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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 September 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
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 November 11, 2003, the number of shares outstanding of the
issuer's common stock, $.01 par value, was 21,911,267.
HOLLYWOOD MEDIA CORP.
TABLE OF CONTENTS
PAGE(S)
PART I FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002........................................ 2
Condensed Consolidated Statements of Operations (unaudited) for the
Three and Nine Months ended September 30, 2003 and 2002.................. 3
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine Months ended September 30, 2003 and 2002............................ 4
Condensed Consolidated Statement of Shareholders' Equity (unaudited)
for the Nine Months ended September 30, 2003............................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)......... 6-22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................... 23-40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................................ 40
ITEM 4. CONTROLS AND PROCEDURES ................................................ 41
PART II OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS ...................................................... 42-43
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .............................. 43-44
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................... 45
Signatures ..................................................................... 46
- 1 -
PART I FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 434,130 $ 2,342,238
Receivables, net 1,319,747 1,845,063
Inventories, net 6,870,553 7,144,311
Prepaid expenses 1,435,817 1,026,454
Other receivables 930,934 510,532
Other current assets 50,148 247,532
Deferred advertising - CBS 315,587 924,780
------------- -------------
Total current assets 11,356,916 14,040,910
RESTRICTED CASH 550,000 --
PROPERTY AND EQUIPMENT, net 2,591,876 3,563,569
INVESTMENTS IN AND ADVANCES TO EQUITY
METHOD INVESTEES 772,234 610,172
IDENTIFIABLE INTANGIBLE ASSETS, net 1,811,940 2,342,807
GOODWILL, net 40,813,683 40,773,968
OTHER ASSETS 465,641 737,231
------------- -------------
TOTAL ASSETS $ 58,362,290 $ 62,068,657
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,101,478 $ 1,354,663
Accrued expenses and other 4,393,049 3,854,881
Notes payable -- 250,000
Loan from shareholder/officer 700,000 --
Accrued exit and retail closure costs -- 27,500
Deferred revenue 8,979,603 8,890,002
Current portion of capital lease obligations 189,421 340,083
------------- -------------
Total current liabilities 16,363,551 14,717,129
CAPITAL LEASE OBLIGATIONS, less current portion 113,085 238,546
DEFERRED REVENUE 290,813 214,626
MINORITY INTEREST 29,046 --
OTHER DEFERRED LIABILITY 2,292,022 2,381,863
CONVERTIBLE DEBENTURES, NET 3,803,278 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;
21,383,004 and 20,253,863 shares
issued and outstanding at
September 30, 2003 and December
31, 2002, respectively 213,830 202,539
Deferred compensation (243,750) --
Additional paid-in capital 278,734,767 277,261,293
Accumulated deficit (243,234,352) (236,171,327)
------------- -------------
Total shareholders' equity 35,470,495 41,292,505
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,362,290 $ 62,068,657
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
- 2 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET REVENUES $ 45,515,343 $ 41,450,495 $ 13,975,413 $ 12,629,337
COST OF REVENUES 32,984,812 28,504,839 9,388,669 9,207,606
------------ ------------ ------------ ------------
Gross margin 12,530,531 12,945,656 4,586,744 3,421,731
------------ ------------ ------------ ------------
OPERATING EXPENSES:
General and administrative 5,487,291 4,582,735 1,928,481 1,746,473
Selling and marketing 729,814 1,686,298 261,582 (101,413)
Salaries and benefits 10,130,330 11,145,505 3,480,454 4,092,418
Amortization of CBS advertising 609,193 10,936,495 102,464 1,333,752
Impairment loss- CBS advertising -- 57,274,680 -- 57,274,680
Write-off of prepaid trade credits -- 655,500 -- 655,500
Exit and other retail closure costs -- 411,399 -- 150,000
Depreciation and amortization 1,839,801 2,425,496 585,408 577,760
------------ ------------ ------------ ------------
Total operating expenses 18,796,429 89,118,108 6,358,389 65,729,170
------------ ------------ ------------ ------------
Operating loss (6,265,898) (76,172,452) (1,771,645) (62,307,439)
EQUITY IN EARNINGS - INVESTMENTS 797,730 367,597 (8,396) 136,639
OTHER INCOME (EXPENSE):
Interest expense (1,049,561) (869,113) (373,874) (413,785)
Interest income 12,558 16,756 911 6,525
Other, net (108,165) 7,034 (117,059) 4,634
------------ ------------ ------------ ------------
Loss before minority interest (6,613,336) (76,650,178) (2,270,063) (62,573,426)
MINORITY INTEREST (449,689) (595,668) (50,101) (202,257)
------------ ------------ ------------ ------------
NET LOSS $ (7,063,025) $(77,245,846) $ (2,320,164) $(62,775,683)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.34) $ (2.81) $ (0.11) $ (2.40)
============ ============ ============ ============
Weighted average shares outstanding 20,689,747 27,521,885 21,045,043 26,193,222
============ ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
- 3 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
----------------------------------
2003 2002
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,063,025) $(77,245,846)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,839,801 2,425,496
Amortization of discount on convertible debentures 579,290 346,516
Interest paid in stock 233,360 37,479
Interest non-cash -- 229,812
Equity in earnings of investments, net of return of
invested capital (162,062) 715,863
Issuance of compensatory stock, stock options and
warrants for services rendered 304,649 673,595
Amortization of deferred compensation costs 121,429 1,710,441
Amortization of deferred financing costs 97,272 30,220
Provision for bad debts 178,950 164,905
Exit costs -- 411,399
Write-off of prepaid trade credits -- 655,500
Impairment loss - CBS advertising -- 57,274,680
Amortization of CBS advertising 609,193 10,936,495
Minority interest in loss of subsidiaries 449,689 595,668
Amortization of put/call option (137,000) --
