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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 March 31, 2004
[ ] 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 May 14, 2004, the number of shares outstanding of the issuer's
common stock, $.01 par value, was --,---,---.
HOLLYWOOD MEDIA CORP.
TABLE OF CONTENTS
PAGE(S)
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 2004
(unaudited) and December 31, 2003 2
Condensed Consolidated Statements of Operations (unaudited) for the
Three Months ended March 31, 2004 and 2003 (restated) 3
Condensed Consolidated Statement of Shareholders' Equity (unaudited)
for the Three Months ended March 31, 2004 4
Condensed Consolidated Statement of Cash Flows (unaudited) for the
Three Months ended March 31, 2004 and 2003 (restated) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-20
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
March 31, December 31,
2004 2003
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,642,403 $ 1,867,999
Receivables, net 1,446,944 1,496,934
Inventories, net 8,873,768 5,770,289
Prepaid expenses 854,928 941,966
Other receivables 1,107,222 654,141
Other current assets 41,156 10,296
Deferred advertising - CBS 38,807 38,807
------------- -------------
Total current assets 25,005,228 10,780,432
RESTRICTED CASH 1,000,000 850,000
PROPERTY AND EQUIPMENT, net 2,049,869 2,236,906
INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES 119,213 164,205
IDENTIFIABLE INTANGIBLE ASSETS, net 1,430,029 1,603,985
GOODWILL 40,813,682 40,813,682
OTHER ASSETS 393,818 431,811
------------- -------------
TOTAL ASSETS $ 70,811,839 $ 56,881,021
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,170,975 $ 2,201,431
Accrued expenses and other 4,085,598 5,178,467
Loan from shareholder/officer -- 600,000
Deferred revenue 11,309,411 9,063,317
Current portion of capital lease obligations 218,440 227,538
------------- -------------
Total current liabilities 17,784,424 17,270,753
CAPITAL LEASE OBLIGATIONS, less current portion 155,520 178,790
DEFERRED REVENUE, less current portion 205,813 193,063
MINORITY INTEREST 41,258 21,895
OTHER DEFERRED LIABILITY 191,700 903,192
CONVERTIBLE DEBENTURES, NET 4,019,106 4,027,629
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; 27,669,695
and 21,810,266 shares issued and outstanding at March 31, 2004 and
December 31, 2003, respectively 276,697 218,103
Additional paid-in capital 294,732,710 279,087,772
Deferred compensation (81,250) (162,500)
Accumulated deficit (246,514,139) (244,857,676)
------------- -------------
Total shareholders' equity 48,414,018 34,285,699
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 70,811,839 $ 56,881,021
============= =============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets
-2-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
------------------------------
2004 2003
------------ ------------
(As Restated,
See Note 2)
NET REVENUES:
Ticketing $ 11,878,290 $ 11,520,248
Other 2,906,430 3,017,438
------------ ------------
Total revenues 14,784,720 14,537,686
OPERATING EXPENSES:
Cost of revenues - ticketing 9,951,540 10,038,722
Editorial, production, development and technology (exclusive of
depreciation and amortization shown separately below) 1,188,021 1,159,735
Selling, general and administrative 4,978,313 4,709,438
Amortization of CBS advertising -- 190,023
Depreciation and amortization 530,117 639,876
------------ ------------
Total operating expenses 16,647,991 16,737,794
------------ ------------
Operating loss (1,863,271) (2,200,108)
EQUITY IN EARNINGS OF INVESTEES 4,694 4,405
OTHER INCOME (EXPENSE):
Interest, net (417,955) (340,368)
Other, net 690,561 (49,091)
------------ ------------
Loss before minority interest (1,585,971) (2,585,162)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (70,492) (220,573)
------------ ------------
Net loss $ (1,656,463) $ (2,805,735)
============ ============
Basic and diluted loss per common share $ (0.07) $ (0.14)
============ ============
Weighted average common and common equivalent shares
outstanding - basic and diluted 24,916,531 20,401,079
============ ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
-3-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(Unaudited)
Common Stock,
$.01 par value Additional
----------------------- Paid-In Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
---------- -------- ------------ ------------ ------------- ------------
Balance - December 31, 2003 21,810,266 $218,103 $279,087,772 $(162,500) $(244,857,676) $ 34,285,699
Issuance of stock options
and warrants for
services rendered -- -- 132,091 -- -- 132,091
Amortization of
deferred compensation -- -- -- 81,250 -- 81,250
Issuance of stock -
401 (k) employer match 52,627 526 139,461 -- -- 139,987
Interest payments to
convertible debenture holders 32,697 327 78,314 -- -- 78,641
Issuance of stock -
stock option exercise 750 7 946 -- -- 953
Adjustment of beneficial
conversion feature -
convertible debentures -- -- 294,360 -- -- 294,360
Issuance of common stock
in private placement,
net of expenses 5,773,355 57,734 14,999,766 -- -- 15,057,500
Net loss -- -- -- -- (1,656,463) (1,656,463)
---------- -------- ------------ --------- ------------- ------------
Balance - March 31, 2004 27,669,695 $276,697 $294,732,710 $ (81,250) $(246,514,139) $ 48,414,018
========== ======== ============ ========= ============= ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
-4-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
-----------------------------
2004 2003
------------ -------------
(As Restated,
see Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,656,463) $(2,805,735)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 530,117 639,876
Interest paid in stock 78,641 79,496
Amortization of discount on convertible debentures 285,837 178,665
Amortization of deferred financing costs 32,425 32,425
Equity in earnings of investees, net of return
of invested capital 44,992 374,042
Issuance of compensatory stock, stock options and
warrants for services rendered 132,091 258,421
Amortization of deferred compensation costs 81,250 --
Provision for bad debts 27,471 101,846
Amortization of CBS advertising -- 190,023
Minority interest in earnings of subsidiaries,
net of distributions for minority owners 19,363 140,554
Settlement of put/call option (719,250) --
Changes in assets and liabilities:
Receivables 23,472 487,615
Inventories (3,103,479) (1,495,659)
Prepaid expenses 87,038 (70,852)
Other receivables (453,081) (236,571)
Other current assets (30,860) (37,371)
Restricted cash (150,000) --
Other assets 5,568 28,933
Accounts payable (30,456) 697,895
Accrued expenses and other (825,922) (915,230)
Deferred revenue 2,258,844 1,562,566
Other deferred liability 7,758 --
------------ -----------
Net cash used in operating activities (3,354,644) (789,061)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (137,071) (138,362)
------------ -----------
Net cash used in investing activities (137,071) (138,362)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of shareholder/officer loan (600,000) --
Net advances to third party (126,960) (78,110)
Proceeds from issuance of common stock
in private placement, net of issuance costs 15,057,500 --
Payments under capital lease obligations (64,421) (100,374)
------------ -----------
Net cash provided by (used in) financing activities 14,266,119 (178,484)
------------ -----------
Net increase (decrease) in cash and cash equivalents 10,774,404 (1,105,907)
CASH AND CASH EQUIVALENTS, beginning of period 1,867,999 2,342,238
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 12,642,403 $ 1,236,331
============ ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 20,658 $ 40,045
============ ===========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed 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 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
months ended March 31, 2004 are not necessarily indicative of the results of
operations or cash flows which may result for the remainder of 2004. 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, 2003, as filed with the Securities and Exchange Commission.
(2) RESTATEMENT:
Following the recommendation of management and the concurrence of the
Audit Committee of the Board of Directors, Hollywood Media made a determination
to restate the previously filed unaudited condensed consolidated financial
statements as of and for the quarter ended March 31, 2003, originally included
in Form 10-Q. The restatement is being made primarily to correct errors in the
way Hollywood Media had previously accounted for Ticketing Business gift
certificates and ticketing purchases and to make other adjustments set forth
below which were identified by Hollywood Media's current auditors during the
course of their audit of Hollywood Media's 2003 financial statements. The
restated transactions are described in detail below and have been grouped under
headings for convenience only.
