,213,450 $ 2,001,837
Data Business 3,326,568 2,833,582 1,663,017 1,456,096
Internet Ad Sales and Other 1,079,621 2,629,402 643,264 1,232,889
Intellectual Properties 926,399 913,327 429,786 363,822
------------ ------------ ------------ ------------
$ 7,943,787 $ 9,523,925 $ 3,949,517 $ 5,054,644
============ ============ ============ ============
- 15 -
OPERATING INCOME (LOSS):
Broadway Ticketing $ (343,514) $ 979,405 $ (226,205) $ 892,532
Data Business (B) 364,767 (264,114) 160,557 (94,727)
Internet Ad Sales and Other (C) (1,503,279) (10,926,017) (699,327) (5,605,575)
Intellectual Properties 705,255 727,529 328,982 268,028
Corporate Overhead and Other (3,717,482) (4,381,816) (1,774,375) (1,970,865)
------------ ------------ ------------ ------------
$ (4,494,253) $(13,865,013) $ (2,210,368) $ (6,510,607)
============ ============ ============ ============
SEGMENT ASSETS:
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Broadway Ticketing $ 8,123,546 $ 9,499,232
Data Business 2,519,855 3,050,030
Internet Ad Sales and Other 2,786,725 3,599,136
Intellectual Properties 792,252 720,819
Corporate Overhead and Other 44,830,048 45,199,440
----------- -----------
$59,052,426 $62,068,657
=========== ===========
(A) Includes non-cash barter revenue of $1,356,477 for the six months ended
June 30, 2002, and $598,608 for Q2-02.
(B) Includes $261,399 in expenses in the six months ended June 30, 2002
relating to the closure of the New York Baseline office. The Baseline
operations were moved to the new Baseline office in California and
consolidated with FilmTracker.
(C) Includes $506,729 and $9,602,743 in amortization of CBS advertising for
the six months ended June 30, 2003 and 2002, respectively used to
promote Hollywood.com and Broadway.com. IIII
(11) COMMITMENTS AND CONTINGENCIES:
Water Garden Company LLC, as Plaintiff, v. Hollywood Media Corp., a
Florida corporation; hollywood.com, Inc., a California corporation (and
subsidiary of Hollywood Media Corp.); and The Tribune Company (as successor in
interest to the Times Mirror Company), as Defendants; filed July 16, 2001 in the
Superior Court of the State of California for the County of Los Angeles. Water
Garden Company LLC filed suit against Hollywood Media, its subsidiary,
hollywood.com, Inc., and The Tribune Company ("Tribune"), among others, claiming
damages as a result of alleged defaults by hollywood.com, Inc. under a lease for
office space entered into by hollywood.com, Inc., as lessee, and Water Garden
Company LLC, as lessor. The stated lease term is from January 1999 through
December 2003. Tribune guaranteed hollywood.com, Inc.'s lease obligations.
Hollywood Media has certain contractual indemnification obligations to Tribune
relating to Tribune's guaranty of the lease. The claims against Hollywood Media,
but not hollywood.com, Inc., have been dismissed.
As previously reported in Hollywood Media's 2002 Form 10-K, on March
25, 2003, the court in this action (the "Water Garden Lawsuit") issued its
Ruling on Motion for Summary Judgment and Summary Adjudication, in which it
granted, before trial, the motion of plaintiff for summary judgment against
defendants hollywood.com, Inc. and Tribune. This Ruling resulted in the court's
- 16 -
entry of a money judgment in the Water Garden Lawsuit on April 29, 2003 against
hollywood.com, Inc. and Tribune, jointly and severally, of $988,549, plus
reasonable attorneys' fees and costs of suit in an amount to be subsequently
determined. Interest would accrue on the judgment at the rate of ten percent per
annum until paid.
On May 7, 2003, hollywood.com Inc. and Tribune filed a Notice of Appeal
with the court in the Water Garden Lawsuit, and also filed a Notice of Filing
Undertaking for Stay of Enforcement of Judgment Pursuant to Appeal in order to
stay enforcement of the judgment pending resolution of the appeal (this filing
included an appeal bond obtained by Tribune (the "Appeal Bond") issued by a
surety company in the amount of $1,482,823, which is the amount of the bond
required by law to stay enforcement of the judgment). Based on the advice of our
outside legal counsel, we believe that hollywood.com, Inc. has meritorious
grounds for appeal, and a reasonable possibility exists of the appellate court
reversing the trial court's summary judgment ruling. However, it is not possible
at this time to estimate the probability of a favorable or unfavorable outcome
of such an appeal, and accordingly we cannot and do not provide any such
evaluation. If the appeal is successful, it is probable that the matter would
then be remanded to the trial court for trial.
In April 2003, Tribune and Hollywood Media agreed that Tribune would
obtain the Appeal Bond in exchange for specified advance payments by Hollywood
Media to Tribune as collateral to secure Hollywood Media's indemnification
obligation to Tribune described above. The advance payments consist of a
$100,000 payment made upon commencement of the agreement on April 7, 2003 and
monthly payments of $75,000 (or $100,000, for the last six months of 2003). The
agreement allows Tribune the right to demand additional collateral, the form of
which, cash or shares of Hollywood Media's common stock, to be determined by
Hollywood Media in its discretion, in the approximate amount of the initial
judgment. Hollywood Media's obligation to make payments to Tribune under such
agreement is limited to the amount of the initial judgment plus costs and/or
attorney's fees that may be awarded and accrued interest. The advance payments
and, if applicable, any other security, are to be returned to Hollywood Media if
the appeal is successful (which would result in the bond no longer being
required) or to the extent the payments ultimately exceed Hollywood Media's
indemnification obligation to Tribune. Such payments made to Tribune may be used
by Hollywood Media, in its discretion, to pay the judgment or a settlement in
the Water Garden Lawsuit.
The judgment in the Water Garden Lawsuit is for rent accrued under the
lease through February 13, 2003 however, the facial termination date of the
lease is December 31, 2003. Accordingly, it is probable that the plaintiff in
the Water Garden Lawsuit will file one or more subsequent actions against
hollywood.com, Inc. and Tribune claiming additional amounts representing rent
allegedly accruing after such date through December 31, 2003, together with
litigation costs and attorneys fees.
Hollywood Media believes that hollywood.com, Inc. has valid grounds for
appeal and defenses to the plaintiff's claims. Recognizing that the ultimate
outcome of this case is uncertain, Hollywood Media has accrued on its books, as
of June 30, 2003, an amount which it believes is adequate to account for
potential liability for this matter, and we will continue to evaluate the matter
as the litigation process proceeds.
In addition to the legal proceedings described above, Hollywood Media
is a party to various other legal proceedings including matters arising in the
ordinary course of business. Hollywood Media does not expect such other legal
- 17 -
proceedings to have a material adverse impact on Hollywood Media's financial
condition or results of operations, however, there can be no assurance that such
other matters, if determined adversely, will not have a material adverse effect.
(12) INTERIM ADJUSTMENTS
Ticketing net revenues included a charge of $0.6 million relating to an
under accrual for Broadway Ticketing gift certificates for the year ended
December 31, 2002. This adjustment was not material to the previously reported
results for the year ended December 31, 2002.
Ticketing cost of revenues included a charge of $0.2 million relating
to an under accrual for Broadway Ticketing ticket purchases for the three months
ended March 31, 2003 and the year ended December 31, 2002. This adjustment was
not material to the previously reported results for the three months ended March
31, 2003 or year ended December 31, 2002.
(13) RECLASSIFICATION:
Certain amounts in the 2002 financial statements have been reclassified
to conform with the 2003 classification.
(14) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
For The Six Months Ended June 30, 2003:
o 155,783 shares of Hollywood Media common stock valued at $155,783
were issued as payment of Hollywood Media's 401(k) employer match
for calendar year 2002.
o Hollywood Media issued 192,898 shares of common stock, valued at
$155,573 for interest due to the holders of the convertible
debentures.
o Options and warrants valued at $123,583, under Black Scholes,
were granted for services rendered.
o Hollywood Media issued 28,571 shares of common stock valued at
$39,714 under terms of an earn-out provision in accordance with
the acquisition of BroadwayTheater.com.
For The Six Months Ended June 30, 2002:
o Capital lease transactions totaled $13,607.
o 54,392 shares of Hollywood Media common stock, valued at
$293,095, were issued under the Hollywood Media 2000 Stock
Incentive Plan.
o Hollywood Media issued 1,163 shares of common stock, valued at
$6,390, to satisfy an outstanding obligation.
o 20,777 shares of Hollywood Media common stock, valued at $136,920
were issued as payment of Hollywood Media's 401(k) employer match
for calendar year 2001.