Changes in assets and liabilities:
Receivables 346,366 (157,043)
Prepaid expenses (409,365) (444,349)
Other receivables (420,402) (61,994)
Inventories 273,758 (715,256)
Other current assets 197,384 (89,818)
Other assets 174,318 (40,926)
Accounts payable 746,815 223,654
Accrued liabilities 783,029 (740,440)
Deferred revenue 165,788 (487,548)
Other deferred liability 47,159 --
------------ ------------
Net cash used in operating activities (1,043,604) (3,551,497)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments pursuant to bond agreement (550,000) --
Cash paid for acquisition -- (10,000)
Capital expenditures (337,241) (1,244,567)
------------ ------------
Net cash used in investing activities (887,241) (1,254,567)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder/officer loan 700,000 1,651,000
Payments of shareholder/officer loan -- (2,101,000)
Payments under note payable 60,041 (100,000)
Net advances from factor (119,248) (191,885)
Payments to repurchase common stock -- (340,053)
Proceeds from issuance of convertible debentures and
warrants, less issuance costs -- 5,407,861
Proceeds received from exchange of advertising for
common stock and warrants -- 2,000,000
Return of capital from Tekno Books to minority partner (341,933) (509,017)
Payments under capital lease obligations (276,123) (548,040)
------------ ------------
Net cash provided by financing activities 22,737 5,268,866
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,908,108) 462,802
CASH AND CASH EQUIVALENTS, beginning of period 2,342,238 1,980,966
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 434,130 $ 2,443,768
============ ============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 93,912 $ 92,353
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
- 4 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
Common Stock
---------------------------- Deferred
Shares Amount Compensation
---------- ------------- ------------
Balance - December 31, 2002 20,253,863 $ 202,539 $ --
Isssuance of stock options and warrants for services -- -- --
Other equity transaction 3,000 30 --
Issuance of stock - 401 (k) employer match 155,783 1,558 --
Interest payment on convertible debentures 257,675 2,577 --
Purchase price adjustment 28,571 286 --
Issuance of restricted stock and amortization of
deferred compensation 279,762 2,798 (243,750)
Settlement of guarantee with common stock 84,515 845 --
Settlement of debt with common stock 319,835 3,197 --
Net loss -- -- --
---------- ------------- ----------
Balance - September 30, 2003 21,383,004 $ 213,830 $ (243,750)
========== ============= ==========
[restubbed]
Additional
Paid-in Accumulated
Capital Deficit Total
------------- ------------- -------------
Balance - December 31, 2002 $ 277,261,293 $(236,171,327) $ 41,292,505
Isssuance of stock options and warrants for services 145,866 -- 145,866
Other equity transaction 2,970 -- 3,000
Issuance of stock - 401 (k) employer match 154,225 -- 155,783
Interest payment on convertible debentures 230,783 -- 233,360
Purchase price adjustment 39,428 -- 39,714
Issuance of restricted stock and amortization of
deferred compensation 362,381 -- 121,429
Settlement of guarantee with common stock 110,977 -- 111,822
Settlement of debt with common stock 426,844 -- 430,041
Net loss -- (7,063,025) (7,063,025)
------------- ------------- -------------
Balance - September 30, 2003 $ 278,734,767 $(243,234,352) $ 35,470,495
============= ============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
- 5 -
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 nine months ended September 30, 2003 and cash flows
for the nine months ended September 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.
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) STOCK-BASED COMPENSATION:
As permitted under Statement of Financial Accounting Standard (SFAS)
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of SFAS 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.
Nine months ended September 30, Three months ended September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Reported net loss $ (7,063,025) $(77,245,846) $ (2,320,164) $(62,775,683)
Stock-based employee compensation expense
under the fair value method (1,845,609) (3,034,443) (700,431) (1,011,481)
------------ ------------ ------------ ------------
Adjusted net loss $ (8,908,634) $(80,280,289) $ (3,020,595) $(63,787,164)
============ ============ ============ ============
Reported net loss basic and diluted per share $ (0.34) $ (2.81) $ (0.11) $ (2.40)
============ ============ ============ ============
Adjusted net loss basic and diluted per share $ (0.43) $ (2.92) $ (0.14) $ (2.44)
============ ============ ============ ============
Number of ordinary shares used in computation
basic and diluted 20,689,747 27,521,885 21,045,043 26,193,222
============ ============ ============ ============
- 6 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
(3) 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 5,200,133 and 4,980,743 options and warrants to purchase common shares
outstanding at September 30, 2003 and 2002, respectively, that could potentially
dilute earnings per share in the future. In addition, the convertible debentures
(Note 5) are convertible into 1,647,399 shares of common stock at a conversion
price of $3.46 per share. The potential common shares underlying the options,
warrants and convertible debentures have been excluded from the weighted average
number of common shares outstanding for the three and nine months ended
September 30, 2003 and 2002 because they are 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.
- 7 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 $240,808 and $307,398 at September 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 September 30, 2003 and December 31, 2002,
included in "accrued expenses and other" in the accompanying balance sheets is a
liability of $218,230 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 May 2003, the Financial Accounting Standards Board (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. SFAS No. 149 clarifies
under what circumstances a contract with 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 No. 149 is
effective for contracts entered into or modified after June 30, 2003, with
certain exceptions for hedging relationships designated after June 30, 2003.