Revenue
o Ticketing revenue has been reduced by $25,129 or 0.2% in the
Q1-03 restated condensed consolidated financial statements as
a result of an underaccrual for Broadway Ticketing gift
certificates.
Cost of Revenues - Ticketing
o Cost of Revenues - Ticketing has been decreased by $108,906 or
1.1%, in the Q1-03 restated condensed consolidated financial
statements as a result of an overaccrual for Broadway
ticketing purchases.
Weighted Average Shares Outstanding
o The number of weighted average shares outstanding was
increased by 2,788 shares for the three months ended March 31,
2003 to include vested restricted shares.
The total effect of the errors was a decrease in the net loss in
Q1-03 of $83,777. The following unaudited condensed consolidated statements of
operations and cash flows for the three months ended March 31, 2003, reconcile
the restated amounts to the corresponding amounts, as previously reported:
-6-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2003
(Unaudited)
As previously Restatement
reported adjustments Restated
------------- ----------- ------------
NET REVENUES
Ticketing $ 11,545,377 $ (25,129) $ 11,520,248
Other 3,017,438 -- 3,017,438
------------ --------- ------------
Total revenues 14,562,815 (25,129) 14,537,686
------------ --------- ------------
Cost of revenues - ticketing 10,147,628 (108,906) 10,038,722
Editorial, production, development and
technology (exclusive of
depreciation and amortization
shown separately below) 1,159,735 -- 1,159,735
Selling, general and administrative 4,709,438 -- 4,709,438
Amortization of CBS advertising 190,023 -- 190,023
Depreciation and amortization 639,876 -- 639,876
------------ --------- ------------
Total operating expenses 16,846,700 (108,906) 16,737,794
------------ --------- ------------
Operating loss (2,283,885) 83,777 (2,200,108)
EQUITY IN EARNINGS OF INVESTEES 4,405 -- 4,405
OTHER INCOME (EXPENSE):
Interest, net (340,368) -- (340,368)
Other, net (49,091) -- (49,091)
------------ --------- ------------
Loss before minority interest (2,668,939) 83,777 (2,585,162)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (220,573) -- (220,573)
------------ --------- ------------
Net loss $ (2,889,512) $ 83,777 $ (2,805,735)
============ ========= ============
Basic and diluted loss per common share $ (0.14) $ -- $ (0.14)
============ ========= ============
Weighted average common and common equivalent shares
outstanding - basic and diluted 20,398,291 2,788 20,401,079
============ ========= ============
-7-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2003
(Unaudited)
As previously Restatement
reported adjustments Restated
------------- ----------- -----------
CASH FLOWS FROM OPERTING ACTIVITIES:
Net loss $(2,889,512) $ 83,777 $(2,805,735)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 639,876 -- 639,876
Interest paid in stock 79,496 -- 79,496
Amortization of discount on convertible debentures 178,665 -- 178,665
Amortization of deferred financing costs 32,425 -- 32,425
Equity in earnings of investees,
net of return of invested capital 374,042 -- 374,042
Issuance of compensory stock, stock options and warrants for
services rendered 258,421 -- 258,421
Provision for bad debts 101,846 -- 101,846
Amortization of CBS advertising 190,023 -- 190,023
Minority interest in earnings of subsidiaries, net of
distributions to minority owners 140,554 -- 140,554
Changes in assets and liabilities:
Receivables 487,615 -- 487,615
Inventories (1,495,659) -- (1,495,659)
Prepaid expenses (70,852) -- (70,852)
Other receivables (236,571) -- (236,571)
Other current assets (37,371) -- (37,371)
Other assets 28,933 -- 28,933
Accounts payable 697,895 -- 697,895
Accrued expenses and other (806,324) (108,906) (915,230)
Deferred revenue 1,537,437 25,129 1,562,566
----------- --------- -----------
Net cash used in operating activities (789,061) -- (789,061)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (138,362) -- (138,362)
----------- --------- -----------
Net cash used in investing activities (138,362) -- (138,362)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from factor (78,110) -- (78,110)
Payments under capital lease obligations (100,374) -- (100,374)
----------- --------- -----------
Net cash used in financing activities (178,484) -- (178,484)
----------- --------- -----------
Net decrease in cash and cash equivalents (1,105,907) -- (1,105,907)
CASH AND CASH EQUIVALENTS, beginning of period 2,342,238 -- 2,342,238
----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,236,331 $ -- $ 1,236,331
=========== ========= ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 40,045 $ -- $ 40,045
=========== ========= ===========
-8-
(3) 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 No. 123" ("SFAS No. 148"), which amended SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), Hollywood Media has
elected to account for grants to employees under 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.
In accordance with SFAS 123 and SFAS 148, the following table presents
pro forma information for the three months ended March 31, 2004 and 2003
regarding net income and earnings per share as if the Company had accounted for
all of its employee stock options under the fair value method of SFAS 123:
Three months ended
March 31, (unaudited)
----------------------------
Restated
2004 2003
------------ ------------
Reported net loss $ (1,656,463) $ (2,805,735)
Stock-based employee compensation expense
under the fair value method (433,086) (585,188)
------------ ------------
Adjusted net loss $ (2,089,549) $ (3,390,923)
============ ============
Reported net loss basic and diluted per share $ (0.07) $ (0.14)
============ ============
Adjusted net loss basic and diluted per share $ (0.08) $ (0.17)
============ ============
Number of shares used in computation -
basic and diluted 24,916,531 20,401,079
============ ============
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.
(4) 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.
Restricted shares are not included in the calculation until vesting occurs. As
of March 31, 2004, there were 62,500 unvested restricted shares of Hollywood
Media common stock. There were 6,367,837 and 4,752,842 options and warrants to
purchase common shares outstanding at March 31, 2004 and 2003, respectively,
that could potentially dilute earnings per share in the future. In addition, the
convertible debentures (Note 6) are convertible into 1,727,399 shares of common
stock at an adjusted conversion price of $3.30 per share. The potential shares
underlying the unvested, restricted shares, options, warrants and convertible
debentures have been excluded from the weighted average number of common shares
outstanding for the three months ended March 31, 2004 and 2003 because they are
antidilutive for all periods presented.
-9-
Accounting Estimates
The preparation of the condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates and assumptions embodied in the accompanying
unaudited condensed consolidated 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 majority 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, (iii) have purchased live theater
tickets, and (iv) 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 $251,134 and $259,109 at March 31, 2004
and December 31, 2003, 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 March 31, 2004 and December 31, 2003, included
in "accrued expenses and other" in the accompanying condensed consolidated
balance sheets is a liability of $69,098 and $196,057, 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. In April 2004, Hollywood
Media terminated the agreement.
Recent Accounting Pronouncements
In March 2004, FASB issued its Exposure Draft, "Share Based Payment,"
which is a proposed amendment to FASB Statement No. 123, "Accounting for
Stock-Based Compensation." The exposure draft covers a wide range of
equity-based compensation arrangements. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
recognized as compensation expense. The expense of the award would generally be
measured at the fair value at the grant date. Currently, the final standard is
expected to be issued in late 2004 and adoption will be required in 2005. If the
provisions
-10-
of this exposure draft become required, it may have an impact on the Company's
condensed consolidated financial statements.
In December 2003, the FASB issued a revised Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51", ("FIN 46R"). FIN 46R requires the consolidation of
entities in which an enterprise absorbs a majority of the entity's expected
losses, or receives a majority of the entity's expected residual returns, or
both, as a result of ownership, contractual or other financial interests in the
entity. Currently entities are generally consolidated by an enterprise when it
has a controlling financial interest through ownership of a majority voting
interest in the entity. The provisions of FIN 46R are generally effective for
existing (prior to February 1, 2003) variable interest relationships of a public
entity no later than the end of the first reporting period that ends after March
15, 2004. However, prior to the required application of this interpretation a
public entity that is not a small business issuer shall apply FIN 46R to those
entities that are considered to be special-purpose entities no later than the
end of the first reporting period that ends after December 15, 2003. The Company
currently has no contractual relationship or other business relationships with a
variable interest entity and therefore the adoption of FIN 46R as of March 31,
2004 did not have a material effect on its unaudited condensed consolidated
financial position, results of operations or cash flows.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which revises the
existing revenue recognition SAB in Topic 13, "Revenue Recognition" in order for
the interpretive guidance to be consistent with current accounting guidance,
primarily EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." The impact of adoption was not material.