- 18 -
o Hollywood Media issued 43,044 shares of common stock, valued at
$187,217, for the extension of a promissory note guaranteed by
Hollywood Media.
o 34,644 shares of Hollywood Media were issued for the net exercise
of stock options and warrants during the second quarter of 2002.
o Options and warrants valued at $144,644, under Black Scholes,
were granted for services rendered.
o Hollywood Media issued 28,571 shares of common stock valued at
$110,284 under terms of an earn-out provision in accordance with
the acquisition of BroadwayTheater.com.
o Hollywood Media issued 21,969 shares of common stock valued at
$37,479 for interest due to the holders of the convertible
debentures.
(15) SUBSEQUENT EVENT:
Hollywood Media's Compensation Committee of its Board of Directors
approved equity compensation grants as of July 1, 2003 in connection with its
approval of extensions and other amendments to Hollywood Media's employment
agreements with Mitchell Rubenstein, its Chief Executive Officer, and Laurie S.
Silvers, its President. The employment agreements were to expire on July 1,
2003, and such amendments included extension of the duration of such agreements
through July 1, 2004. In connection with such amendments, the Chief Executive
Officer and the President were each granted (i) stock options to purchase
350,000 shares of the Hollywood Media's common stock at an exercise price equal
to the closing market price of the common stock on the date of grant ($1.20 per
share), which options were granted under Hollywood Media's shareholder-approved
stock option plan, and (ii) 125,000 shares of restricted stock, issued under
Hollywood Media's shareholder-approved 2000 Stock Incentive Plan. The stock
options and the shares of restricted stock vest at the rate of twenty-five
percent per quarter over the one-year period following the date of grant,
subject to accelerated vesting upon certain events, and the options have a
five-year term.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Item 2 or elsewhere in this Form 10-Q or
that are otherwise made by us or on our behalf about our financial condition,
results of operations and business constitute "forward-looking statements,"
within the meaning of federal securities laws. Hollywood Media Corp. ("Hollywood
Media") cautions readers that certain important factors may affect Hollywood
Media's actual results, levels of activity, performance or achievements and
could cause our actual results, levels of activity, performance or achievements
to differ materially from any future results, levels of activity, performance or
achievements anticipated, expressed or implied by any forward-looking statements
that may be deemed to have been made in this Form 10-Q or that are otherwise
made by or on behalf of Hollywood Media. For this purpose, any statements
contained in this Form 10-Q that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
- 19 -
foregoing, "forward-looking statements" are typically phrased using words such
as "may," "will," "should," "expect," "plans," "believe," "anticipate,"
"intend," "could," "estimate," "pro forma" or "continue" or the negative
variations thereof or similar expressions or comparable terminology. Factors
that may affect Hollywood Media's results and the market price of our common
stock include, but are not limited to:
o our continuing operating losses,
o negative cash flows from operations and accumulated deficit,
o our limited operating history,
o the need for additional capital to finance our operations,
o the need to manage our growth and integrate new businesses into
Hollywood Media,
o our ability to develop strategic relationships,
o our ability to compete with other companies,
o technology risks,
o future government regulation,
o dependence on our founders, and
o the volatility of our stock price.
Hollywood Media is also subject to other risks detailed herein or
detailed in our Annual Report on Form 10-K for the year ended December 31, 2002
and in other filings made by Hollywood Media 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 statements,
which speak only as of the date of this Form 10-Q. We do not undertake any
responsibility to review or confirm analysts' expectations or estimates or to
release publicly any revisions to these forward-looking statements to take into
account events or circumstances that occur after the date of this Form 10-Q. As
a result of the foregoing and other factors, no assurance can be given as to the
future results, levels of activity or achievements and neither us nor any other
person assumes responsibility for the accuracy and completeness of such
statements.
OVERVIEW
Hollywood Media is a leading provider of news, information, data and
other content, and ticketing to consumers and businesses covering the
entertainment and media industries. We manage a number of business units focused
on the entertainment industry. Hollywood Media derives a diverse stream of
revenues from this array of business units, including revenue from individual
and group Broadway ticket sales, data syndication, subscription fees, content
licensing fees, advertising, and book development.
DATA SYNDICATION DIVISIONS
Hollywood Media's Data Business is a provider of integrated database
information and complementary data services to the entertainment and media
industries. The Data Business consists of two divisions, The Source Business and
Baseline/FilmTracker.
The Source Business is comprised of three related lines of business:
CinemaSource, EventSource and AdSource.
- 20 -
CinemaSource. CinemaSource is the largest supplier of movie showtimes
as measured by market share in the United States and Canada, and compiles movie
showtimes data for over 33,000 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 The Washington Post, wireless companies including Sprint PCS,
AT&T Wireless, Cingular Wireless, Verizon and Vindigo, Internet companies
including AOL's Moviefone and Digital City, MSN, Yahoo! and Lycos, and other
media outlets. CinemaSource also syndicates entertainment news, movie reviews,
and celebrity biographies. CinemaSource's data is displayed by its customers in
local newspapers, on websites and through cell phone services, to provide
moviegoers with information for finding and choosing movies, theaters and
showtimes. CinemaSource collects a majority of these movie listings through
electronic mediums such as email and FTP files, and collects additional listings
through traditional mediums such as faxes and phone calls. Through annual and
multi-year contracts, CinemaSource generates recurring revenue from licensing
fees paid by its customers.
EventSource. We launched the EventSource business in 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 shows, touring
companies, community playhouses and dinner theaters throughout North America and
in London's West End. The EventSource database contains detailed information for
over 12,000 venues, and the EventSource services are monitored by individual
city editors specializing in their respective markets. Hollywood Media believes
that EventSource is the largest (based on market share), and the only national,
compiler and syndicator of detailed information on community and cultural events
in North America. EventSource's unique and diversified information is a content
source for AOL's Digital City, as to which EventSource entered into an agreement
in April 2000 to provide event listings for 200 cities nationwide. In addition
to Digital City, other EventSource customers include The New York Times,
Vindigo, Earthlink and VoltDelta. Through annual and multi-year contracts,
EventSource generates recurring revenues from licensing fees.
AdSource. We launched AdSource during the first quarter of 2002 as yet
another expansion of the CinemaSource operations. AdSource leverages the movie
theater showtimes from the CinemaSource data collection systems and our
relationship with various movie exhibitors, to provide our movie-exhibitor
customers with directory advertising for insertion in newspapers around the
country. Our customers include AMC Theatres, a major theater chain that has
expanded use of AdSource nationally. The types of ads created by AdSource
include the large weekly movie ads typically carried in newspapers, which
highlight a particular movie theater where the film is playing and the start
times. Through a web-based data system, AdSource is able to create ads using
showtimes data from the CinemaSource database, resulting in exhibitor ads that
Hollywood Media believes are generally superior in quality and accuracy in
comparison to ads developed by its competitors. These advertisements are
delivered to the newspapers in one of several formats, ready for publication.
Baseline/FilmTracker. Baseline is a comprehensive entertainment
database, research service, and application service provider offering
information to movie studios, production companies, movie and TV distributors,
entertainment agents, managers, producers, screenwriters, news organizations,
and financial analysts covering the entertainment industry. Baseline's film and
television database contains over 14,000 celebrity biographies, credits for over
125,000 released feature films, television series, miniseries, TV movies and
- 21 -
specials dating back nearly 100 years, over 15,000 film and television projects
in every stage of development and production, over 1,900 movie reviews, box
office grosses dating back nearly 20 years, over 17,000 company rosters and
representation/contact information for over 19,000 entertainment professionals.
Baseline provides applications that allow entertainment professionals to
streamline workflow, increase efficiency, and expand market awareness. Baseline
offers its data and application modules on an annual subscription basis,
syndicates data to a number of leading information aggregators and publications,
and also provides data on a pay per use basis. Baseline's 3,000+ customers
include four major movie studios, numerous production companies, law firms,
investment banks, news agencies, advertising agencies, consulting firms and
other professionals in the entertainment industry. Baseline's customer base
includes Bloomberg, Daily Variety, People Magazine, Lexis-Nexis, NBC, HBO, ABC,
Paramount Pictures, DreamWorks SKG, Fox Studios, Universal Studios, E!
Entertainment Television and the Directors Guild of America. The current
Baseline/FilmTracker service resulted from our January 2002 acquisition of
FilmTracker from Fountainhead Media Services ("Fountainhead"), a provider of
information services in the feature film and television industries. Our
previously existing Baseline service was integrated with FilmTracker in the
first quarter of 2002, resulting in a combined service that incorporates
Baseline's data into FilmTracker's content management system and interface.
Since the integration with FilmTracker in the first quarter of 2002, the
combined unit has signed multi-year licensing contracts with four major film
studios. Pursuant to such acquisition, Fountainhead acquired 20% of the capital
stock of our subsidiary that owns Baseline, in return for combining FilmTracker
with Baseline and Fountainhead's $2 million promissory note payable to Hollywood
Media. See Note 3 -- Acquisitions and Other Capital Transactions, of the Notes
to Hollywood Media's Financial Statements in Item 1 of this Form 10-Q, for
additional information about the transaction pursuant to which FilmTracker was
acquired.