This statement did not have a material impact on the Company's financial
position or results of operations for the periods presented.
In May 2003, 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. There was no impact to the
Hollywood Media's consolidated financial statements upon the adoption of the
provisions of SFAS No. 150.
- 8 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest entities, an interpretation of ARB No. 51 (FIN No. 46). FIN
No. 46 requires companies to make certain disclosures about variable interest
entities (VIEs) with which it has involvement, if it is reasonably possible that
it will consolidate or disclose information about the variable interest entity
when FIN No. 46 becomes effective in July 2003 or December 2003 if certain
criteria are met. The disclosure requirements are effective to all financial
statements issued after January 31, 2003. Hollywood Media is in the process of
evaluating the impact of the adoption of FIN No. 46 will have on its financial
position, result, and operations or cash flows.
(4) 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 September 30, 2003, the amount of principal and interest past
due to Hollywood Media is $214,656. 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 nine months and
three months ended September 30 2003, the value of the option was reduced by
$137,000 and $30,000, respectively, and marked to market through earnings.
(5) 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 (5% at September 30, 2003). The second promissory note
is a one-year non-interest bearing note with a face value of $250,000. An
agreement was reached effective 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.
Total balance as of December 31, 2002 was $320,000 for principal and interest. A
guaranty was granted to the former owner in connection with the sale of the
- 9 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
former owner's shares obtained at acquisition. As a result of the guaranty, the
Company recorded a liability of $50,000 which was included in "Accrued expenses
and other" on the condensed consolidated balance sheet as of June 30, 2003.
During the three months ended September 30, 2003, the Company issued 262,000
shares valued at $353,700 to the former owner as payment for the outstanding
principal and interest balance of $320,000. In addition, 57,835 shares valued at
$76,341 were issued to a third party as payment under the guaranty granted to
the former owner. As a result, the additional consideration of $60,041 was
recorded as additional other expense.
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 committed 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 prime rate plus one percent. There was
$700,000 principal amount outstanding under this commitment at September 30,
2003, of which $500,000 is collateralized by Broadway Ticketing inventory and
$200,000 is unsecured. No amounts were outstanding as of December 31, 2002 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
customary 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 nine months ended September 30, 2003, $32,424 and $97,272,
respectively, were recognized as interest expense from the amortization of the
debt issuance costs.
- 10 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
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
nine months ended September 30, 2003, Hollywood Media recorded $207,270 and
$579,290, 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 in nine monthly installments
commencing April 2003. During the three months ended September 30, 2003, the
Company agreed to pay the holder half of any monthly payment, at the Company's
election, in restricted stock. As a result, the Company recorded an additional
liability of $89,215, which was included in "Accrued expenses and other" on the
condensed consolidated balance sheet as of September 30, 2003 for the market
premium of the common stock payments. During the third quarter, the Company
issued 84,515 shares valued at $111,822. The outstanding balance of such loan at
September 30, 2003 was $264,662.
(6) 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 September
30, 2003, management believes there are no indicators that an impairment has
occurred. The next impairment evaluation will occur as of October 1, 2003.
(7) 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.
- 11 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
On July 1, 2003, pursuant to the employment agreements for both
Hollywood Media's Chairman of the Board and Chief Executive Officer and
Hollywood Media's Vice Chairman and President, Hollywood Media issued 250,000
shares of restricted common stock valued at $325,000. During the three and nine
months ended September 30, 2003, $81,250 was recorded as compensation expense
and $243,750 was included in "Deferred compensation" on the condensed
consolidated balance sheet as of September 30, 2003.
On July 2, 2003, Hollywood Media issued 64,777 shares of common stock
valued at $77,787 to the holders of the convertible debentures for interest due
for the period April 1, 2003 to June 30, 2003.
On July 17, 2003 Hollywood Media issued 57,835 shares of common stock
valued at $76,341 to a third party as payment under the guaranty (Note 5)
granted to the former owner of TDI.
On July 25, 2003 Hollywood Media issued 29,151 shares of common stock
valued at $37,313 as payment for a guaranty (Note 5) on a CinemaSource note sold
to an independent third party in 2000.
On September 2, 2003 Hollywood Media issued 30,488 shares of common
stock valued at $37,195 as payment on account of a guaranty (Note 5) on a
CinemaSource note sold to an independent third party in 2000.
On September 24, 2003 Hollywood Media issued 24,876 shares of common
stock valued at $37,314 as payment for a guaranty (Note 5) on a CinemaSource
note sold to an independent third party in 2000.
On September 25, 2003 Hollywood Media issued 262,000 shares of
restricted common stock valued at $353,700 to the former owner of TDI as payment
for the outstanding principal and interest balance on a promissory note (Note 5)
in connection with the TDI acquisition.
On September 25, 2003 Hollywood Media issued 29,762 shares of common
stock valued at $40,179 as payment for a bonus pursuant to an employment
agreement to a non-executive officer of Hollywood Media.
During the nine months ended September 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. No
compensation expense has been recorded as of September 30, 2003 due to the low
probability of the vesting event occurring.
- 12 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(8) INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES:
Investments in and advances to equity method investees consist of the
following:
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------- ---------
NetCo Partners (a) $ 777,209 $ 615,147
MovieTickets.com (b) (4,975) (4,975)
--------- ---------
$ 772,234 $ 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 nine and three months ended September 30, 2003 and 2002 are
presented below:
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues $2,069,191 $ 970,263 $ 38,266 $ 33,557
Gross Profit 1,721,518 742,477 (16,439) 27,315
Net Income 1,595,460 735,194 (16,792) 25,206
Hollywood Media's
share of net income 797,730 367,597 (8,396) 12,603
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.