(5) ACQUISITIONS AND OTHER CAPITAL TRANSACTIONS:
On January 14, 2002, Fountainhead Media Services ("FMS") acquired a
20% equity interest in a subsidiary that owns Baseline, Inc., a wholly owned
subsidiary of Hollywood Media. Consideration consisted of a $2 million
promissory note payable to Hollywood Media and the contribution by Fountainhead
Media of its FilmTracker database, intellectual property rights, all existing
contracts and content management system with a stated value of $2 million. The
Baseline service was integrated with FilmTracker's content management system and
interface. On January 7, 2004, Hollywood Media exchanged the promissory note for
the 20% equity interest owned by Fountainhead, and Hollywood Media now owns 100%
of a subsidiary that owns Baseline. In conjunction with the exchange of the
promissory note, the negative fair value of $719,250 on a put and call option
obtained by FMS was relieved through earnings, and is included in other, net in
the accompanying unaudited condensed consolidated statement of operations for
the three months ended March 31, 2004.
(6) DEBT:
Promissory Notes
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 was 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. The second promissory note was 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. A guaranty was
granted to the former owner in connection with the sale of the former owner's
shares obtained at acquisition. During the year ended December 31, 2003, the
-11-
Company issued 262,000 shares valued at $353,700 to the former owner as payment
for the outstanding principal and interest balance. In addition, 57,835 shares
valued at $76,342 were issued to a third party as payment under the guaranty
granted to the former owner. There was no outstanding balance due at March 31,
2004.
CEO Commitment
Under a commitment that expired on January 1, 2004, in the event that
Hollywood Media required additional funding, Hollywood Media's Chairman of the
Board and Chief Executive Officer and Hollywood Media's Vice Chairman and
President, 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 would be reduced dollar for dollar to the extent Hollywood Media
generated cash from financings, operational cash flow or proceeds from a sale of
a division or subsidiary of Hollywood Media. Advances bore interest at the prime
rate plus one percent. There was $600,000 principal amount outstanding under
this commitment at December 31, 2003, of which $500,000, which was loaned by a
wholly-owned limited liability corporation of Hollywood Media's Chairman and
President, was collateralized by Broadway Ticketing inventory and $100,000 was
unsecured. During the first quarter of 2004, the outstanding balance was paid in
full plus accrued interest of $17,626.
May 2002 Convertible Debentures
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 which was $3.46 per share which was adjusted as described
below. 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 (the "Warrants") to acquire at any time through May 22, 2007 an
aggregate of 576,590 shares of common stock at an exercise price of $3.78 per
share. On May 22, 2003, an investor holding at least seventy-five percent of
such investor's shares of common stock issued or issuable to such investor under
the Debentures, had the exercise price of the warrants held by such investor
decreased to $3.46 per share which equals the pre-adjustment conversion price of
the Debentures. The Debentures and Warrants contain customary anti-dilution
provisions as more fully described in the agreements. As a result of the private
placement discussed in Note 8, the conversion price of the Debentures upon
issuance of $3.46 per share was reduced to $3.30 per share, and the exercise
price of the Warrants was reduced to $3.34 per share, after giving effect to a
weighted average anti-dilution provision per the agreements. 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. No
investor exercised its right to purchase. A total of $389,095 in debt issuance
costs were incurred for the 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). Hollywood Media recognized $32,425 for the three months ended March
31, 2004 and 2003 as
-12-
interest expense from the amortization of the debt issuance costs. As of March
31, 2004, $1,680,894 of unamortized discount on the Debentures is reducing the
face amount of Debentures and will be amortized to interest expense over the
term of the Debentures. Interest expense of $285,837 and $178,665, consisting of
stated interest plus discount authorization was recorded for the three months
ended March 31, 2004 and 2003, respectively.
The Warrants granted to these investors were recorded at a relative fair value
of $1,608,422 using the Black Scholes option valuation model. The assumptions
used to calculate the value of the Warrants using Black Scholes are as follows:
volatility of 83.7%, 5 year expected life, exercise priced $3.78 per share, a
stock price of $3.27 per share and a risk free interest rate of 4%. The value of
the Warrants and the beneficial conversion feature are being amortized to
interest expense over 3 years, using the effective interest method. 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. As a result of the reduction in the conversion price discussed
above, during the quarter ended March 31, 2004, the Company recorded $294,360,
which will be amortized over the remaining term of the Debentures. The value
attributable to the increase was recorded as a discount to the convertible
Debentures and included in additional paid-in capital.
CinemaSource Guaranty
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. In July 2003, pursuant to an agreement with the holder,
the Company had the right at its election, to pay the holder half of any monthly
payment in restricted stock at a 33% discount to the market price and during
2003, the Company issued 107,836 shares of common stock valued at $149,136
pursuant to such agreement. As a result, the Company recorded an additional
expense of $89,215 for the market premium of the common stock payments, which
expense charge was reversed in the fourth quarter 2003 as the Company determined
to instead pay the holder in cash. The outstanding balance of such loan at March
31, 2004 and December 31, 2003 was $138,152 and is included in accrued expenses
and other in the accompanying unaudited condensed consolidated balance sheets.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS:
Effective January 1, 2002, Hollywood Media adopted SFAS No. 142,
"Goodwill and other Intangible Assets," ("SFAS No. 142"). As prescribed by SFAS
No. 142, the Company completed the transitional goodwill impairment test by the
second quarter of 2002, which did not result in an impairment charge.
Additionally Hollywood Media established October 1, as its annual impairment
test date and conducted required testing on that date in 2002 and 2003. As of
March 31, 2004, Hollywood Media is not aware of any events or changes in
circumstance that would require it to evaluate goodwill for impairment.
-13-
(8) COMMON STOCK:
On January 20, 2004, Hollywood Media issued 32,697 shares of common
stock valued at $78,641 to the holders of the Debentures for interest due for
the period October 1, 2003 through January 1, 2004.
On February 4, 2004, Hollywood Media issued 52,627 shares of common
stock valued at $139,987 for payment of Hollywood Media's 401(k) employer match
for calendar year 2003.
On February 13, 2004, Hollywood Media issued 5,773,355 shares of common
stock in a private placement valued at $16,396,327 to investors, and detachable
Warrants to purchase 1,443,339 shares of its common stock. Hollywood Media's net
proceeds were $15,278,501 after deducting the placement agent's fee and
expenses. In addition, Hollywood Media incurred $151,284 for legal, accounting
and travel expenses associated with the offering. The warrants issued in the
private placement have an exercise price of $2.84 per share of common stock and
expire in February 2009. The warrants are callable by Hollywood Media after one
year if the common stock of Hollywood Media trades at twice the exercise price
for 20 trading days. In addition to the warrants issued to the investors,
Hollywood Media issued warrants to the placement agent having the same exercise
price, which are exercisable to purchase up to 288,667 shares of common stock.
In addition, Hollywood Media issued an option to purchase 35,211 shares of
common stock for $50,000 to a third party consultant with a net value of
$69,717.
During the three months ended March 31, 2004, Hollywood Media recorded
$132,091 in consulting expense on stock options issued to independent third
parties for services rendered.
In July of 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, which is recognized
quarterly as shares vest. During the quarter ended March 31, 2004, Hollywood
Media amortized $81,250. Remaining unamortized deferred compensation of $81,250
as of March 31, 2004, will be amortized during the quarter ending June 30, 2004.