BROADWAY TICKETING DIVISION
Broadway Ticketing: Theatre Direct International ("TDI"); Broadway.com
and 1-800-BROADWAY (collectively called "Broadway Ticketing").
TDI. We acquired TDI as of September 15, 2000. Founded in 1990, TDI is
a live theater ticketing wholesaler that provides groups and individuals with
access to theater tickets and knowledgeable service, covering shows on Broadway,
long running shows off-Broadway, shows in London's West End theatre district and
shows in Toronto. TDI sells tickets directly to group buyers including travel
agents and tour groups. TDI also manages a marketing cooperative that markets
numerous Broadway shows to the travel industry around the world. Recent Broadway
shows marketed by this cooperative include Aida, Beauty and the Beast, Cabaret,
Chicago, 42nd Street, Gypsy, Mamma Mia!, Man of La Mancha, Movin' Out, Nine,
Rent, The Boy from Oz, The Lion King, The Phantom of the Opera, Thoroughly
Modern Millie, Urinetown and Wicked. In addition, TDI's education division,
Broadway Classroom, markets group tickets to schools across the country.
Broadway.com and 1-800-BROADWAY. We launched the Broadway.com website
on May 1, 2000. Broadway.com features the ability to purchase Broadway,
off-Broadway and London's West End theater tickets online. Our 1-800-BROADWAY
number, which we acquired in October 2001, is marketed in tandem by us with
Broadway.com. TDI's offline ticketing service complements the online ticketing
services available on our Broadway.com unit and our ticket sales through our
1-800-BROADWAY number.
- 22 -
The combined businesses, Broadway Ticketing, provide live theater
ticketing and related content for over 200 venues in multiple markets to a
customer base consisting of individual consumers, as well as over 40,000 travel
agencies, tour operators, corporations and educational institutions, in addition
to numerous newspapers and web sites. As a result of the consolidation of these
businesses, we believe that Broadway Ticketing is the leading wholesaler of
Broadway tickets, based on ticket sales. Broadway Ticketing offers its customers
access to virtually all the Broadway theatres. We work with the theatre box
offices to obtain tickets and we maintain ticket inventory. Broadway Ticketing
is often able to obtain better seats than its competitors due to its high
volume, advance group purchases, and related inventory practices. To assist
customers with the important decision of purchasing Broadway show tickets,
Broadway Ticketing employs a theatre-knowledgeable sales force that can describe
the shows and make recommendations as well as explain the seat locations of a
variety of theatres. We believe that our knowledgeable sales force provides
Broadway Ticketing with a marketing advantage over such competitors.
In August 2003, a new manager was appointed for Hollywood Media's
Broadway Ticketing division following the resignation of the prior manager. The
new manager is the founder of BroadwayTheater.com, a company acquired by
Hollywood Media in April 2000 and consolidated into our Broadway.com business,
and he has been a senior member of the Broadway Ticketing division's management
since then. BroadwayTheater.com's business included selling of Broadway tickets
over the Internet.
INTERNET DIVISIONS
Hollywood.com. Hollywood.com is a premier online entertainment
destination and movie industry information and services website. Hollywood.com
generates revenue by selling advertising on its website. Hollywood.com features
in-depth movie information, including movie descriptions and reviews, movie
showtimes listings, entertainment news and an extensive multimedia library
containing hundreds of hours of celebrity interviews, premier coverage and
behind the scenes footage as well as independent films. Hollywood.com provides
premier content and online ticketing services for movies creating a "one-stop
destination" for movie information. Some of the largest advertisers who have
advertised on Hollywood.com include Disney Studios, New Line Cinema, Sony
Studios, General Motors, Universal Studios, Visa, Colgate, HBO, A&E, British
Airways, MGM, US Army, AT&T, Chase, Ford, Kodak, Fox and Warner Bros.
As a result of its relationship with Hollywood Media's Data Business
(CinemaSource and Baseline), Hollywood.com has access to a constantly updated
database of information related to movies and entertainment. We believe these
sources of content provide Hollywood.com with a competitive advantage over other
entertainment-related websites that incur significant costs to create content of
comparable quality and scope.
Hollywood.com has further established its presence in the wireless
arena. Through relationships with major carriers (AT&T, Cingular, Sprint, and
Verizon), Hollywood.com provides a movie and entertainment destination on a
variety of mobile phones.
Broadway.com. We launched Broadway.com on May 1, 2000. Broadway.com
features: the ability to purchase Broadway, off-Broadway and London's West End
theater tickets online; theater showtimes; 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 the sale of both tickets and
advertising, with its principal business purpose being to generate ticket sales.
- 23 -
Cable Network Initiatives. To further leverage our base of proprietary
content, Hollywood Media launched two interactive digital cable television
channels in 2002: "Totally Hollywood TV" and "Totally Broadway TV." Both cable
channels utilize existing Hollywood Media content and are designed for
distribution on digital tiers of cable TV systems. The cable TV channels
complement Hollywood Media's existing business units. Totally Broadway TV and
Totally Hollywood TV offer audiences interactive entertainment and information,
with on-demand video content including premiers, movie previews, reviews,
behind-the-scenes footage, interviews and more, as well as up-to-date showtimes
for the latest movies and current Broadway shows. Both networks use Hollywood
Media's content, news and information covering the entertainment industry, and
were available initially to Cablevision System Corporation's iO: Interactive
Optimum(sm) subscribers in the Long Island, Warwick Valley, New York, and Morris
County, New Jersey, markets. During the fourth quarter of 2002, Hollywood Media
Corp. extended its cable television initiative to a second major cable operator,
Cox Communications. Cox added Totally Hollywood TV to its video-on-demand
service in the San Diego, California market. Subscribers to Cox Cable San
Diego's digital TV service are now able to view, on Totally Hollywood TV, movie
previews and related content for the newest movies in theaters.
INTELLECTUAL PROPERTIES BUSINESS
Book Development and Book Licensing. Our Intellectual Properties
division includes a book development and book licensing business owned and
operated by our 51% owned subsidiary, Tekno Books, which develops and executes
book projects, typically with best-selling authors. Tekno Books has worked with
over 60 New York Times best-selling authors, including Isaac Asimov, Tom Clancy,
Tony Hillerman, John Jakes, Jonathan Kellerman, Dean Koontz, Robert Ludlum, Nora
Roberts and Scott Turow, and has also worked with numerous media celebrities,
including Louis Rukeyser and Leonard Nimoy. Our intellectual properties division
has licensed books for publication with more than 100 domestic book publishers,
including Random House (Bertelsmann), Penguin Publishing Group (Pearson), Simon
& Schuster (Viacom), HarperCollins (News Corp.), St. Martin's Press (Holtzbrink
of Germany), Warner Books (AOL Time Warner) and the publishing division of
Barnes & Noble. Tekno Books has also produced numerous books under license from
such entertainment companies as Universal Studios, New Line Cinema, CBS
Television, DC Comics (AOL Time Warner), and MGM Studios. Since 1980, Tekno
Books has developed over 1,440 books that have been published. Another 2,950
foreign, audio, paperback, electronic, and other editions of these books have
been sold to hundreds of publishers around the world, and published in 33
languages. Tekno's books have been finalists for, or winners of, over 100
awards, including the The Edgar Allan Poe Award, The Agatha Christie Award
(Mystery), The Hugo Award (Science Fiction), The Nebula Award (Fantasy), The
International Horror Guild Award (Horror) and The Sapphire Award (Romance).
Tekno Books' current backlog and anticipated books for future publishing include
more than 270 books under contract or in final negotiations, including over
70 books by New York Times best-selling authors. We are expanding into one of
the largest areas of publishing, which is romance fiction, and one of the
fastest growing areas of publishing, which is the Christian book market. In
January 2003, Tekno Books was engaged to create two new spin-off series based on
the best-selling Left Behind series. The Chief Executive Officer and founder of
Tekno Books, Dr. Martin H. Greenberg, is also a director of Hollywood Media and
owner of the remaining 49% interest in Tekno Books.
- 24 -
Intellectual Properties. Our Intellectual Properties division also owns
the exclusive rights to intellectual properties that are complete stories and
ideas for stories, created by best-selling authors and media celebrities. Some
examples of our intellectual properties are Anne McCaffrey's Acorna the Unicorn
Girl, Leonard Nimoy's Primortals, and Mickey Spillane's Mike Danger. We license
rights to our intellectual properties for use by licensees in developing
projects in various media forms. 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, Hollywood Media and C.P. Group Inc.
