UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 5, 2004, the number of shares outstanding of the issuer's
common stock, $.01 par value, was 28,050,426.
HOLLYWOOD MEDIA CORP.
TABLE OF CONTENTS
PAGE(S)
-------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of June 30, 2004 (unaudited) and December 31, 2003.............. 2
Condensed Consolidated Statements of Operations
(unaudited) for the Six and Three Months ended
June 30, 2004 and 2003 (restated).................................. 3
Condensed Consolidated Statement of Shareholders' Equity
(unaudited) for the Six Months ended June 30, 2004................. 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Six Months ended
June 30, 2004 and 2003 (restated).................................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)... 6-24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................25-40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................. 41
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................................... 44
Signatures................................................................. 45
-1-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,297,242 $ 1,867,999
Receivables, net 1,344,930 1,496,934
Inventories, net 6,619,689 5,770,289
Prepaid expenses 1,231,593 941,966
Acquisition deposit 769,000 --
Other receivables 892,850 654,141
Other current assets 73,972 10,296
Deferred advertising - CBS -- 38,807
------------- -------------
Total current assets 20,229,276 10,780,432
RESTRICTED CASH 1,075,000 850,000
PROPERTY AND EQUIPMENT, net 2,182,509 2,236,906
INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES 560,679 164,205
IDENTIFIABLE INTANGIBLE ASSETS, net 1,256,073 1,603,985
GOODWILL 41,137,461 40,813,682
OTHER ASSETS 359,919 431,811
------------- -------------
TOTAL ASSETS $ 66,800,917 $ 56,881,021
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,555,797 $ 2,201,431
Accrued expenses and other 4,009,208 5,178,467
Loan from shareholder/officer 200,000 600,000
Deferred revenue 8,094,268 9,063,317
Current portion of capital lease obligations 186,507 227,538
Current portion of convertible debentures, net 4,282,946 --
------------- -------------
Total current liabilities 18,328,726 17,270,753
CAPITAL LEASE OBLIGATIONS, less current portion 142,479 178,790
DEFERRED REVENUE, less current portion 163,313 193,063
MINORITY INTEREST 7,662 21,895
OTHER DEFERRED LIABILITY 198,646 903,192
CONVERTIBLE DEBENTURES, NET, less current portion -- 4,027,629
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 1,000,000 shares authorized; none outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized; 27,885,475
and 21,810,266 shares issued and outstanding at June 30, 2004 and
December 31, 2003, respectively 278,855 218,103
Additional paid-in capital 295,429,466 279,087,772
Deferred compensation -- (162,500)
Accumulated deficit (247,748,230) (244,857,676)
------------- -------------
Total shareholders' equity 47,960,091 34,285,699
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 66,800,917 $ 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)
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(As Restated, (As Restated,
See Note 2) See Note 2)
NET REVENUES:
Ticketing $ 27,950,166 $ 25,523,288 $ 16,071,876 $ 14,003,040
Other 6,218,864 6,160,579 3,312,434 3,143,141
------------ ------------ ------------ ------------
Total revenues 34,169,030 31,683,867 19,384,310 17,146,181
OPERATING EXPENSES:
Cost of revenues - ticketing 24,152,323 22,495,773 14,200,783 12,457,051
Editorial, production, development and technology (exclusive
of depreciation and amortization shown separately below) 2,504,927 2,437,714 1,316,906 1,277,979
Selling, general and administrative 9,615,442 9,067,195 4,637,129 4,357,757
Amortization of CBS advertising 38,807 506,729 38,807 316,706
Depreciation and amortization 1,042,351 1,254,393 512,234 614,517
------------ ------------ ------------ ------------
Total operating expenses 37,353,850 35,761,804 20,705,859 19,024,010
------------ ------------ ------------ ------------
Operating loss (3,184,820) (4,077,937) (1,321,549) (1,877,829)
EQUITY IN EARNINGS OF INVESTEE 588,086 806,126 583,392 801,721
OTHER INCOME (EXPENSE):
Interest, net (785,501) (664,040) (367,546) (323,672)
Other, net 727,673 8,894 37,112 57,985
------------ ------------ ------------ ------------
Loss before minority interest (2,654,562) (3,926,957) (1,068,591) (1,341,795)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (235,992) (399,588) (165,500) (179,015)
------------ ------------ ------------ ------------
Net loss $ (2,890,554) $ (4,326,545) $ (1,234,091) $ (1,520,810)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.11) $ (0.21) $ (0.04) $ (0.07)
============ ============ ============ ============
Weighted average common and common equivalent shares
outstanding - basic and diluted 26,308,112 20,510,680 27,717,948 20,618,978
============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
-3-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(Unaudited)
Common Stock 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
Isssuance of stock options and
warrants for services rendered 85,211 500 279,438 -- -- 279,938
Amortization of deferred compensation -- -- -- 162,500 -- 162,500
Issuance of stock