(9) INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES:
Investments in and advances to equity method investees consist of the
following:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
NetCo Partners (a) $ 124,188 $ 169,180
MovieTickets.com (b) (4,975) (4,975)
--------- ---------
$ 119,213 $ 164,205
========= =========
(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 of Investees. The revenues, gross profit and net income of NetCo
Partners for the three months ended March 31, 2004 and 2003 are presented below:
-14-
THREE MONTHS ENDED
MARCH 31,
-----------------
2004 2003
------- -------
Revenues $14,000 $26,703
Gross Profit 10,955 9,161
Net Income 9,388 8,809
Hollywood Media's
share of net income 4,694 4,405
Hollywood Media and C.P. Group are each 50% partners in NetCo Partners.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement, Hollywood
Media is responsible for developing, producing, manufacturing, advertising,
promoting, marketing and distributing NetCo Partners' illustrated novels and
related products and for advancing all costs incurred in connection therewith.
All amounts advanced by Hollywood Media to fund NetCo Partners' operations are
treated as capital contributions of Hollywood Media and Hollywood Media is
entitled to a return of such capital contributions before distributions of
profits are split equally between Hollywood Media and C.P. Group.
NetCo Partners has signed several significant licensing agreements for
Tom Clancy's NetForce. These agreements include book licensing agreements for
North American rights to a series of adult and young adult books, audio book
agreements and licensing agreements with various foreign publishers for rights
to publish Tom Clancy's NetForce books in different languages. These contracts
typically provide for payment of non-refundable advances to NetCo Partners upon
achievement of specific milestones, and for additional royalties based on sales
of the various products at levels in excess of the levels implicit in the
non-refundable advances. NetCo Partners recognizes revenue pursuant to these
contracts when the earnings process has been completed based on performance of
all services and delivery of completed manuscripts.
As of March 31, 2004 and December 31, 2003, NetCo Partners had $850,731
of accounts receivable. Deferred revenues, consisting of cash advances received
but not yet recognized as revenue, amounted to $671,573 as of March 31, 2004,
compared to $569,333 at December 31, 2003. These accounts receivable and
deferred revenue balances are not included in Hollywood Media's consolidated
balance sheets.
Through March 31, 2004, Hollywood Media has received cumulative profit
distributions from NetCo Partners since its formation totaling approximately
$9.6 million, 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 voting equity interest in
MovieTickets.com for $8.5 million in cash, which can be converted into
-15-
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
March 31, 2004. Excluding AOL's convertible preferred voting 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 of
Investees. 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 three
months ended March 31, 2004, and 2003, in its investment in MovieTickets.com.
(10) SEGMENT REPORTING:
Hollywood Media's reportable segments are Broadway Ticketing, Data
Business, Internet Ad Sales, Intellectual Properties, Cable TV, and Other. The
Broadway Ticketing segment sells tickets to live theater events for Broadway,
Off-Broadway and London, online and offline, and to domestic and international
travel professionals including travel agencies and tour operators, educational
institutions and consumers. The Data Business segment licenses entertainment
content and data and includes CinemaSource (which licenses movie showtimes and
other movie content), EventSource (which licenses local listings of events
around the country to media, wireless and Internet companies), AdSource (which
creates exhibitor paid directory ads for insertion in newspapers around the
country) and Baseline (a flat fee and pay-per-use subscription web site geared
towards professionals in the feature film and television industry). The Internet
Ad Sales 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. The Cable TV segment owns and operates two interactive
cable TV networks, Totally Hollywood TV and Totally Broadway TV, that provide
on-demand content and are distributed on certain cable TV systems. The Cable TV
division is in the development stage and revenues since inception are
approximately $3,000.
Management evaluates performance based on a comparison of actual profit
or loss from operations before income taxes, depreciation, interest, and
nonrecurring gains and losses to budgeted amounts. There are no material
intersegment sales or transfers.
The following table illustrates financial information regarding
Hollywood Media's reportable segments. Hollywood Media has included an
additional segment "Cable TV", below, which was previously reported in "Other".
THREE MONTHS ENDED MARCH 31,
----------------------------
RESTATED
2004 2003
------------ ------------
NET REVENUES:
Broadway Ticketing $ 11,878,290 $ 11,520,248
Data Business 1,662,798 1,749,114
Internet Ad Sales 772,507 492,452
Intellectual Properties 471,125 775,872
------------ ------------
$ 14,784,720 $ 14,537,686
============ ============
-16-
OPERATING INCOME (LOSS):
Broadway Ticketing $ 530,600 $ (33,532)
Data Business 166,337 146,286
Internet Ad Sales (a) (656,420) (803,953)
Intellectual Properties 135,533 416,878
Cable TV (228,923) (212,884)
Other (1,810,398) (1,712,903)
------------ ------------
$ (1,863,271) $ (2,200,108)
============ ============
SEGMENT ASSETS:
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
Broadway Ticketing $10,743,876 $ 8,278,538
Data Business 2,149,045 2,189,971
Internet Ad Sales 2,673,091 2,525,191
Intellectual Properties 691,484 615,587
Cable TV 301,238 362,149
Other 54,253,105 42,909,585
----------- -----------
$70,811,839 $56,881,021
=========== ===========
(a) Includes $0 and $190,023 in amortization of CBS advertising for the
three months ended March 31, 2004 and 2003, respectively, used to
promote Hollywood.com and Broadway.com.
(11) COMMITMENTS AND CONTINGENCIES:
Litigation -
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 ("Water Garden"), as lessor. The stated lease term was 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.
-17-
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
stop enforcement of the judgment until 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, the Appeal Bond was increased to
$1,646,641 on November 14, 2003.
On May 6, 2004, the California Court of Appeal for the Second District
issued its decision affirming the judgment against defendants hollywood.com,
Inc. and Tribune. Hollywood.com, Inc. and Tribune intend to petition the Court
of Appeal for a re-hearing, and, if necessary, to seek review of the decision by
the California Supreme Court. If neither the petition for rehearing nor the
petition for review by the California Supreme Court are successful, then the
appeal will have become finally determined and the judgment will become final.
In such event, added to the amount of the judgment would be the plaintiff's
attorneys fees and costs incurred in opposing these further appeal efforts. It
is not possible at this time to estimate the amount of such additional
attorneys' fees and costs.
The California Court of Appeal has discretion as to whether or not it
will grant a re-hearing, and the California Supreme Court has discretion as to
whether or not it will decide to hear an appeal in this case. If either such
court decides to hear this case, and if such hearing results in reversal of the
judgment against hollywood.com, Inc. and Tribune, the matter would then likely
be returned to the trial court for a trial of the case.
In April 2003, Tribune and Hollywood Media agreed that Tribune would
obtain the Appeal Bond in exchange for specified advance payments by Hollywood
Media to Tribune as collateral to secure Hollywood Media's indemnification
obligation to Tribune described above. The advance payments consist of a
$100,000 payment made upon commencement of the agreement on April 7, 2003, and
monthly payments of $75,000 (or $100,000, for the last six months of 2003). The
agreement allows Tribune the right to demand additional collateral, the form of
which, cash or shares of Hollywood Media's common stock, to be determined by
Hollywood Media in its discretion, in the approximate amount of the initial
judgment. Hollywood Media's obligation to make payments to Tribune under such
agreement is limited to the amount of the initial judgment plus costs and/or
attorney's fees that may be awarded and accrued interest. The advance payments
and, if applicable, any other security, are to be returned to Hollywood Media if
the appeal is successful (which would result in the bond no longer being
required) or to the extent the payments ultimately exceed Hollywood Media's
indemnification obligation to Tribune. Such payments made to Tribune may be used
by Hollywood Media, in its discretion, to pay the judgment or a settlement in
the Water Garden Lawsuit.