("C.P. Group"), entered into an agreement to form NetCo Partners. NetCo Partners
owns Tom Clancy's NetForce. Hollywood Media 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 Hollywood Media 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. In 1997, NetCo Partners licensed
to Putnam Berkley the rights to publish the first six Tom Clancy's NetForce
books in North America for advance payments of $14 million. This agreement was
subsequently renewed in December 2001 for four more books with guaranteed
advances for North American book rights of $2 million per book for the first two
books with the amount of the advance payable as to the next two books to be
negotiated at a later date. Each of the published titles has been on The New
York Times Bestseller list. The first book in the series was adapted as a 4-hour
mini-series on ABC. NetForce books have so far been published in mass market
paperback format with the potential to produce forthcoming books in the higher
priced hard cover format. NetCo owns all rights in all media to the NetForce
property including film, television, video and games. NetCo licenses NetForce
book rights to publishers in various foreign countries. Through its interest in
NetCo Partners, Hollywood Media receives distributions of its share of proceeds
generated from the rights to the NetForce series.
For additional information about Netco Partners, see Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Equity in Earnings of Investments, and Note 8 -- Investments In And Advances To
Equity Method Investees, of the Unaudited Notes to Hollywood Media's Condensed
Consolidated Financial Statements in Item 1 of this Form 10-Q.
MOVIETICKETS.COM
MovieTickets.com is one of the three leading destinations for the
purchase of movie tickets through the Internet; our two competitors (other than
some theatres that may conduct their own internet ticket sales) are Fandango and
AOL Moviefone. Hollywood Media launched the MovieTickets.com web site in May
2000 with several major theatre exhibitors. Hollywood Media currently owns 26.4%
of the equity of MovieTickets.com, Inc. See Management's Discussion and Analysis
of Financial Condition and Results of Operations - Equity in Earnings of
Investments, for additional information about our equity interest in
MovieTickets.com, Inc. MovieTickets.com, Inc. entered into an agreement with
Viacom Inc. effective August 2000 whereby Viacom Inc. acquired a five percent
interest in MovieTickets.com, Inc. for $25 million of advertising and promotion
over five years. In addition to the Viacom advertising and promotion,
MovieTickets.com is promoted through on-screen advertising in most participating
- 25 -
exhibitors' movie screens. In March 2001, AOL purchased a non-interest bearing
convertible preferred equity interest in MovieTickets.com, Inc. for $8.5 million
in cash, which can be converted into approximately 3% of the common stock of
MovieTickets.com, Inc. In connection with that transaction, MovieTickets.com's
ticket inventory is promoted throughout America Online's interactive properties
and ticket inventory of AOL's Moviefone is available through MovieTickets.com.
MovieTickets.com has been selected by MSN Network, Yahoo!, Lycos Entertainment
and several other premier online destinations, as the exclusive provider for
online movie ticketing services. MovieTickets.com continues to experience strong
growth in ticket sales, with 3.0 million tickets sold in the second quarter
2003, an increase of 24.2% over its ticket sales in the second quarter 2002.
MovieTickets.com, Inc.'s current participating exhibitors include AMC
Entertainment Inc., National Amusements, Inc., Famous Players Inc., Hoyts
Cinemas, Marcus Theatres, Consolidated Theatres, Crown Theatres, Krikorian
Premiere Theatres, Metropolitan Theatres, Rave Motion Pictures, and Spotlight
Theatres. Ritz Theatres is the process of being launched on MovieTickets.com.
MovieTickets.com 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 50 grossing theaters in North
America. 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 participating theaters. The web site contains
movie content from Hollywood Media's various divisions 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
which includes ads on the "print-at-home" ticket.
RESULTS OF OPERATIONS
The following table summarizes Hollywood Media's revenues, cost of
revenues and gross margin by reportable segment for the six months ended June
30, 2003 ("Y2-03") and 2002 ("Y2-02"), and the three months ended June 30, 2003
("Q2-03") and 2002 ("Q2-02") respectively:
BROADWAY DATA INTERNET AD SALES INTELLECTUAL
TICKETING BUSINESS AND OTHER (A) PROPERTIES (B) TOTAL
----------- ----------- ----------- ----------- -----------
Y2-03
- -----
Net Revenues $25,379,351 $ 3,496,233 $ 1,229,137 $ 1,435,209 $31,539,930
Cost of Revenues 22,768,152 169,665 149,516 508,810 23,596,143
----------- ----------- ----------- ----------- -----------
Gross Margin $ 2,611,199 $ 3,326,568 $ 1,079,621 $ 926,399 $ 7,943,787
=========== =========== =========== =========== ===========
Y2-02
- -----
Net Revenues $21,591,085 $ 2,947,948 $ 2,839,520 $ 1,442,605 $28,821,158
Cost of Revenues 18,443,471 114,366 210,118 529,278 19,297,233
----------- ----------- ----------- ----------- -----------
Gross Margin $ 3,147,614 $ 2,833,582 $ 2,629,402 $ 913,327 $ 9,523,925
=========== =========== =========== =========== ===========
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BROADWAY DATA INTERNET AD SALES INTELLECTUAL
TICKETING BUSINESS AND OTHER (A) PROPERTIES (B) TOTAL
----------- ----------- ----------- ----------- -----------
Q2-03
- -----
Net Revenues $13,833,974 $ 1,747,120 $ 736,685 $ 659,336 $16,977,115
Cost of Revenues 12,620,524 84,103 93,421 229,550 13,027,598
----------- ----------- ----------- ----------- -----------
Gross Margin $ 1,213,450 $ 1,663,017 $ 643,264 $ 429,786 $ 3,949,517
=========== =========== =========== =========== ===========
Q2-02
- -----
Net Revenues $12,756,241 $ 1,523,347 $ 1,342,174 $ 493,954 $16,115,716
Cost of Revenues 10,754,404 67,251 109,285 130,132 11,061,072
----------- ----------- ----------- ----------- -----------
Gross Margin $ 2,001,837 $ 1,456,096 $ 1,232,889 $ 363,822 $ 5,054,644
=========== =========== =========== =========== ===========
(a) Net Revenues include barter revenue of $1,356,477 and $598,608,
for Y2-02 and Q2-02, respectively, which when removed from these
amounts reduces gross margin.
(b) Does not include Hollywood Media's 50% interest in NetCo Partners which
is accounted for under the equity method of accounting and Hollywood
Media's share of the income (loss) is reported as equity in earnings of
investments.
COMPOSITION OF OUR SEGMENTS IS AS FOLLOWS:
o BROADWAY TICKETING - Includes our TDI ticketing business as well as our
Broadway.com online ticketing operations and ticket sales through
1-800-BROADWAY.
o DATA BUSINESS - Includes our CinemaSource, EventSource, AdSource, and
Baseline/FilmTracker operations.
o INTERNET AD SALES AND OTHER - Includes advertising sold on the web sites
Hollywood.com and Broadway.com, the AlwaysI subscription service which
offers films to subscribers over the Internet and barter revenues derived
from the collection and compilation of movie showtimes data and the hosting
of web sites for movie theaters in exchange for advertising services from
the theaters.
o INTELLECTUAL PROPERTIES - Includes our book development and book licensing
operation through our 51% owned subsidiary Tekno Books. This segment does
not include our 50% interest in NetCo Partners.
NET REVENUES
Total net revenues were $31,539,930 for Y2-03 as compared to
$28,821,158 for Y2-02, an increase of $2,718,772 or 9% and $16,977,115 for Q2-03
compared to $16,115,716 for Q2-02, an increase of $861,399 or 5%. The increase
in revenue was primarily due to an increase in Broadway Ticketing and Data
Business revenues, which was partially offset by a decrease in Internet Ad Sales
and Other revenues which was caused in part by a reduction of barter revenue to
zero in Y2-03. Non-cash barter revenue was $0 and $1,356,477 for Y2-03 and
Y2-02, and $0 and $598,608 for Q2-03 and Q2-02, respectively. Barter revenue as
a percentage of total net revenue was 0% and 5% for Y2-03 and Y2-02,
respectively, and 0% for Q2-03 compared to 4% for Q2-02. In Y2-03 net revenues
were derived 80% from Broadway Ticketing, 11% from Data Business, 4% from
- 27 -
Internet Ad Sales and Other and 5% from Intellectual Properties. In Q2-03, net
revenues were derived 82% from Ticketing, 10% for Data Business, 4% from
Internet Ad Sales and Other and 4% from Intellectual Properties. Revenues
excluding barter are non-GAAP financial measures, and are provided for
consideration in addition to, and not as a substitute for or superior to,
reported revenues without such exclusion, which are also set forth above.
Hollywood Media believes that revenues excluding barter may be useful
information for investors regarding Hollywood Media's results of operations for
the second quarter of 2003 and for the six months ended June 30, 2003, because
such measures show growth in revenues without the effects of non-cash barter
revenue, as Hollywood Media has decided to minimize its utilization of barter
revenue arrangements. Barter revenue is offset by an equal amount of barter
epense, and therefore does not impact the calculation of net loss. Excluding
barter revenue, total net revenues were $31,539,930 for Y2-03 as compared to
$27,464,681 for Y2-02, an increase of $4,075,249 or 15% and $16,977,115 for
Q2-03 compared to $15,517,108 from Q2-02, an increase of $1,460,007 or 9%.