- 13 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of September 30, 2003, NetCo Partners had $1,421,375 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 $145,168 as of September 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.
As of September 30, 2003, Hollywood Media has received cumulative
profit distributions from NetCo Partners since its formation totaling
$9,088,026, 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
September 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 for the nine
months ended September 30, 2003 and 2002 and $0 and $124,036 for the three
months ended September 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
- 14 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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." The NATO contract is
no longer in effect. Barter revenue recorded for the nine months ended September
30, 2003 and 2002, was $0 and $993,917 and $0 and $(344,871) for the three
months ended September 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/Filmtracker (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.
- 15 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table illustrates financial information regarding
Hollywood Media's reportable segments.
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------ -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET REVENUES:
Broadway Ticketing $ 36,431,122 $ 31,626,407 $ 11,051,771 $ 10,035,322
Data Business 5,227,476 4,495,244 1,731,243 1,554,396
Internet Ad Sales and Other (a) 1,926,737 3,177,962 696,280 331,342
Intellectual Properties 1,930,008 2,150,882 496,119 708,277
------------ ------------ ------------ ------------
$ 45,515,343 $ 41,450,495 $ 13,975,413 $ 12,629,337
============ ============ ============ ============
GROSS MARGIN:
Broadway Ticketing $ 4,718,807 $ 4,445,058 $ 2,107,608 $ 1,297,444
Data Business 4,972,828 4,295,500 1,646,260 1,470,518
Internet Ad Sales and Other 1,700,740 2,853,425 619,799 216,923
Intellectual Properties 1,138,156 1,351,673 213,077 436,846
------------ ------------ ------------ ------------
$ 12,530,531 $ 12,945,656 $ 4,586,744 $ 3,421,731
============ ============ ============ ============
OPERATING INCOME (LOSS):
Broadway Ticketing $ 380,651 $ 1,030,377 $ 724,165 $ 50,972
Data Business (b) 501,512 (389,765) 166,407 (7,787)
Internet Ad Sales (c) (2,862,310) (70,498,565) (926,201) (59,572,548)
Intellectual Properties 895,933 1,074,476 190,678 346,947
Corporate Overhead and Other (5,181,684) (7,388,975) (1,926,694) (3,125,023)
------------ ------------ ------------ ------------
$ (6,265,898) $(76,172,452) $ (1,771,645) $(62,307,439)
============ ============ ============ ============
SEGMENT ASSETS: (unaudited)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Broadway Ticketing $ 8,655,633 $ 9,499,232
Data Business 2,471,148 3,049,655
Internet Ad Sales 3,049,039 3,599,136
Intellectual Properties 780,730 720,819
Corporate Overhead and Other 43,405,740 45,199,815
----------- -----------
$58,362,290 $62,068,657
=========== ===========
(a) Includes non-cash barter revenue of $1,011,606 for the nine
months ended September 30, 2002, and $(344,871) for three
months ended September 30, 2002. During the three months ended
September 30, 2002, Hollywood Media recorded an adjustment to
non-cash barter revenue, which was recognized previously. This
adjustment did not impact net loss for the period.
(b) Includes $261,399 in expenses for the nine months ended
September 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 $609,193 and $10,936,495 in amortization of CBS
advertising for the nine months ended September 30, 2003 and
2002, respectively, used to promote certain of the Company's
businesses. The three and nine months ended September 30, 2002
includes an impairment loss of $57,274,680 related to CBS
advertising pursuant to the termination of various agreements.
- 16 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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
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. Subsequently, on September 9, 2003, the court granted a motion
to add certain litigation costs and attorneys fees to the judgment, such that
the current principal amount of the judgment, including costs and attorneys
fees, is $1,097,761.
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 was the amount of the bond
required by law to stay enforcement of the judgment). Upon the adding of certain
costs and attorneys fees to the judgment, as described in the preceding
paragraph, an application has been made to increase the amount of the
Appeal Bond to $1,646,641, and it is expected that the increased undertaking
will shortly be filed with the court. 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
- 17 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. If the appeal of the Water Garden Lawsuit is
unsuccessful, then, pursuant to a written stipulation between the parties to the
lawsuit, the judgment will be modified to add rent accruing between February 13,
2003 and December 31, 2003, together with attorneys fees and costs. Should the
appeal be unsuccessful, we anticipate that the amount of the judgment would
increase, pursuant to such stipulation, by approximately $400,000.
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 September 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 a separate matter, in November 2002 there was an arbitration action
commenced by a third party against Hollywood Media regarding a contract dispute
involving claims against Tribune Company and the hollywood.com, Inc. subsidiary
of Hollywood Media, which dispute was settled in October 2003. Under the
settlement, Hollywood Media made a $200,000 payment in October 2003, and agreed
to purchase certain advertising to advertise Hollywood Media's
exhibition-related businesses in a trade publication at a cost of $14,167 per
month, at prevailing rates, over a six-month period commencing in December 2003.
In a separate matter, a lawsuit pertaining to an insertion order was
filed against Hollywood Media in May 2003, seeking damages of $161,000 plus
interest and costs. Hollywood Media does not believe any monies are owed and
intends to defend this case vigorously. This proceeding is in its early stages
and discovery has not yet commenced.
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.
- 18 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 presentation.