The judgment in the Water Garden Lawsuit is for rent accrued under the
lease through February 13, 2003, however, the facial termination date of the
lease is December 31, 2003. 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.
-18-
Recognizing that the ultimate outcome of this case is uncertain,
Hollywood Media has accrued on its books, as of March 31, 2004, an amount which
it believes is adequate to account for potential liability for this matter, and
will continue to evaluate the matter as the litigation process proceeds. There
can be no assurance that any further appeal efforts contemplated above will be
successful.
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 has asserted substantive defenses in this
litigation and does not believe any monies are owed and intends to defend this
case vigorously. This proceeding is continuing, including discovery which is
currently anticipated to continue for up to 12 months.
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.
(12) RECLASSIFICATION:
Certain amounts in the 2003 financial statements have been reclassified
to conform with the 2004 presentation.
(13) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
For The Three Months Ended March 31, 2004:
o 52,627 shares of Hollywood Media common stock, valued at
$139,987 were issued as payment of Hollywood Media's 401(k)
employee match for calendar year 2003.
o 32,697 shares of Hollywood Media common stock, valued at
$78,641 for interest due to the holders of the debentures.
o Options valued at $132,091 under Black Scholes, were granted
for services rendered.
o Hollywood Media issued 5,773,355 shares of common stock in a
private placement valued at $16,396,327 to investors, and
warrants to purchase 1,443,339 shares of its common stock.
-19-
Hollywood Media's net proceeds were $15,278,501 after
deducting the placement agent's fee and expenses. In addition,
Hollywood Media incurred $151,284 for legal, accounting and
travel expenses associated with the offering. The warrants
issued in the private placement have an exercise price of
$2.84 per share of common stock and expire in February 2009.
The warrants are callable by Hollywood Media after one year if
the common stock of Hollywood Media trades at twice the
exercise price for 20 trading days. In addition to the
warrants issued to the investors, Hollywood Media issued
warrants to the placement agent having the same exercise
price, which are exercisable to purchase up to 288,667 shares
of common stock. In addition, Hollywood Media issued an option
to purchase 35,211 shares of common stock for $50,000 to a
third party consultant, valued at $69,717 under Black Scholes.
o An adjustment of the beneficial conversion feature of the
Debentures in the amount of $294,360 was made pursuant to
certain anti-dilution provisions.
For The Three Months Ended March 31, 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 101,062 shares of Hollywood Media common stock, valued at
$79,495 for interest due to the holders of the convertible
debentures.
o Options and warrants, valued at $99,637, under Black Scholes,
were granted for services rendered.
-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 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 Internet companies and other
competitors,
o the need for additional capital to finance our growth or operations,
o technology risks and the general risk of doing business over the
Internet,
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, 2003
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
-21-
person assumes responsibility for the accuracy and completeness of such
statements.
OVERVIEW
Hollywood Media is a provider of information, data and other content,
and ticketing to consumers and businesses covering the entertainment, Internet
and media industries. We manage a number of business units focused on the
entertainment and media industries. 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 comprises 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 approximately 40,000 movie screens. Since its start in 1995,
CinemaSource has substantially increased its operations and currently provides
movie showtime listings to more than 250 newspapers, wireless companies,
Internet sites, and other media outlets, including, 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 real-time direct connections to many exhibitor point-of-sale
systems, 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 thousands of 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 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,
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Earthlink and VoltDelta. Through annual and multi-year contracts, EventSource
generates recurring revenues from licensing fees.
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 relationships 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, Consolidated Theatres,
Crown Theatres and others. The types of ads created by AdSource include the
weekly movie ads typically carried in newspapers, which highlight a particular
movie theater where the film is playing and the start times of the films.
Through a web-based data system, AdSource is able to create ads using showtimes
data from the CinemaSource database. These advertisements are delivered to the
newspapers in one of several formats, ready for publication. AdSource also
provides other exhibitors market services, including brochures and movie
showtimes e-mail marketing.
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 130,000 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, revenue and
cost estimates for over 5,000 released feature films, over 18,000 company
rosters and representation/contact information for over 50,000 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 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, Viacom, the Directors Guild of America, DreamWorks,
Universal Studios, Miramax Films and other movie studios. The current
Baseline/FilmTracker service resulted from our January 2002 acquisition of
FilmTracker, 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
movie studios.
BROADWAY TICKETING DIVISION
Broadway Ticketing: Theatre Direct International ("TDI"); Broadway.com
and 1-800-BROADWAY (collectively called "Broadway Ticketing").
TDI. We acquired TDI as of September 15, 2000. Founded in 1990, TDI is
a live theater ticketing wholesaler that provides groups and individuals with
access to theater tickets and knowledgeable service, covering shows on Broadway,
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
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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, Chicago, Fame, 42nd Street, Rent, The Lion King and
The Phantom of the Opera. In April 0f 2004, the marketing cooperative will be
joined by Avenue Q, Bombay Dreams, Dracula, The Producers, Hairspray and Little
Shop of Horrors. In addition, TDI's education division, Broadway Classroom,
markets group tickets along with educational programs to schools across the
country.
Broadway.com and 1-800-BROADWAY. We launched Broadway.com 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, features
the ability to purchase Broadway, Off-Broadway and London's West End theater
tickets over the phone and complements the online ticketing and information
services available through Broadway.com.
The combined businesses provide theater ticketing and related content
for over 100 venues in multiple markets to consumer households and thousands of
travel agencies, tour operators, corporations, educational institutions and
affiliated websites. Our Broadway Ticketing division employs a knowledgeable
sales force that offers ticket buyers a concierge-style service that includes
show recommendations, hotel packages and dinner choices. We obtain tickets to
sell through our arrangements with theater box offices and we also maintain our
own inventory of tickets for sale.
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. 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.
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 agreements with wireless 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
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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 TV DIVISION
Cable TV Initiatives. To further leverage our base of proprietary
content, Hollywood Media launched two interactive 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. Totally Hollywood TV is pursuing a national roll-out
strategy and is currently available on certain cable TV systems of Cablevision
Systems Corporation, Cox Communications, Comcast, and Insight Communications.
Totally Broadway TV is distributed on Cablevision Systems' New York area
systems.
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
more than 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 numerous media celebrities, including
Louis Rukeyser and Leonard Nimoy. Our intellectual properties division has
licensed books for publication with more than 100 domestic book publishers,
including Random House (Bertelsmann), Penguin Publishing Group (Pearson), Simon
& Schuster (Viacom), HarperCollins (News Corp.), St. Martin's Press (Holtzbrink
of Germany), Warner Books (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 (Time Warner), and MGM Studios. Since 1980, Tekno Books has developed
over 1,567 books that have been published. Another 3,330 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, more than 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 315 books
under contract or in final negotiations, including more than 60 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.
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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, which provide for advances to NetCo
Partners of $2 million per book for the first two books and $1 million per book
for the second two books against a percentage of the cover price. The first book
in the series was adapted as a four-hour mini-series on ABC. NetForce books have
so far been published in mass market paperback 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, Hollywood Media receives distributions of its
share of proceeds generated from the rights to the NetForce series.
For additional information about Netco Partners, see Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Equity in Earnings of Investments, and Note 9 -- 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, INC.
MovieTickets.com is one of the three leading destinations for the purchase
of movie tickets through the Internet; our two competitors (other than some
theaters 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 theater exhibitors. Hollywood Media currently owns 26.4% of
the equity of MovieTickets.com, Inc. See "Equity in Earnings of Investees"
below, 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 5% 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' theaters. In March 2001, AOL
purchased a non-interest bearing convertible preferred equity voting 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
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selected by MSN Network, Lycos Entertainment and several other premier online
destinations as the exclusive provider for online movie ticketing services.
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, Pacific Theatres, Rave Motion
Pictures, Ritz Theatres and Spotlight Theatres. 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. Additionally,
MovieTickets.com recently launched in the United Kingdom. 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.