Broadway Ticketing revenues were $25,379,351 and $21,591,085 for Y2-03
and Y2-02, respectively, an increase of $3,788,266 or 18% and $13,833,974 for
Q2-03 compared to $12,756,241 for Q2-02 for an increase of $1,077,733 or 8%.
Broadway Ticketing revenues increased due to increased ticket sales and an
increase in the service charge on individual tickets, in spite of a $0.6 million
charge against sales relating to an under accrual for Broadway Ticketing gift
certificates as of December 31, 2002. The charge was not material to the
previously reported results for the three months ended March 31, 2003 or year
ended December 31, 2002. Broadway Ticketing revenue is generated from the sale
of live theater tickets for Broadway, off-Broadway and London through
Broadway.com and the 1-800-BROADWAY telephone number, and to domestic and
international travel professionals, traveling consumers, business organizations,
schools and New York area theater patrons. Broadway Ticketing revenue is
recognized on the date of performance of the show.
Data Business revenues (which includes our Source businesses,
CinemaSource, EventSource, AdSource and Baseline/FilmTracker) were $3,496,233
for Y2-03 as compared to $2,947,948 for Y2-02, an increase of $548,285 or 19%
and $1,747,120 for Q2-03 compared to $1,523,347 for an increase of $223,773 or
15%. Our Source business revenues increased approximately $240,966 in Y2-03 as
compared to Y2-02 and our Baseline business revenues increased approximately
$307,319 in Y2-03 as compared to Y2-02. The Source Business revenues increased
$78,058 for Q2-03 compared to Q2-02 and the Baseline business increased $145,715
for Q2-03 over Q2-02. Revenue for CinemaSource and EventSource is generated by
the licensing of movie, event and theater showtimes and other information to
other media outlets and Internet companies including newspapers such as the New
York Times and The Washington Post, Internet companies including AOL's Digital
City, Lycos, and Yahoo! and wireless providers such as AT&T Wireless, Sprint PCS
and Verizon. Revenue for AdSource is generated by creating exhibitor paid
directory ads for insertion in newspapers around the country. Baseline is a film
and television database, licensing its data to businesses and professionals in
the entertainment industry and generates revenues from the syndication of its
data as well as subscription revenue.
The composition of Internet Ad Sales and Other revenues was as follows:
Six Months Ended Three Months Ended
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenue - Non-barter $1,229,137 $1,483,043 $ 736,685 $ 743,566
Revenue - NATO barter -- 1,338,788 -- 593,350
Revenue - Barter -- 17,689 -- 5,258
---------- ---------- ---------- ----------
$1,229,137 $2,839,520 $ 736,685 $1,342,174
========== ========== ========== ==========
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Internet Ad Sales and Other revenue was $1,229,137 for Y2-03 as
compared to $2,839,520 for Y2-02, a decrease of $1,610,383 or 57% and Q2-03 was
$736,685 compared to $1,342,174 for Q2-02, a decrease of $605,489 or 45%. The
decrease in revenues was in part attributable to no barter revenue being
recognized during Y2-03 and CBS advertising which was eliminated after the
Viacom Exchange Agreement in 2002. Excluding barter revenue and the effects of
the CBS advertising, revenue increased $193,119 or 35% for Q2-03 from Q2-02 and
$146,094 or 13% for Y2-03 from Y2-02. Internet Ad Sales and Other revenue is
generated from the sale of sponsorships and banner advertisements on
Hollywood.com and Broadway.com. Included in Internet Ad Sales and Other revenue
were non-cash barter revenues of $0 and $1,356,477 for Y2-03 and Y2-02 and $0
and $598,608 for Q2-03 and Q2-02, respectively. As a percentage of Internet Ad
Sales and Other revenue, barter revenues comprised 0% and 48% for Y2-03 and
Y2-02, and 0% and 45% for Q2-03 and Q2-02, respectively. Hollywood Media records
two types of barter revenue related to Internet advertising as more fully
described below.
Hollywood Media recorded barter revenue and an equal amount of expense
earned under an agreement with NATO, which agreement Hollywood Media acquired
through its acquisition of hollywood.com, Inc. on May 20, 1999. This income is
included in Internet Ad Sales and Other revenue. This contract is no longer in
effect and thus Hollywood Media recorded $0 in promotional non-cash revenue and
non-cash expense for Y2-03 in comparison to $1,338,788 in Y2-02. Hollywood Media
recorded $0 and $593,350 in barter of revenue under the NATO contract for Q2-03
and Q2-02 respectively.
Revenues from our Intellectual Properties division were $1,435,209 for
Y2-03 as compared to $1,442,605 for Y2-02, a decrease of $7,396 or 1% and
$659,336 and $493,954 for Q2-03 and Q2-02, an increase of $165,382 for 33%. The
Intellectual Properties division generates revenues from several different
activities including book development and licensing and intellectual property
licensing. Revenues vary quarter to quarter dependent on the timing of the
delivery of the 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. The Intellectual Properties division revenues
do not include our 50% interest in NetCo Partners, which is accounted for under
the equity method of accounting and under which, Hollywood Media's share of the
income (loss) is reported as equity in earnings of investments.
COST OF REVENUES
Cost of revenues was $23,596,143 for Y2-03 as compared to $19,297,233
for Y2-02, an increase of $4,298,910 or 22% and $13,027,598 for Q2-03 compared
to $11,061,072 for Q2-02, an increase of $1,966,526 or 18%. As a percentage of
net revenues, cost of revenues was 75% and 67% for Y2-03 and Y2-02, respectively
and 77% and 69% for Q2-03 and Q2-02, respectively. The increase in the cost of
revenues is primarily the result of an increase in Broadway ticketing revenues
and a $0.2 million charge increasing cost of revenues relating to an under
accrual for ticket purchases as of December 31, 2002. The charge was not
material to the previously reported results for the three months ended March 31,
2003 or year ended December 31, 2002. The Broadway Ticketing segment accounted
for 96% of the cost of revenues for Y2-03 and Y2-02 and 97% for both Q2-03 and
Q2-02, reflecting the greater proportion of revenue attributable to Broadway
Ticketing. Cost of revenue consists primarily of the cost of tickets and credit
card fees for the Broadway ticketing segment; commissions due to advertising
agencies, advertising rep firms and other third parties for revenue generated
from the data business and Internet ad sales and other segments; and fees and
royalties paid to authors and co-editors for the intellectual properties
segment.
- 29 -
GROSS MARGIN
Gross margin was $7,943,787 for Y2-03 as compared to $9,523,925 for
Y2-02, a decrease of $1,580,138 or 17% and $3,949,517 for Q2-03 as compared to
$5,054,644 for Q2-02, a decrease of $1,105,127 or 22%. Excluding non-cash barter
revenue, gross margin decreased $223,661 or 3% in Y2-03 compared to Y2-02 and
decreased $506,519 or 11% in Q2-03 compared to Q2-02. As a percentage of net
revenue, gross margin excluding barter in Y2-03 was 25% compared to 30% in Y2-02
and Q2-03 was 23% compared to 29% in Q2-02. This was due in part to an increased
percentage of revenues from the relatively lower margin Broadway Ticketing
segment and the impact of $0.8 million in charges from December 31, 2002 and
January 31, 2003 relating to an under accrual for Broadway Ticketing gift
certificates and ticket purchases for $0.6 million and $0.2 million,
respectively. The charges were not material to the previously reported results
for the three months ended March 31, 2003 or year ended December 31, 2002. The
gross margin without these changes would have been 22% and 24% of the three and
six months ended 2003. Gross Margin excluding barter is a non-GAAP financial
measure, and is provided for consideration in addition to, and not as a
substitute for or superior to, reported gross margin without such exclusion,
which is also set forth above. Hollywood Media believes that gross margin
exclluding barter may be useful information for investors regarding Hollywood
Media's results of operations for the second quarter of 2003 and for the six
months ended June 30, 2003, because such measures show changes in gross margin
without the effects of non-cash barter transactions, as Hollywood Media has
decided to minimize its utilization of barter arrangements.
EQUITY IN EARNINGS OF INVESTMENTS
Equity in earnings of investments consisted of the following:
Six Months Ended June 30, Three Months Ended June 30,
----------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
NetCo Partners (a) $ 806,126 $ 354,994 $ 801,721 $ 67,920
MovieTickets.com (b) -- (124,036) -- (53,345)
--------- --------- --------- ---------
$ 806,126 $ 230,958 $ 801,721 $ 14,575
========= ========= ========= =========
(a) NetCo Partners
NetCo Partners owns Tom Clancy's NetForce and is primarily engaged
in the development and licensing of Tom Clancy's NetForce. NetCo Partners
recognizes revenues when the earnings process has been completed based on the
terms of the various agreements, generally upon the delivery of the manuscript
to the publisher and at the point where ultimate collection is substantially
assured. When advances are received prior to completion of the earnings process,
NetCo Partners defers recognition of revenue until the earnings process has been
completed. Hollywood Media owns 50% of NetCo Partners and accounts for its
investment under the equity method of accounting. Hollywood Media's 50% share of
earnings was $806,126 for Y2-03 as compared to $354,994 for Y2-02. Revenues vary
quarter to quarter dependent on timing of deliveries of various manuscripts to
the publisher although, notwithstanding the timing of manuscript deliveries,
typically, one NetForce book is published each year in North America.