(14) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
For The Nine Months Ended September 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 257,675 shares of common stock, valued
at $233,360 for interest due to the holders of the convertible
debentures.
o Options and warrants valued at $145,866, 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 connection
with the acquisition of BroadwayTheater.com.
o Hollywood Media issued 279,762 shares of common stock valued
at $365,179, of which $243,750 is deferred compensation,
pursuant to employment agreements with Hollywood Media
executives.
o Hollywood Media issued 84,515 shares of common stock valued at
$111,822 pursuant to a guaranty agreement entered into with
the purchaser of a CinemaSource note sold by Hollywood Media.
o Hollywood Media issued 319,835 shares of common stock valued
at $430,041 as payment for debt in connection with the
acquisition of TDI and a related guaranty granted to the
former owner of TDI on Hollywood Media shares held by the
former owner.
- 19 -
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Nine Months Ended September 30, 2002:
o Capital lease transactions totaled $162,518.
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.
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 first
quarter of 2002.
o Options and warrants, valued at $412,195, under Black Scholes,
were granted for services rendered.
o Hollywood Media issued 28,571 shares of common stock, valued
at $110,284, under the 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.
o Pursuant to the exercise of a warrant, Hollywood Media issued
218,009 shares of common stock.
o Prepaid trade credits of $655,500, relating to closed
e-commerce business were written off.
- 20 -
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
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.
- 21 -
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. Hollywood Media manages 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.
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. Hollywood Media 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.
- 22 -
AdSource. Hollywood Media 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"). 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 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 customers include four major movie studios, numerous production
companies, law firms, investment banks, news agencies, magazines, 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, Showtime, the Directors Guild of America,
DreamWorks SKG, Universal Studios, and other movie studios. 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, data 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 the
FilmTracker assets with Baseline and Fountainhead's $2 million promissory note
payable to Hollywood Media. See Note 4 -- 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.
- 23 -
BROADWAY TICKETING DIVISION
Broadway Ticketing: Theatre Direct International ("TDI"); Broadway.com
and 1-800-BROADWAY (the foregoing Broadway ticketing businesses are 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,
off-Broadway, and in London's West End. TDI sells tickets directly to group
buyers including travel agents and tour groups. TDI also manages a marketing
cooperative that represents participating Broadway shows to the travel industry
around the world. Recent Broadway shows marketed by this cooperative include
Aida, Beauty and the Beast, Cabaret, Chicago, Fame, 42nd Street, Gypsy, Mamma
Mia!, 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 and educational
programs to schools across the country.
Broadway.com and 1-800-BROADWAY. We launched the Broadway.com website
on May 1, 2000. Broadway.com offers the ability to purchase Broadway,
off-Broadway and London's West End theater tickets online. In addition, the site
provides a wide variety of editorial content about the theater business; feature
stories, opening nights, star profiles, photo opportunities and a critical
roundup of reviews. Our 1-800-BROADWAY toll-free number, acquired in October
2001, complements the online ticketing and information services available
through Broadway.com.
The combined businesses, Broadway Ticketing, provide theater ticketing
and related content for over 100 venues in multiple markets to consumer
households and over 20,000 travel agencies, tour operators, corporations,
educational institutions and affiliated websites. The consolidation of these
businesses makes Broadway Ticketing one of the leading wholesalers of theater
tickets worldwide. Broadway Ticketing employs a knowledgeable sales force that
offers ticket buyers a concierge-style service that includes show
recommendations, hotel packages and dinner choices.
In August 2003, Hollywood Media promoted Matt Kupchin to be the new
President of our Broadway Ticketing division. He was the founder of
BroadwayTheater.com, which Hollywood Media acquired in April 2000 and
consolidated its operations into Broadway.com; BroadwayTheater.com's business
included selling of Broadway tickets over the Internet. Mr. Kupchin has been a
senior member of Broadway Ticketing's management since April 2000.
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 Walt 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.
- 24 -
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.
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 Hollywood TV and
Totally Broadway 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
Optimumsm 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, which added Totally Hollywood TV to its video-on-demand
("VOD") 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,
- 25 -
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 1,510 books that have been published. Another 3,143
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 the owner of the remaining 49% interest
in Tekno Books.
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.
- 26 -
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
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 Yahoo!, MSN Network, 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 approximately 1.6 million tickets sold in the third
quarter 2003, an increase of 21.2% over its ticket sales in the third quarter
2002. Movietickets.com has sold over $19.0 million tickets to date.
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 and Warren Theatres are in 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.
- 27 -
RESULTS OF OPERATIONS
The following table summarizes Hollywood Media's revenues, cost of
revenues and gross margin by reportable segment for the nine months ended
September 30, 2003 ("Y3-03") and 2002 ("Y3-02"), and the three months ended
September 30, 2003 ("Q3-03") and 2002 ("Q3-02"), respectively:
BROADWAY DATA INTERNET AD SALES INTELLECTUAL
TICKETING BUSINESS AND OTHER (A) PROPERTIES (B) TOTAL
--------- -------- ------------- -------------- -----
Y3-03
Net Revenues $36,431,122 $ 5,227,476 $ 1,926,737 $ 1,930,008 $45,515,343
Cost of Revenues 31,712,315 254,648 225,997 791,852 32,984,812
----------- ----------- ----------- ----------- -----------
Gross Margin $ 4,718,807 $ 4,972,828 $ 1,700,740 $ 1,138,156 $12,530,531
=========== =========== =========== =========== ===========
Y3-02
Net Revenues $31,626,407 $ 4,495,244 $ 3,177,962 $ 2,150,882 $41,450,495
Cost of Revenues 27,181,349 199,744 324,537 799,209 28,504,839
----------- ----------- ----------- ----------- -----------
Gross Margin $ 4,445,058 $ 4,295,500 $ 2,853,425 $ 1,351,673 $12,945,656
=========== =========== =========== =========== ===========
Q3-03
Net Revenues $11,051,771 $ 1,731,243 $ 696,280 $ 496,119 $13,975,413
Cost of Revenues 8,944,163 84,983 76,481 283,042 9,388,669
----------- ----------- ----------- ----------- -----------
Gross Margin $ 2,107,608 $ 1,646,260 $ 619,799 $ 213,077 $ 4,586,744
=========== =========== =========== =========== ===========
Q3-02
Net Revenues $10,035,322 $ 1,554,396 $ 331,342 $ 708,277 $12,629,337
Cost of Revenues 8,737,878 83,878 114,419 271,431 9,207,606
----------- ----------- ----------- ----------- -----------
Gross Margin $ 1,297,444 $ 1,470,518 $ 216,923 $ 436,846 $ 3,421,731
=========== =========== =========== =========== ===========
(a) Net Revenues include barter revenue of $1,011,606 and $(344,871) for
Y3-02 and Q3-02, respectively, which, when removed from these amounts,
reduces and increases gross margin, respectively.