The following discussion and analysis should be read in conjunction with
Hollywood Media's Unaudited Condensed Consolidated Financial Statements and the
notes thereto included in Item 1 of Part I of this report.
RESULTS OF OPERATIONS
The following table summarizes Hollywood Media's revenues, operating
expenses and operating income (loss) by reportable segment for the three months
ended March 31, 2004 ("Q1-04") and 2003 ("Q1-03") as restated, respectively:
BROADWAY DATA INTERNET INTELLECTUAL CABLE
TICKETING BUSINESS AD SALES PROPERTIES(a) TV OTHER(a) TOTAL
------------ ------------ ------------ ------------ ------------ ------------ ------------
Q1-04
Net Revenues $ 11,878,290 $ 1,662,798 $ 772,507 $ 471,125 $ -- $ -- $ 14,784,720
Operating Expenses 11,347,690 1,496,461 1,428,927 335,592 228,923 1,810,398 16,647,991
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating Income
(loss) $ 530,600 $ 166,337 $ (656,420) $ 135,533 $ (228,923) $ (1,810,398) $ (1,863,271)
============ ============ ============ ============ ============ ============ ============
Q1-03 (RESTATED)
Net Revenues $ 11,520,248 $ 1,749,114 $ 492,452 $ 775,872 $ -- $ -- $ 14,537,686
Operating Expenses
11,553,780 1,602,828 1,296,405 358,994 212,884 1,712,903 16,737,794
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating Income
(loss) $ (33,532) $ 146,286 $ (803,953) $ 416,878 $ (212,884) $ (1,712,903) $ (2,200,108)
============ ============ ============ ============ ============ ============ ============
a. 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
investees.
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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. TDI and
BroadwayTheater.com were acquired on September 15, 2000 and
May 1, 2000, respectively, therefore the numbers presented
include ticketing revenue and expense from the date of
acquisition.
o DATA BUSINESS - Includes our CinemaSource, EventSource,
AdSource and Baseline/FilmTracker operations.
o INTERNET AD SALES - Includes advertising sold on the web sites
Hollywood.com and Broadway.com, the AlwaysI subscription
service which offers films to subscribers over the Internet
and barter revenues derived from the collection and
compilation of movie showtimes data and the hosting of web
sites for movie theaters in exchange for advertising services
from the theaters.
o INTELLECTUAL PROPERTIES - Includes our book development and
book licensing operation through our 51% owned subsidiary
Tekno Books. This segment does not include our 50% interest in
NetCo Partners.
o CABLE TV - Includes two interactive cable television channels,
"Totally Hollywood TV" and "Totally Broadway TV".
NET REVENUES
Total net revenues were $14,784,720 for Q1-04 as compared to
$14,537,686 for Q1-03, an increase of $247,034 or 2%. The increase in revenue
was primarily due to an increase in Broadway Ticketing and Internet Ad Sales,
which was offset by a decrease in Intellectual Properties and Data Business
revenue. In Q1-04 net revenues were derived 81% from Broadway Ticketing, 11%
from Data Business, 5% from Internet Ad Sales and 3% from Intellectual
Properties. In Q1-03 net revenues were derived 80% from Broadway Ticketing, 12%
from Data Business, 3% from Internet Ad Sales and 5% from Intellectual
Properties.
Broadway Ticketing revenues were $11,878,290 and $11,520,248 for Q1-04
and Q1-03, respectively, an increase of $358,042 or 3%. Broadway Ticketing
revenues increased due to an increase in individual ticket sales, which was
partially offset by a decrease in group ticket sales. Broadway Ticketing revenue
is generated from the sale of live theater tickets for Broadway, off-Broadway
and London and hotel packages 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. The first quarter is generally seasonally slow in our Broadway
Ticketing division due to a relatively low-level of tourism in New York City in
that period. There was also unusually cold weather in New York in Q1-04 compared
to the previous year, which management believes may have negatively impacted
Broadway Ticketing revenues. Ticket sales collected in advance of the date of
performance are treated as deferred revenues.
Data Business revenues (which includes our Source businesses
[CinemaSource, EventSource, AdSource], and Baseline/FilmTracker) were $1,662,798
for Q1-04 as compared to $1,749,114 for Q1-03, a decrease of $86,316 or 5%. Our
Source business revenues decreased approximately $168,016 in Q1-04 as compared
to Q1-03 following a reduction in the level of event coverage in some smaller
geographic markets. We determined that the collection of data in these smaller
markets was not cost efficient and in reducing these costs, caused a slight
revenue decrease as most customers pay fees based on the total number of venues
covered. The customer pipeline remains strong and the customer base is
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continuing to increase. Our Baseline business increased approximately $81,700 in
Q1-04 as compared to Q1-03 due to a high retainage of our current customers and
continued expansion of our customer base. Revenue for CinemaSource and
EventSource is generated by the licensing of movie, event and theater showtimes
and other information to other media outlets and Internet companies including
newspapers such as The New York Times and The Washington Post, Internet
companies including AOL's Digital City, Lycos, and Yahoo! and wireless providers
such as AT&T Wireless, Sprint PCS and Verizon. Revenue for AdSource is generated
by creating exhibitor paid directory ads for insertion in newspapers around the
country. Baseline is a film and television database, licensing its data to
businesses and professionals in the entertainment industry and generates
revenues from the syndication of its data as well as subscription revenue.
Internet Ad Sales revenue was $772,507 for Q1-04 as compared to
$492,452 for Q1-03, an increase of $280,055 or 57%. The increase in revenues was
attributable to an increase in national movie studio and other Internet
advertising. Internet Ad Sales revenue is generated from the sale of
sponsorships and banner advertisements on Hollywood.com and Broadway.com.
Revenues from our Intellectual Properties division were $471,125 for
Q1-04 as compared to $775,872 for Q1-03, a decrease of $304,747 or 39%. The
decrease in revenues was attributable to the timing of the delivery of
manuscripts resulting in fewer manuscripts delivered in Q1-04 as compared to
Q1-03. The Intellectual Properties division generates revenues from several
different activities including book development and licensing and intellectual
property licensing. Revenues vary quarter to quarter dependent on the timing of
the delivery of the manuscripts to the publishers. Revenues are recognized when
the earnings process is complete and ultimate collection of such revenues is no
longer subject to contingencies. The Intellectual Properties division revenues
do not include our 50% interest in NetCo Partners, which is accounted for under
the equity method of accounting and under which, Hollywood Media's share of the
income (loss) is reported as equity in earnings of investees.
EQUITY IN EARNINGS OF INVESTEES
Equity in earnings of investees consisted of the following:
Three Months Ended March 31,
----------------------------
2004 2003
------ ------
NetCo Partners (a) $4,694 $4,405
MovieTickets.com (b) -- --
------ ------
$4,694 $4,405
====== ======
(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 $4,694 for Q1-04 as compared to $4,405 for Q1-03. Revenues vary
quarter-to-quarter dependent on timing of deliveries of various manuscripts to
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the publisher although, notwithstanding the timing of manuscript deliveries, one
NetForce book is typically published each year in North America.
(b) MovieTickets.com
Hollywood Media owns 26.4% of the total equity in MovieTickets.com,
Inc. joint venture at March 31, 2004. 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 investees. Excluding AOL's three percent convertible preferred voting equity
interest, Hollywood Media shares in 27.1% of the losses or income generated by
the joint venture. We have not recorded any of our share of the joint venture's
results of operations in Q1-04 and Q1-03 related to our investment in
MovieTickets.com. Since the investment had 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
COST OF REVENUE - TICKETING. Cost of revenue - ticketing was $9,951,540
for Q1-04 compared to $10,038,722 for Q1-03 for a decrease of $87,182. Cost of
revenue consists primarily of the cost of tickets and credit card fees for the
Broadway Ticketing segment. As a percentage of ticketing revenue, cost of
revenue - ticketing was 84% and 87% for Q1-04 and Q1-03 respectively. The
reduction in cost of revenue as a percentage of ticketing revenue in Q1-04
compared to Q1-03 was due in part to a greater proportion of higher margin
consumer ticket sales in Q1-04 and an increase in higher margin hotel packages
sales.