(b) MovieTickets.com
Hollywood Media owns 26.4% of the total equity in MovieTickets.com,
Inc. joint venture at June 30, 2003. Hollywood Media records its investment in
MovieTickets.com, Inc. under the equity method of accounting, recognizing its
percentage of ownership of MovieTickets.com income or loss as equity in earnings
of investments. Excluding AOL's three percent convertible preferred equity
interest, Hollywood Media shares in 27.1% of the losses or income generated by
the joint venture. We recorded income (losses) of $0 and $(124,036) in Y2-03 and
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Y2-02, respectively in our investment in MovieTickets.com. Since the investment
has been reduced to zero, Hollywood Media is currently not providing for
additional losses, if any, generated by MovieTickets.com as Hollywood Media had
not guaranteed to fund future losses, if any, generated by MovieTickets.com. The
web site generates revenues from service fees charged to users for the purchase
of tickets and the sale of advertising.
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $461,149 or 15% to $3,558,810 for Y2-03 from $3,097,661 for
Y2-02 and increased $421,899 or 34% to $1,667,758 for Q2-03 from $1,245,679 for
Q2-02. General and administrative expenses consist of occupancy costs,
production costs, human resources and administrative expenses, professional and
consulting fees, telecommunication costs, provision for doubtful accounts
receivable and business insurance costs, all of which were higher than is
typical for the Company in any particular quarter. The increase is primarily due
to rising accounting, legal and insurance costs, all of which were higher than
historical amounts for the Company in any particular quarter. As a percentage of
revenue, general and administrative expenses remained the same at 11% for Y2-03
and Y2-02 and increased to 10% for Q2-03 from 8% for Q2-02.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
decreased $1,319,479 or 74% to $468,232 for Y2-03 from $1,787,711 for Y2-02 and
decreased $670,943 or 78% to $190,836 for Q2-03 from $861,779 for Q2-02. The
decrease is due primarily to no barter transactions and therefore no barter
expense in 2003 compared to $1,356,477 in barter expense for Y2-02. Selling and
marketing expenses include advertising, marketing, promotional, business
development and public relations expenses. As a percentage of revenue, selling
and marketing expenses decreased to 1% for Y2-03 from 6% for Y2-02 and decreased
to 1% for Q2-03 from 5% for Q2-02.
SALARIES AND BENEFITS. Salaries and benefits decreased $403,211 or 6%
to $6,649,876 for Y2-03 from $7,053,087 for Y2-02 and decreased $119,719 or 3%
to $3,370,248 for Q2-03 from $3,489,967 for Q2-02. This decrease is primarily
attributable to a decrease in administrative salaries in Y2-03 offset in part by
various expense increases including additional payroll costs in our Broadway
Ticketing division for extra labor needed to handle customer calls including
re-bookings and bonus provisions as a result of the closure of most Broadway
shows due to the musicians' strike during March 2003. As a percentage of
revenue, salaries and benefits decreased to 21% for Y2-03 from 24% for Y2-02 and
decreased to 20% for Q2-03 from 22% in Q2-02.
AMORTIZATION OF CBS ADVERTISING AND IMPAIRMENT LOSS RELATING TO CBS
ADVERTISING. Amortization of CBS advertising related to the agreement with
Viacom was $506,729 and $9,602,743 for Y2-03 and Y2-02, respectively and
$316,706 and $5,025,145 for Q2-03 and Q2-02 respectively. Under the agreement we
had with Viacom, Hollywood Media issued shares of common stock and warrants in
exchange for cash and CBS's advertising and promotional efforts over seven years
across its full range of media properties. The fair value of the common stock
and warrants issued to Viacom has been recorded in the balance sheet as deferred
advertising and is being amortized as the advertising is used each related
contract year.
On August 28, 2002, an Exchange Agreement ("Exchange Agreement") was
entered into among Hollywood Media, its wholly owned subsidiaries,
hollywood.com, Inc. and Broadway.com, Inc., and Viacom Inc. Pursuant to the
Exchange Agreement, Viacom reconveyed to Hollywood Media an aggregate of
8,614,687 shares of Hollywood Media's common stock, $.01 par value per share,
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and warrants held by Viacom to purchase 262,973 shares of Hollywood Media's
common stock were cancelled. The common stock and warrants had a fair value of
$10,656,657 at the time of the Exchange Agreement. Viacom also paid Hollywood
Media $2.0 million in cash and Hollywood Media retained $5.0 million in non-cash
advertising and promotion across CBS properties for use through December 31,
2003. Each of the Advertising and Promotion Agreement and Content License
Agreement, dated as of January 3, 2000, between hollywood.com, Inc. and Viacom,
including hollywood.com, Inc.'s right to air additional advertising and
promotion on CBS properties was terminated. The remaining recorded value of the
terminated advertising and promotion under the Advertising and Promotion
Agreement and Content License Agreement at the time of the Exchange Agreement
was $70,998,003 (representing approximately $49 million in actual advertising).
Hollywood Media recorded a non-cash impairment loss of $58,341,346 in August
2002, the difference between the advertising cancelled and the fair value of the
common stock and warrants returned by Viacom, plus the $2.0 million in cash paid
by Viacom. In addition, during 2001 Viacom had prepaid to Hollywood Media, in
cash for advertising to be delivered in 2002 and 2003. At August 28, 2002, the
value of the deferred advertising revenue remaining on Hollywood Media's balance
sheet was $1,066,666. This balance reduced the impairment loss recorded. The
aggregate impairment loss recorded in August 2002 was $57,274,680.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was
$1,254,393 for Y2-03 and $1,847,736 for Y2-02, representing a decrease of
$593,343 or 32% and $614,517 for Q2-03, $942,681 for Q2-02 representing a
decrease of $328,165 or 35%. The decrease was primarily attributable to certain
intangible assets that became fully amortized during 2002.
INTEREST EXPENSE. Interest expense was $675,687 for Y2-03 as compared
to $455,328 for Y2-02, an increase of $220,359 or 48% and $333,026 for Q2-03 as
compared to $237,705 for Q2-02, an increase of $95,321 or 40%. The increase for
Y2-03 was primarily attributable to the amortization of the beneficial
conversion feature related to the convertible debentures issued in May 2002.
INTEREST INCOME. Interest income was $11,647 for Y2-03 as compared to
$10,231 for Y2-02, an increase of $1,416 and $9,354 for Q2-03 compared to $7,209
for Q2-02, an increase of $2,145.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, we had cash and cash equivalents of $1,517,700
compared to cash and cash equivalents of $2,342,238 at December 31, 2002. Our
working capital deficiency, (defined as current assets less current liabilities)
at June 30, 2003, which included $324,393 in deferred CBS advertising was
$(3,658,684) as compared to working capital deficiency of $(676,219) at December
31, 2002. During the six months ended June 30, 2003, net cash used in operating
activities was $573,754, net cash used in investing activities was $249,550
comprising capital expenditures and net cash used in financing activities was
$1,234. As a result of the above, cash and cash equivalents decreased by
$824,538 for the six months ended June 30, 2003. In comparison, during the six
months ended June 30, 2002, net cash used in operating activities was
$1,870,925, net cash used in investing activities was $1,050,709, and $4,104,119
in cash was provided by financing activities. Net cash used in operating
activities improved by $1,297,171 or 69% from $1,870,925 for Y2-02 to $573,754
for Y2-03. In Q2-03, net cash provided by operating activities was $215,307.