(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.
- 28 -
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
(now discontinued) which offered 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 $45,515,343 for Y3-03 as compared to
$41,450,495 for Y3-02, an increase of $4,064,848 or 10% and $13,975,413 for
Q3-03 compared to $12,629,337 for Q3-02, an increase of $1,346,076 or 11%. 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 the elimination of non-cash
barter revenue in 2003. Non-cash barter revenue was $0 and $1,011,606 for Y3-03
and Y3-02, and $0 and $(344,871) for Q3-03 and Q3-02, respectively. Barter
revenue as a percentage of total net revenue was 0% and 2% for Y3-03 and Y3-02,
respectively, and 0% for Q3-03 compared to 3% for Q3-02. In Y3-03 net revenues
were derived 80% from Broadway Ticketing, 12% from Data Business, 4% from
Internet Ad Sales and Other and 4% from Intellectual Properties.
Broadway Ticketing revenues were $36,431,122 and $31,626,407 for Y3-03
and Y3-02, respectively, an increase of $4,804,715 or 15% and $11,051,771 for
Q3-03 compared to $10,035,322 for Q3-02 for an increase of $1,016,449 or 10%.
Broadway Ticketing revenues increased due to increased ticket sales and an
increase in the service charge on individual tickets. 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 $5,227,476
for Y3-03 as compared to $4,495,244 for Y2-02, an increase of $732,232 or 16%
and $1,731,243 for Q3-03 compared to $1,554,396 for an increase of $176,847 or
11%. Our Source business revenues increased approximately $312,237 in Y3-03 as
compared to Y3-02 and our Baseline business revenues increased approximately
$419,995 in Y3-03 as compared to Y3-02. The Source business revenues increased
$64,172 for Q3-03 compared to Q3-02 and the Baseline business increased $112,675
for Q3-03 over Q3-02. Revenue for CinemaSource and EventSource is generated by
the licensing of movie, event and theater showtimes and other information to
- 29 -
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:
Nine Months Ended Three Months Ended
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenue - Non-barter $1,926,737 $2,166,356 $ 696,280 $ 676,213
Revenue - NATO barter -- 993,917 -- (344,871)
Revenue - Barter -- 17,689 -- --
---------- ---------- ---------- ----------
$1,926,737 $3,177,962 $ 696,280 $ 331,342
========== ========== ========== ==========
Internet Ad Sales and Other revenue was $1,926,737 for Y3-03 as
compared to $3,177,962 for Y3-02, a decrease of $1,251,225 or 39% and Q3-03 was
$696,280 compared to $331,342 for Q3-02, an increase of $364,938 or 110%. The
decrease in Y3-03 revenues was in part attributable to no barter revenue being
recognized during Y3-03 and CBS advertising which was eliminated after the
Viacom Exchange Agreement in 2002. Internet Ad Sales 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 $1,011,606 for Y3-03 and Y3-02, respectively and $0
and $(344,871) for Q3-03 and Q3-02, respectively. As a percentage of Internet Ad
Sales and Other revenue, barter revenues comprised 0% and 32% for Y3-03 and
Y3-02, respectively and 0% and 104% for Q3-03 and Q3-02, 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 revenue. This contract is no longer in effect and
thus Hollywood Media recorded $0 in promotional non-cash revenue and non-cash
expense for Y3-03 in comparison to $993,917 in Y3-02. Hollywood Media recorded
$0 and $(344,871) in barter revenue under the NATO contract for Q3-03 and Q3-02
respectively.
Revenues from our Intellectual Properties division were $1,930,008 for
Y3-03 as compared to $2,150,882 for Y3-02, a decrease of $220,874 or 10% and
$496,119 and $708,277 for Q3-03 and Q3-02, a decrease of $212,158 or 30%. 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
- 30 -
longer subject to contingencies which makes comparison between quarters an
inaccurate indicator of future cash flows. The Intellectual Properties division
just experienced its 36th consecutive profitable quarter. 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 $32,984,812 for Y3-03 as compared to $28,504,839
for Y3-02, an increase of $4,479,973 or 16%, and $9,388,669 for Q3-03 compared
to $9,207,606 for Q3-02, an increase of $181,063 or 2%. As a percentage of net
revenues, cost of revenues was 72% and 69% for Y3-03 and Y3-02, respectively and
67% and 73% for Q3-03 and Q3-02, respectively. The increase in the cost of
revenues is primarily the result of an increase in Broadway ticketing revenues.