EDITORIAL, PRODUCTION, DEVELOPMENT AND TECHNOLOGY. Editorial,
production, development and technology costs consist of payroll and related
expenses for the editorial and production staff responsible for creating content
on the company's web sites for our Internet ad sales and business to business
segments. Internet access and computer related expenses for the support and
delivery of the company's services and fees and royalties paid to authors and
co-editors for the intellectual properties segments are also included.
Editorial, production, development and technology costs for Q1-04 were
$1,188,021 compared to $1,159,735 for Q1-03, an increase of $28,286 or 2%. As a
percentage of revenues from our Ad Sales, Data Business, and Intellectual
Properties, these costs were 41% and 38% for Q1-04 and Q1-03 respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist of occupancy costs, production costs, human
resources and administrative functions as well as professional and consulting
service fees, telecommunications costs, provision for doubtful accounts
receivable, general insurance costs, selling and marketing costs (such as
commission due to advertising, marketing, promotional, business development,
public relations, and commission due to advertising agencies, ad rep firms and
other parties) and salaries and benefits. Selling, general and administrative
expenses for Q1-04 were $4,978,313 compared to $4,709,438 for Q1-03, an increase
of $268,875 or 6%. As a percentage of net revenues, selling, general and
administrative expenses were 34% and 32% for Q1-04 and Q1-03 respectively. The
increase in Q1-04 as compared to Q1-03 is due primarily to an addition to
reserves we booked in connection with the Water Garden appeal. (See Note 11 of
unaudited Notes to Condensed Consolidated Financial Statements).
AMORTIZATION OF CBS ADVERTISING. Amortization of CBS advertising
relating to our agreements with Viacom was $0 for Q1-04 compared to $190,023 for
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Q1-03. Under our agreement 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 was recorded in the
balance sheet as deferred advertising and amortized as the advertising was used
each related contract year. No advertising was used during Q1-04.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists of depreciation of property and equipment, furniture and fixtures, web
development, leasehold improvements, capital leases and amortization of goodwill
and intangibles. Depreciation and amortization expense was $530,117 for Q1-04 as
compared to $639,876 for Q1-03, a decrease of $109,759 or 17%. The decrease was
primarily attributable to certain tangible assets that became fully amortized
during 2003.
INTEREST, NET. Interest, net was $417,955 for Q1-04, as compared to
$340,368 for Q1-03. The increase of $77,587 in interest, net in Q1-04 over
Q1-03, was primarily attributable to interest charges and an increase in the
amortization of the beneficial conversion feature related to the convertible
debentures of $107,172 due to an anti-dilution provision. (See Note 6 of
Unaudited Condensed Consolidated Financial statements).
OTHER INCOME (EXPENSE), NET. Other, net was $690,561 for Q1-04 as
compared to $(49,091) for Q1-03. The increase of $739,652 in other income
(expense), net was primarily attributable to a gain recognized upon termination
of Fountainhead Media Services put-call option in connection with its surrender
of its 20% equity interest in a subsidiary that owns Baseline, thus reducing the
option to $0. (See Note 5 of Unaudited Condensed Consolidated Financial
Statements).
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had cash and cash equivalents of $12,642,403
compared to cash and cash equivalents of $1,867,999 at December 31, 2003. Our
net working capital surplus (current assets less current liabilities) at March
31, 2004 was $7,220,804 as compared to a working capital deficit of $6,490,321
at December 31, 2003. During the three months ended March 31, 2004: net cash
used in operating activities was $3,354,644, which cash usage consisted
primarily of $3,103,479 of deferred costs associated with Broadway ticket sales,
including $730,000 used to purchase Broadway ticketing inventory to be held for
sale during 2004, payment of $856,378 on various outstanding payables and other
current liabilities, and $150,000 expended for the Water Garden bond deposit,
net cash provided by investing activities was $137,071; and net cash provided by
financing activities was $14,266,119, comprised primarily of net proceeds
resulting from the private placement of common stock during Q1-04 (see Note 8 to
the Unaudited Condensed Consolidated Financial Statements included in this Form
10-Q report). As a result of the above, cash and cash equivalents increased by
$10,774,404 for the three months ended March 31, 2004. In comparison, during the
three months ended March 31, 2003, net cash used in operating activities was
$789,061, net cash used in investing activities was $138,362, and net cash used
in financing activities was $178,484.
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
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shares of Hollywood Media common stock, par value $0.01 per share, at a
conversion price which was $3.46 per share until adjusted as described below. In
addition, Hollywood Media can elect at its option to convert up to 50% of the
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 (the
"Warrants") to acquire at any time through May 22, 2007 an aggregate of 576,590
shares of common stock at an exercise price of $3.78 per share. On May 22, 2003,
provided an investor had held at least seventy-five percent of such investor's
shares of common stock issued or issuable to such investor under the Debentures,
the exercise price of the warrants held by such investor decreased to $3.46 per
share which equals the pre-adjustment conversion price of the Debentures. The
Debentures and Warrants contain customary anti-dilution provisions as more fully
described in the agreements. As a result of the private placement referenced
above, the conversion price of $3.46 per share was reduced to $3.30 per share,
and the exercise price of the Warrants was reduced to $3.34 per share, after
giving effect to a weighted average anti-dilution provision contained in the
agreement. 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.) Hollywood Media
recognized $32,425 for the three months ended March 31, 2004 and 2003 as
interest expense from the amortization of the debt issuance costs. As of March
31, 2004, $1,680,894 discount on the Debentures is reducing the face amount of
Debentures and will be amortized to interest expense over the term of the
Debentures.
The warrants granted to these investors were recorded at a relative
fair value of $1,608,422 using the Black Scholes option valuation model. The
assumptions used to calculate the value of the Warrants using Black Scholes are
as follows: volatility of 83.7%, 5 year expected life, exercise price of $3.78
per share, a quoted market price of $3.27 per share and a risk free interest
rate of 4%. The value of the beneficial conversion feature of the Debentures was
$1,295,416. The value of the Warrants and the beneficial conversion feature are
being amortized to interest expense over 3 years, using the effective interest
method. The value of the Warrants and the beneficial conversion feature of the
Debentures were recorded as a discount to the convertible debentures and
included in additional paid-in capital. As a result of the reduction in the
conversion price discussed above, the value attributed to the beneficial
conversion feature and the Warrants of the Debentures increased $294,360. The
value attributable to the increase was recorded as a discount to the Debentures
and included in additional paid-in capital. The additional value is being
amortized over the remaining term of the Debentures using the effective interest
method.
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 March 31, 2004, a liability of $69,098 was
recorded for advances that had been paid to Hollywood Media but remain payable
by Hollywood Media's customers to the third party. In April of 2004, the
agreement was terminated by Hollywood Media.
Under a commitment that expired on January 1, 2004, in the event that
Hollywood Media required additional funding, Hollywood Media's Chairman of the
Board and Chief Executive Officer and Hollywood Media's Vice Chairman and
President, 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 would be reduced dollar for dollar to the extent Hollywood Media
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generated cash from financings, operational cash flow or proceeds from a sale of
a division or subsidiary of Hollywood Media. Advances bore interest at the prime
rate plus one percent. There was $600,000 principal amount outstanding under
this commitment at December 31, 2003, of which $500,000, which was loaned by a
wholly-owned limited liability corporation of Hollywood Media's Chairman and
President, was collateralized by Broadway Ticketing inventory and $100,000 was
unsecured. During the first quarter of 2004, the outstanding balance was paid in
full plus accrued interest of $17,626.