- 32 -
On May 22, 2002, Hollywood Media issued an aggregate of $5.7 million in
principal amount of 6% Senior Convertible Debentures due May 22, 2005 (the
"Debentures") to a group of four institutional investors, including existing
shareholders of Hollywood Media. Mitchell Rubenstein, the Chairman of the Board
and Chief Executive Officer, and Laurie S. Silvers, the Vice Chairman and
President of Hollywood Media, participated in the financing with a $500,000 cash
investment upon the same terms as the other investors. The Debentures are
convertible at the option of the investors at any time through May 22, 2005 into
shares of Hollywood Media common stock, par value $0.01 per share, at a
conversion price of $3.46 per share. In addition, Hollywood Media can elect at
its option to convert up to 50% of the convertible debentures if the debentures
are still outstanding at maturity, subject to certain conditions. Prior to
conversion, the Debentures bear interest at 6% per annum, payable quarterly in
common stock or cash at the option of Hollywood Media. The investors also
received fully vested detachable warrants to acquire at any time through May 22,
2007 an aggregate of 576,590 shares of common stock at exercise prices ranging
from $3.78 to $3.91 per share. If on May 22, 2003, an investor held at least
seventy-five percent of such investor's shares of common stock issued or
issuable to such investor under the Debentures, then the exercise price of the
warrants held by such investor would decrease to $3.46 per share which equals
the conversion price of the debenture. The Debentures and Warrants contain
anti-dilution provisions as more fully described in the agreements. In addition,
the investors had the right to purchase an aggregate of $1 million in principal
amount of additional Debentures on the same terms at any time through May 22,
2003. The investors did not exercise the right and the option has expired. A
total of $389,095 in debt issuance costs were incurred for the convertible
debentures, including $161,695 in fees paid to a placement agent (including
$130,000 in cash and a warrant valued at $31,695, with substantially the same
terms as the warrants issued to the debenture holders.) During the three and six
months ended June 30, 2003, $32,423 and $64,848, respectively were recognized as
interest expense from the amortization of the debt issuance costs.
In 2001, Hollywood Media entered into an agreement with a third party
whereby we monetized a certain portion of our accounts receivable. Hollywood
Media receives an initial advance of 85% of the invoice amount, with the
remaining 15%, less fees, transferred to Hollywood Media upon payment by the
customer to the third party. At June 30, 2003 and December 31, 2002, a liability
of $119,716 and $337,478, respectively, was recorded for advances that had been
paid to Hollywood Media but remain payable by Hollywood Media's customers to the
third party.
In the event that Hollywood Media requires additional funding and
cannot secure additional funding, Hollywood Media's Chairman of the Board and
Chief Executive Officer and Hollywood Media's Vice Chairman and President, have
indicated their intention to provide to Hollywood Media, if required, with an
amount not to exceed $3.5 million through January 1, 2004, in order to enable
Hollywood Media to meet its working capital requirements; provided, however,
that the commitment will be reduced dollar for dollar to the extent Hollywood
Media generates cash from financings, operational cash flow or a sale of a
division or subsidiary of Hollywood Media Corp. There was a $400,000 outstanding
balance under this commitment at June 30, 2003, which was collateralized by
Broadway Ticketing inventory. Subsequent to June 30, 2003, an additional
$300,000, on security, was drawn against this commitment.
CRITICAL ACCOUNTING POLICIES
In response to the Security and Exchange Commission (SEC) Release
Number 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies" and SEC Release Number 33-8056, "Commission Statement about
Management's Discussion and Analysis of Financial Condition and Results of
Operations," we have identified the following critical accounting policies that
affect the more significant judgments and estimates used in the preparation of
the consolidated financial statements. The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires that we make estimates and judgments that affect
- 33 -
the reported amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis,
we will evaluate our estimates, including those related to asset impairment,
accruals for compensation and related benefits, revenue recognition, allowance
for doubtful accounts, and contingencies and litigation. These estimates are
based on the information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could vary from those estimates under different assumptions or
conditions. For a summary of all our significant accounting policies, including
the critical accounting policies discussed below, see Note 1 to the accompanying
consolidated financial statements.
Ticketing Revenue Recognition
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 recognition is deferred on
ticket sales until performance has taken place. Ticket revenue and cost of
revenue are recorded on a gross basis.
In August 2002, the FASB Emerging Issue Task Force issued EITF Issue
No. 02-16, "Accounting by a Reseller for Cash Consideration Received from a
Vendor" (EITF 02-16), which addresses the accounting by a vendor for
consideration given to a customer, including both a reseller of the vendor's
products and an entity that purchases the vendor's products from a reseller.
Hollywood Media adopted early EITF Issue No. 02-16 on December 31, 2002 for its
ticketing business. The impact on reported results of operations was a reduction
in net revenues and a corresponding decrease in cost of sales resulting in no
change in financial position.
Advertising Costs
Hollywood Media expenses the cost of advertising as incurred or when
such advertising initially takes place. In the first quarter of 2000, Hollywood
Media 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. Hollywood Media was
entitled to utilize a specified portion of this advertising each contract year.
The deferred advertising is carried on Hollywood Media's balance sheet as a
deferred asset and is being amortized over the contract period as the
advertising is utilized. Advertising expense recorded related to CBS advertising
for the six months ended June 30, 2003 and 2002 was $506,729 and $9,602,743
respectively, and $316,706 for Q2-03 compared to $5,025,145 for Q2-02. This is
separately reported in the accompanying consolidated statements of operations
under the caption "Amortization of CBS Advertising."
On August 28, 2002, Hollywood Media entered into an Exchange Agreement
with Viacom which terminated various agreements with CBS. Refer to "Amortization
of CBS Advertising and Impairment Loss Relating to CBS Advertising" above.
Barter Transactions
Hollywood Media recorded barter revenue and expense under its contract
with NATO described under "Net Revenue" above. In connection with the NATO
contract, Hollywood Media also acquired rights and obligations under ancillary
agreements with individual theaters that participate in the NATO organization.
- 34 -
Pursuant to these agreements, Hollywood Media collected and compiled movie
showtimes data for NATO member theaters and hosted web sites for certain
theaters so as to display the movie showtimes and other information about the
theater. In addition, Hollywood Media provided ongoing web site maintenance
services for certain theaters including providing promotional materials, movie
and theater information, advertising and editorial content. In exchange, the
theaters were to promote the Hollywood.com web site to movie audiences by airing
movie trailers about Hollywood.com. Hollywood Media recorded revenue and expense
from these activities measured at the fair value of the services exchanged in
accordance with Accounting Principles Board Opinion ("APB") No. 29, "Accounting
for Nonmonetary Transactions." In Q2-03 and Q2-02 we recorded $0 and $593,350
and $0 and $1,338,788 for Y2-03 and Y2-02 respectively, in revenue and expense
under the NATO contract. Additionally in Q2-03 and Q2-02 we recorded $0 and
$5,258, and $0 and $17,689 for Y2-03 and Y2-02, respectively in other non-cash
Internet barter transactions. The NATO contract is no longer in effect.
Stock Based Compensation
As permitted under Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transaction and Disclosure - an
amendment of FAS 123" ("SFAS No. 148"), which amended Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS
No. 123"), we have chosen to account for our Stock Plan under the intrinsic
value method as allowed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations. Under APB No. 25, because the exercise price of our employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded. FSAS No. 148 requires disclosure of
the estimated fair value of our employee stock options granted and pro forma
financial information assuming compensation expense was recorded using these
fair values.
Impairment of Long-Lived Assets
Effective December 31, 2001, Hollywood Media adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144"). SFAS No. 144 superseded
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121") and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," ("APB No. 30") for
the disposal of a segment of a business. Consistent with SFAS No. 121, SFAS No.
144 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
We evaluate the recoverability of long-lived assets not held for sale
by comparing the carrying amount of the assets to 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. We determined 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 Q2-03 and Y2-03.
- 35 -
In June 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and
intangible assets acquired after June 30, 2001 were no longer subject to
amortization. Goodwill and intangibles with indefinite lives acquired prior to
June 30, 2001 ceased to be amortized beginning January 1, 2002. In addition,
SFAS 142 changed the way we evaluated goodwill and intangibles for impairment.
Beginning January 1, 2002, goodwill and certain intangibles are no longer
amortized; however, they are subject to evaluation for impairment at least
annually using a fair value based test. The fair value based test is a two-step
test. The first step involved comparing the fair value of each of our reporting
units to the carrying value of those reporting units. If the carrying value of a
reporting unit exceeds the fair value of the reporting unit, we are required to
proceed to the second step. In the second step, the fair value of the reporting
unit would be allocated to the assets (including unrecognized intangibles) and
liabilities of the reporting unit, with any residual representing the implied
fair value of goodwill. An impairment loss would be recognized if and to the
extent that the carrying value of goodwill exceeded the implied value.
We completed step one of the test for each of our reporting units using
an outside appraisal firm. For all of our reporting units, no impairment existed
as the fair value of those reporting units were determined to be in excess of
their carrying values as of January 1, 2002. We performed an additional
impairment test on Hollywood.com as of October 1, 2002 using an outside
appraisal firm, in which we found no impairment to exist. Effective January 1,
2002, we ceased to amortize approximately $40.7 million of goodwill. We believe
the provisions of SFAS 142 did not materially impact the results of operations.
INFLATION AND SEASONALITY
Although Hollywood Media cannot accurately determine the precise
effects of inflation, it does not believe inflation has a material effect on
sales or results of operations. Hollywood Media 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 business as a result of the general publishing industry practice of
paying royalties semi-annually. The ticketing business is also affected by
seasonal variations with net revenues generally higher in the second quarter as
a result of increased sales volumes due to the Tony Awards(C) and in the fourth
quarter due to increased levels during the holiday period. In addition, although
not seasonal, Hollywood Media's intellectual properties division and NetCo
Partners both experience fluctuations in their respective revenue streams,
earnings and cash flow as a result of the amount of time that is expended in the
creation and development of the intellectual properties and their respective
licensing agreements. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in our
assets or liabilities that might occur due to changes in market rates and
prices, such as interest or foreign currency exchange rates, as well as other
relevant market rate or price changes.