The Broadway Ticketing segment accounted for 96% of the cost of revenues for
Y3-03 and 95% for Y3-02, and 95% for both Q3-03 and Q3-02, 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.
GROSS MARGIN
Gross margin was $12,530,531 for Y3-03 as compared to $12,945,656 for
Y3-02, a decrease of $415,125 or 3%, and $4,586,744 for Q3-03 as compared to
$3,421,731 for Q3-02, an increase of $1,165,013 or 34%. As a percentage of net
revenue, gross margin in Y3-03 was 28% compared to 31% in Y3-02, and Q3-03 was
33% compared to 27% in Q3-02. The percentage decrease for Y3-03 was due in part
to an increased percentage of revenues from our Broadway Ticketing segment which
has lower gross margin than our other business segments.
EQUITY IN EARNINGS OF INVESTMENTS
Equity in earnings of investments consisted of the following:
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
NetCo Partners (a) $ 797,730 $ 367,597 $ (8,396) $ 12,603
MovieTickets.com (b) -- -- -- 124,036
--------- --------- --------- ---------
$ 797,730 $ 367,597 $ (8,396) $ 136,639
========= ========= ========= =========
(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 $797,730 for Y3-03 as compared to $367,597 for Y3-02. Revenues vary
quarter-to-quarter dependent on timing of deliveries of various manuscripts to
the publisher although, notwithstanding the timing of manuscript deliveries,
one NetForce book is typically published each year in North America.
- 31 -
(b) MovieTickets.com
Hollywood Media owns 26.4% of the total equity in MovieTickets.com,
Inc. joint venture at September 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 $0 in Y3-03 and Y3-02,
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 $904,556 or 20% to $5,487,291 for Y3-03 from $4,582,735 for
Y3-02, and increased $182,008 or 10% to $1,928,481 for Q3-03 from $1,746,473 for
Q3-02. 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. The increase is primarily due to rising
accounting costs, and increased legal costs due to the activity
disclosed in Note 11 to the Consolidated Financial Statements included in this
10-Q Report and similar matters. As a percentage of revenue, general and
administrative expenses increased to 12% for Y3-03 from 11% for Y3-02 and
remained the same at 14% for Q3-03 and Q3-02.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
decreased $956,484 or 57% to $729,814 for Y3-03 from $1,686,298 for Y3-02, and
increased $362,995 or 358% to $261,582 for Q3-03 from $(101,413) for Q3-02. The
decrease from Y3-02 to Y3-03 is due primarily to no barter transactions and
therefore, no barter expense in 2003 compared to $1,011,606 in barter expense
for Y3-02. The increase from Q3-02 to Q3-03 is due primarily to the negative
non-cash barter revenue of $(344,871) representing an adjustment to NATO barter
revenue booked in Q3-02. Selling and marketing expense includes advertising,
marketing, promotional, business development and public relations expenses. As a
percentage of revenue, selling and marketing expenses decreased to 2% for Y3-03
from 4% for Y3-02, and increased to 2% for Q3-03 from 1% for Q3-02.
SALARIES AND BENEFITS. Salaries and benefits decreased $1,015,175 or 9%
to $10,130,330 for Y3-03 from $11,145,505 for Y3-02 and decreased $611,964 or
15% to $3,480,454 for Q3-03 from $4,092,418 for Q3-02. As a percentage of
revenue, salaries and benefits decreased to 22% for Y3-03 from 27% for Y3-02 and
decreased to 25% for Q3-03 from 32% in Q3-02. This decrease is primarily
attributable to a decrease in administrative salaries resulting in part from
continued streamlining of the business in 2002 and early 2003, which was
partially offset by various expense increases including additional payroll costs
in our Broadway Ticketing division for extra labor needed to handle customer
calls including re-bookings as a result of the closure of most Broadway shows
due to a musicians' strike during March 2003.
AMORTIZATION OF CBS ADVERTISING AND IMPAIRMENT LOSS RELATING TO CBS
ADVERTISING. Amortization of CBS advertising related to the agreement with
Viacom was $609,193 and $10,936,495 for Y3-03 and Y3-02, respectively, and
$102,464 and $1,333,752 for Q3-03 and Q3-02, 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,
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
$1,839,801 for Y3-03 and $2,425,496 for Y3-02, representing a decrease of
$585,695 or 24%, and $585,409 for Q3-03, and $577,760 for Q3-02, representing a
decrease of $7,649 or 1%. The decrease was primarily attributable to certain
intangible assets that became fully amortized during 2002.
INTEREST EXPENSE. Interest expense was $1,049,561 for Y3-03 as compared
to $869,113 for Y3-02, an increase of $180,448 or 21% and $373,874 for Q3-03, as
compared to $413,785 for Q3-02, a decrease of $39,911 or 10%. The increase for
Y3-03 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 $12,558 for Y3-03 as compared to
$16,756 for Y3-02, a decrease of $4,198 or 25% and $911 for Q3-03 compared to
$6,525 for Q3-02, a decrease of $5,614 or 86%.