As of the date of this 10-Q report, we currently anticipate capital
expenditures during the remainder of 2004 of approximately $500,000, for various
systems and equipment upgrades (which expenditures do not include potential
business acquisitions, and do not include costs being incurred (as described
below) in connection with our review of internal controls and upgrading of
information systems in preparation for compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal controls). At
this time we are unable to accurately estimate the full amount of the costs that
Hollywood Media will incur during 2004 in connection with preparations for
compliance with Section 404 of the Sarbanes-Oxley Act of 2002, however, such
costs are currently anticipated to include at least $250,000 for consulting
expertise with such process. Additional costs will be incurred in connection
with Section 404 compliance preparations but are not quantified at this time.
CRITICAL ACCOUNTING POLICIES
In response to the Securities 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 4 to the consolidated
financial statements included in our Form 10-K for the year ended December 31,
2003.
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.
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
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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 three months ended March 31, 2004 and 2003 was $0 and $190,023
respectively. This is separately reported in the accompanying unaudited
condensed consolidated statements of operations under the caption "Amortization
of CBS Advertising."
Stock Based Compensation
As permitted under Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transaction and Disclosure - an
amendment of FAS 123" ("SFAS No. 148"), which amended Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS
No. 123"), we have chosen to account for our Stock Plan under the intrinsic
value method as allowed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations. Under APB No. 25, because the exercise price of our employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded. FSAS No. 148 requires disclosure of
the estimated fair value of our employee stock options granted and pro forma
financial information assuming compensation expense was recorded using these
fair values.
Impairment of Long-Lived Assets
Effective December 31, 2001, Hollywood Media adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144 superseded SFAS 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 APB 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.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). 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
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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.
As prescribed by SFAS No. 142, Hollywood Media completed the
transitional goodwill impairment test by the second quarter of 2002 which did
not result in an impairment charge. Additionally, Hollywood Media established
October 1, as its annual impairment charge. Additionally, Hollywood Media
established that date in 2002 and 2003. As of March 31, 2004, Hollywood Media is
not aware of any events or changes in circumstance that would require it to
evaluate goodwill for impairment. Future charges in estimates used to conduct
the impairment review, including revenue projections or market values could
cause the analysis to indicate that Hollywood Media's goodwill is impaired in
subsequent periods and result in a write-off of a portion or all of the
goodwill.
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
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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.
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 ("Water Garden"), as lessor. The stated lease term was 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.
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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
stop enforcement of the judgment until 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, the Appeal Bond was increased to
$1,646,641 on November 14, 2003.
On May 6, 2004, the California Court of Appeal for the Second District
issued its decision affirming the judgment against defendants hollywood.com,
Inc. and Tribune. Hollywood.com, Inc. and Tribune intend to petition the Court
of Appeal for a re-hearing, and, if necessary, to seek review of the decision by
the California Supreme Court. If neither the petition for rehearing nor the
petition for review by the California Supreme Court are successful, then the
appeal will have become finally determined and the judgment will become final.
In such event, added to the amount of the judgment would be the plaintiff's
attorneys fees and costs incurred in opposing these further appeal efforts. It
is not possible at this time to estimate the amount of such additional attorneys
fees and costs.
The California Court of Appeal has discretion as to whether or not it
will grant a re-hearing, and the California Supreme Court has discretion as to
whether or not it will decide to hear an appeal in this case. If either such
court decides to hear this case, and if such hearing results in reversal of the
judgment against hollywood.com, Inc. and Tribune, the matter would then likely
be returned to the trial court for a trial of the case.
In April 2003, Tribune and Hollywood Media agreed that Tribune would
obtain the Appeal Bond in exchange for specified advance payments by Hollywood
Media to Tribune as collateral to secure Hollywood Media's indemnification
obligation to Tribune described above. The advance payments consist of a
$100,000 payment made upon commencement of the agreement on April 7, 2003, and
monthly payments of $75,000 (or $100,000, for the last six months of 2003). The
agreement allows Tribune the right to demand additional collateral, the form of
which, cash or shares of Hollywood Media's common stock, to be determined by
Hollywood Media in its discretion, in the approximate amount of the initial
judgment. Hollywood Media's obligation to make payments to Tribune under such
agreement is limited to the amount of the initial judgment plus costs and/or
attorney's fees that may be awarded and accrued interest. The advance payments
and, if applicable, any other security, are to be returned to Hollywood Media if
the appeal is successful (which would result in the bond no longer being
required) or to the extent the payments ultimately exceed Hollywood Media's
indemnification obligation to Tribune. Such payments made to Tribune may be used
by Hollywood Media, in its discretion, to pay the judgment or a settlement in
the Water Garden Lawsuit.
The judgment in the Water Garden Lawsuit is for rent accrued under the
lease through February 13, 2003, however, the facial termination date of the
lease is December 31, 2003. 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.
Recognizing that the ultimate outcome of this case is uncertain,
Hollywood Media has accrued on its books, as of March 31, 2004, an amount which
it believes is adequate to account for potential liability for this matter, and
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we will continue to evaluate the matter as the litigation process proceeds.
There can be no assurance that any further appeal efforts contemplated above
will be successful.
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 March 31, 2004, in transactions that were not registered under the
Securities Act of 1933.
On January 20, 2004, Hollywood Media issued 32,697 shares of common
stock valued at $78,641 to the holders of its Debentures for interest due for
the period October 1, 2003 through January 1, 2004.
On February 13, 2004, Hollywood Media issued 5,773,355 shares of common
stock and warrants to purchase 1,443,339 shares of its common stock in a private
placement to accredited investors at an aggregate cash offering price of
$16,396,327. Hollywood Media's net proceeds were $15,278,501 after deducting the
placement agent's fee and expenses. In addition, Hollywood Media incurred
$151,284 for legal, accounting and travel expenses associated with the offering.
The warrants issued in the private placement have an exercise price of $2.84 per
share of common stock and expire in February 2009. The warrants are callable by
Hollywood Media after one year if the common stock of Hollywood Media trades at
twice the exercise price for 20 trading days. In addition to the warrants issued
to the investors, Hollywood Media issued warrants to the placement agent having
the same exercise price, which are exercisable to purchase up to 288,667 shares
of common stock. In addition, Hollywood Media issued an option to a third party
consultant to purchase 35,211 shares of common stock for an aggregate exercise
price of $50,000.
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, based
upon investment representations to Hollywood Media relating thereto.
Hollywood Media did not repurchase any shares of its common stock
during the quarter ended March 31, 2004.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Incorporated by
Exhibit Description Reference From
- ------- ----------- --------------
10.1 Agreement dated as of January 7, 2004 between Fountainhead Media
Services, Inc. and Hollywood Media Corp., providing for the satisfaction of
Fountainhead's promissory note to Hollywood Media in exchange for
Fountainhead's shares of common stock of Baseline Acquisitions Corp. (*)
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
March 31, 2004, on February 17, 2004. Item 5 of the Form 8-K included the
following information. On February 13, 2004, Hollywood Media completed the
closing of a $16.4 million private placement, which included the issuance to
investors of 5,773,355 shares of its common stock and warrants to purchase
1,443,339 shares of its common stock. Hollywood Media received net proceeds of
approximately $15.2 million after deducting the estimated expenses in connection
with the transaction. The warrants have an exercise price of $2.84 per share of
common stock and expire in February 2009. In addition to the warrants issued to
the investors, Hollywood Media issued warrants to the placement agent having the
same exercise price, which are exercisable to purchase up to 288,667 shares of
common stock. Hollywood Media agreed to file a registration statement covering
resales from time to time of shares issued in the private placement or pursuant
to exercise of the warrants. Certain agreements relating to the private
placement were filed as exhibits to the Form 8-K.
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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: May 17, 2004 By: /s/ Mitchell Rubenstein
------------------------------------
Mitchell Rubenstein, Chief Executive
Officer (Principal executive
officer)
Date: May 17, 2004 By: /s/ Scott Gomez
------------------------------------
Scott Gomez, Vice President of
Finance and Accounting
(Principal accounting officer)
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