- 36 -
Interest rates charged on Hollywood Media's debt instruments are
primarily fixed in nature. We therefore do not believe that the risk of loss
relating to the effect of changes in market interest rates is material.
We purchase and sell tickets to live theater shows in London's West
End. We minimize our exposure to adverse changes in currency exchange rates by
taking steps to reduce the time lag between the purchase and payment of tickets
for the London shows and the collection of related sales proceeds. We further
reduce our exposure by setting favorable currency conversion rates in our
foreign ticket pricing. We do not believe the risk of loss relating to adverse
changes in currency conversion rates to be material.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of Hollywood Media's management, including the Chief Executive
Officer and the Vice President of Finance and Accounting (principal financial
and accounting officer), of the effectiveness of Hollywood Media's disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, Hollywood Media's management, including the Chief
Executive Officer and the Vice President of Finance and Accounting, concluded
that Hollywood Media's disclosure controls and procedures were effective as of
the end of the period covered by this Form 10-Q. There have been no changes in
Hollywood Media's internal controls over financial reporting that occurred
during the fiscal quarter covered by this Form 10-Q that have materially
affected, or are reasonably likely to materially affect, Hollywood Media's
internal control over financial reporting.
- 37 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Water Garden Company LLC, as Plaintiff, v. Hollywood Media Corp., a
Florida corporation; hollywood.com, Inc., a California corporation (and
subsidiary of Hollywood Media Corp.); and The Tribune Company (as successor in
interest to the Times Mirror Company), as Defendants; filed July 16, 2001 in the
Superior Court of the State of California for the County of Los Angeles. Water
Garden Company LLC filed suit against Hollywood Media, its subsidiary,
hollywood.com, Inc., and The Tribune Company ("Tribune"), among others, claiming
damages as a result of alleged defaults by hollywood.com, Inc. under a lease for
office space entered into by hollywood.com, Inc., as lessee, and Water Garden
Company LLC, as lessor. The stated lease term is from January 1999 through
December 2003. Tribune guaranteed hollywood.com, Inc.'s lease obligations.
Hollywood Media has certain contractual indemnification obligations to Tribune
relating to Tribune's guaranty of the lease. The claims against Hollywood Media,
but not hollywood.com, Inc., have been dismissed.
As previously reported in Hollywood Media's 2002 Form 10-K, on March
25, 2003, the court in this action (the "Water Garden Lawsuit") issued its
Ruling on Motion for Summary Judgment and Summary Adjudication, in which it
granted, before trial, the motion of plaintiff for summary judgment against
defendants hollywood.com, Inc. and Tribune. This Ruling resulted in the court's
entry of a money judgment in the Water Garden Lawsuit on April 29, 2003 against
hollywood.com, Inc. and Tribune, jointly and severally, of $988,549, plus
reasonable attorneys' fees and costs of suit in an amount to be subsequently
determined. Interest would accrue on the judgment at the rate of ten percent per
annum until paid.
On May 7, 2003, hollywood.com Inc. and Tribune filed a Notice of Appeal
with the court in the Water Garden Lawsuit, and also filed a Notice of Filing
Undertaking for Stay of Enforcement of Judgment Pursuant to Appeal in order to
stay enforcement of the judgment pending resolution of the appeal (this filing
included an appeal bond obtained by Tribune (the "Appeal Bond") issued by a
surety company in the amount of $1,482,823, which is the amount of the bond
required by law to stay enforcement of the judgment). Based on the advice of our
outside legal counsel, we believe that hollywood.com, Inc. has meritorious
grounds for appeal, and a reasonable possibility exists of the appellate court
reversing the trial court's summary judgment ruling. However, it is not possible
at this time to estimate the probability of a favorable or unfavorable outcome
of such an appeal, and accordingly we cannot and do not provide any such
evaluation. If the appeal is successful, it is probable that the matter would
then be remanded to the trial court for trial.
In April 2003, Tribune and Hollywood Media agreed that Tribune would
obtain the Appeal Bond in exchange for specified advance payments by Hollywood
Media to Tribune as collateral to secure Hollywood Media's indemnification
obligation to Tribune described above. The advance payments consist of a
$100,000 payment made upon commencement of the agreement on April 7, 2003,
monthly payments of $75,000 (or $100,000, for the last six months of 2003). The
agreement allows Tribune the right to demand additional collateral, the form of
which, cash or shares of Hollywood Media's common stock, to be determined by
Hollywood Media in its discretion, in the approximate amount of the initial
judgment. Hollywood Media's obligation to make payments to Tribune under such
agreement is limited to the amount of the initial judgment plus costs and/or
attorney's fees that may be awarded and accrued interest. The advance payments
and, if applicable, any other security, are to be returned to Hollywood Media if
- 38 -
the appeal is successful (which would result in the bond no longer being
required) or to the extent the payments ultimately exceed Hollywood Media's
indemnification obligation to Tribune. Such payments made to Tribune may be used
by Hollywood Media, in its discretion, to pay the judgment or a settlement in
the Water Garden Lawsuit.
The judgment in the Water Garden Lawsuit is for rent accrued under the
lease through February 13, 2003, however, the facial termination date of the
lease is December 31, 2003. Accordingly, it is probable that the plaintiff in
the Water Garden Lawsuit will file one or more subsequent actions against
hollywood.com, Inc. and Tribune claiming additional amounts representing rent
allegedly accruing after such date through December 31, 2003, together with
litigation costs and attorneys fees.
Hollywood Media believes that hollywood.com, Inc. has valid grounds for
appeal and defenses to the plaintiff's claims. Recognizing that the ultimate
outcome of this case is uncertain, Hollywood Media has accrued on its books, as
of June 30, 2003, an amount which it believes is adequate to account for
potential liability for this matter, and we will continue to evaluate the matter
as the litigation process proceeds.
In addition to the legal proceedings described above, Hollywood Media
is a party to various other legal proceedings including matters arising in the
ordinary course of business. Hollywood Media does not expect such other legal
proceedings to have a material adverse impact on Hollywood Media's financial
condition or results of operations, however, there can be no assurance that such
other matters, if determined adversely, will not have a material adverse effect.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following securities were issued by Hollywood Media during the
quarter ended June 30, 2003, in transactions that were not registered under the
Securities Act of 1933.
On April 2, 2003, Hollywood Media issued an aggregate of 91,836 shares
of common stock valued at $76,078 to holders of its Convertible Debentures
pursuant to the terms thereof, in payment for interest due for the quarterly
period ended March 31, 2003.
On May 16, 2003, Hollywood Media issued 28,571 shares of common stock
valued at $39,714 to the previous owner of BroadwayTheater.com under the terms
of an earn-out provision in the Asset Purchase Agreement.
The securities described above were issued without registration under
the Securities Act of 1933 by reason of the exemption from registration afforded
by the provisions of Section 4 (2) thereof and/or Regulation D thereunder, each
recipient of securities having delivered appropriate investment representations
to Hollywood Media with respect thereto.
ITEM 5. OTHER INFORMATION
HOLLYWOOD MEDIA RECEIVES NOTICE OF REGAINED COMPLIANCE FROM NASDAQ
On May 30, 2003, Hollywood Media received a letter from The Nasdaq Stock Market,
Inc., notifying Hollywood Media that it had regained compliance with the $1.00
minimum bid price requirement under Nasdaq Marketplace Rule 4450(a)(5).
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
INCORPORATED BY
EXHIBIT DESCRIPTION REFERENCE FROM
------- ----------- --------------
31.1 Certification of Chief Executive Officer. (Section 302) (*)
31.2 Certification of Vice President of Finance and Accounting (Principal (*)
financial and accounting officer). (Section 302)
32.1 Certification of Chief Executive Officer (Section 906). (*)
32.2 Certification of Vice President of Finance and Accounting (Principal (*)
financial and accounting officer) (Section 906).
__________________
* Filed as an exhibit to this Form 10-Q
(b) REPORTS ON FORM 8-K:
Hollywood Media filed one report on Form 8-K during the quarter ended June 30,
2003, on May 16, 2003. Item 12 of the Form 8-K reported that on May 14, 2003 we
issued a press release announcing Hollywood Media's first quarter 2003 financial
results, and a copy of the press release was included in the filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD MEDIA CORP.
Date: August 14, 2003 By: /s/ Mitchell Rubenstein
-------------------------------------------------------------------
Mitchell Rubenstein, Chief Executive Officer (Principal executive
officer)
Date: August 14, 2003 By: /s/ Scott Gomez
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Scott Gomez, Vice President of Finance and Accounting
(Principal accounting officer)
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