- 32 -
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had cash and cash equivalents of $434,130
compared to cash and cash equivalents of $2,342,238 at December 31, 2002. There
is $2,800,000 remaining available to be drawn by Hollywood Media on a line of
credit commitment through January 1, 2004 provided by Hollywood Media's Chairman
of the Board and Vice Chairman to satisfy working capital requirements, if
necessary (such line of credit is further described below and in Note 5 to the
Consolidated Financial Statements included in this Form 10-Q Report). Our
working capital deficit (defined as current assets less current liabilities) at
September 30, 2003, which included $315,587 in deferred CBS advertising, was
$5,006,635 as compared to working capital deficit of $676,219 at December 31,
2002. During the nine months ended September 30, 2003, net cash used in
operating activities was $1,043,604, net cash used in investing activities was
$887,241 comprised primarily of payments made pursuant to a bond agreement (Note
11 to the Consolidated Financial Statements included in this Form 10-Q report)
and net cash provided by financing activities was $22,737. As a result of the
above, cash and cash equivalents decreased by $1,908,108 for the nine months
ended September 30, 2003. In comparison, during the nine months ended September
30, 2002, net cash used in operating activities was $3,551,497, net cash used in
investing activities was $1,254,567, and $5,268,866 in cash was provided by
financing activities. Net cash used in operating activities improved by
$2,507,893 or 71% from $3,551,497 for Y3-02 to $1,043,604 for Y3-03. The
improvement is primarily attributable to a significant decrease in Broadway
ticketing inventories with a corresponding increase in accrued expenses
attributable to the Water Garden litigation (discussed in Note 11 to the
Consolidated Financial Statements included in the Form 10-Q) and the guaranty
relating to the Cinema Source acquisition (discussed in Note 5 to the
Consolidated Financial Statements included in this 10-Q).
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 per share 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
customary 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 nine months ended September 30, 2003, $32,424 and $97,232,
respectively, were recognized as interest expense from the amortization of the
debt issuance costs.
- 33 -
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 September 30, 2003 and December 31, 2002, a
liability of $218,230 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
committed 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. Advances bear interest at the
prime rate based on published bank rates plus one percent. There was $700,000
principal amount outstanding under this commitment at September 30, 2003, of
which $500,000 is collateralized by Broadway Ticketing inventory and $200,000 is
unsecured.
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
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 3 to the accompanying
condensed 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.
- 34 -
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 nine months ended September 30, 2003 and 2002 was $609,193 and
$10,936,495 respectively, and $102,464 for Q3-03 compared to $1,333,752 for
Q3-02. 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.
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 Q3-03 and Q3-02 we recorded $0 and $(344,871),
respectively, and for Y3-03 and Y3-02, $0 and $993,917 respectively, in revenue
and expense under the NATO contract. Additionally in Q3-03 and Q3-02 we recorded
$0 and $0, and for Y3-03 and Y3-02, $0 and $17,689, 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 SFAS 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. SFAS 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.
- 35 -
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. As of September 30, 2003, we believe there are no
indications that an impairment has occurred. The next impairment evaluation will
occur as of October 1, 2003.
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.
- 36 -
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 Broadway 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.
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. Subsequently, on September 9, 2003, the court granted a motion
to add certain litigation costs and attorneys fees to the judgment, such that
the current principal amount of the judgment, including costs and attorneys
fees, is $1,097,761.
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 was the amount of the bond
required by law to stay enforcement of the judgment). Upon the adding of certain
costs and attorneys fees to the judgment, as described in the preceding
paragraph, an application has been made to increase the amount of the
Appeal Bond to $1,646,641.30, and it is expected the increased undertaking
will shortly be filed with the court. 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
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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. If the appeal of the Water Garden Lawsuit is
unsuccessful, then, pursuant to a written stipulation between the parties to the
lawsuit, the judgment will be modified to add rent accruing between February 13,
2003 and December 31, 2003, together with attorneys fees and costs. Should the
appeal be unsuccessful, we anticipate that the amount of the judgment would
increase, pursuant to such stipulation, by approximately $400,000.
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 September 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 (see Note 11 to the Condensed
Consolidated Financial Statements included in this Form 10-Q Report) 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 September 30, 2003, in transactions that were not registered under
the Securities Act of 1933.
On July 2, 2003, Hollywood Media issued 64,777 shares of common stock
valued at $77,787 to the holders of the convertible debentures for interest due
for the period April 1, 2003 to June 30, 2003.
On July 17, 2003, Hollywood Media issued 57,835 shares of common stock
valued at $76,341 to a third party as payment under the guaranty granted to the
former owner of TDI (see Note 5) to the Condensed Consolidated Financial
Statements included in this Form 10-Q Report).
On July 25, 2003, Hollywood Media issued 29,151 shares of common stock
valued at $37,313 as payment on account of a guaranty of a note relating to the
acquisition of CinemaSource (the "CinemaSource Guaranty") (see Note 5) to the
Condensed Consolidated Financial Statements included in this Form 10-Q Report).
On September 2, 2003 Hollywood Media issued 30,488 shares of common
stock valued at $37,195 as payment on account of the CinemaSource Guaranty.
On September 24, 2003 Hollywood Media issued 24,876 shares of common
stock valued at $37,314 as payment on account of the CinemaSource Guaranty.
On September 25, 2003, Hollywood Media issued 262,000 shares of
restricted common stock valued at $353,700 to the former owner of TDI as payment
for the outstanding principal and interest balance on a promissory note in
connection with the TDI acquisition (see Note 5) to the Condensed Consolidated
Financial Statements included in this Form 10-Q Report).
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Incorporated by
Exhibit Description Reference From
- ------- ----------- --------------
10.1 Indemnification Agreement for Surety Bonds dated as of May 7, 2003, (*)
by and between Hollywood Media Corp., and Mitchell Rubenstein and
Laurie Silvers.
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 September
30, 2003, on August 12, 2003. Item 12 of the Form 8-K reported that on August
12, 2003 we issued a press release announcing Hollywood Media's second 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: November 14, 2003 By: /s/ Mitchell Rubenstein
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Mitchell Rubenstein, Chief Executive Officer (Principal executive
officer)
Date: November 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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