- 401 (k) employer match 52,627 526 139,461 -- -- 139,987
Interest payment to convertible
debenture holders 57,095 571 155,856 -- -- 156,427
Exercises of stock options and
warrants 15,458 154 36,299 -- -- 36,453
Warrants and beneficial conversion
feature - convertible debentures -- -- 294,360 -- -- 294,360
Issuance of common stock for private
placement, net 5,773,355 58,086 15,113,416 -- -- 15,171,502
Issuance of stock for asset acquisition 91,463 915 322,864 -- -- 323,779
Net loss -- -- -- -- (2,890,554) (2,890,554)
------------- ------------- ------------- ------------- ------------- -------------
Balance - June 30, 2004 27,885,475 $ 278,855 $ 295,429,466 $ -- $(247,748,230) $ 47,960,091
============= ============= ============= ============= ============= =============
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)
Six Months Ended June 30,
----------------------------
2004 2003
------------ ------------
(As Restated,
see Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,890,554) $ (4,326,545)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,042,351 1,254,393
Interest paid in stock 156,427 155,783
Amortization of discount on convertible debentures 549,677 372,020
Amortization of deferred financing costs 64,850 64,848
Equity in earnings of investee, net of return of invested capital (396,474) (247,850)
Issuance of stock options and warrants for services rendered 279,938 282,366
Amortization of deferred compensation 162,500 --
Provision for bad debts 83,250 124,328
Amortization of CBS advertising 38,807 506,729
Minority interest in earnings of subsidiary, net of distribution to minority owners (14,233) 126,859
Amortization of put/call option (719,250) (107,000)
Changes in assets and liabilities:
Receivables 69,707 448,931
Inventories (849,400) 973,403
Prepaid expenses (289,627) (448,221)
Other receivables (238,709) (274,420)
Other current assets (63,676) (76,861)
Restricted cash (225,000) (250,000)
Other assets 7,043 405,461
Accounts payable (645,634) 598,969
Accrued expenses and other (833,214) 762,643
Deferred revenue (998,800) (952,343)
Other deferred liability 14,704 32,753
------------ ------------
Net cash used in operating activities (5,695,317) (573,754)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (586,990) (249,550)
Acquisition deposit (769,000) --
------------ ------------
Net cash used in investing activities (1,355,990) (249,550)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of) shareholder/officer loan (400,000) 400,000
Net advances to third party (196,057) (217,762)
Proceeds from private placement warrant exercise 35,500 --
Proceeds from issuance of common stock in private placement, net of issuance costs 15,171,502 --
Payments under capital lease obligations (130,395) (183,472)
------------ ------------
Net cash provided by (used in) financing activities 14,480,550 (1,234)
------------ ------------
Net increase (decrease) in cash and cash equivalents 7,429,243 (824,538)
CASH AND CASH EQUIVALENTS, beginning of period 1,867,999 2,342,238
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 9,297,242 $ 1,517,700
============ ============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 30,419 $ 69,960
============ ============
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 of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to those rules and
regulations. However, management believes that the disclosures contained herein
are adequate to make the information presented not misleading. The financial
statements reflect, in the opinion of management, all material adjustments
(which include only normal recurring adjustments) necessary to present fairly
Hollywood Media's financial position and results of operations. The results of
operations for the three and six months ended June 30, 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 three and six months ended June 30, 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 increased by $143,937 or .57% in the
restated condensed consolidated financial statements for the six
months ended June 30, 2003 as a result of an overaccrual for
Broadway Ticketing gift certificates.
o Ticketing revenue has been increased by $169,066 or 1.2% in the
restated condensed consolidated financial statements for the three
months ended June 30, 2003 as a result of an overaccrual for
Broadway Ticketing gift certificates.
-6-
Cost of Revenues - Ticketing
o Cost of Revenues - Ticketing has been decreased by $272,379 or 1.2%
in the restated condensed consolidated financial statements for the
six months ended June 30, 2003 as a result of an overaccrual for
Broadway Ticketing purchases.
o Cost of Revenues - Ticketing has been decreased by $163,473 or
1.3%, in the restated condensed consolidated financial statements
for the three months ended June 30, 2003 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
1,525 shares for the six months ended June 30, 2003 to include
vested restricted shares.
o The number of weighted average shares outstanding was increased by
3,000 shares for the three months ended June 30, 2003 to include
vested restricted shares.
The total effect of the errors was a decrease in the net loss for the six
months ended June 30, 2003 of $416,316 or $.02 per share and a decrease in
the net loss for the three months ended June 30, 2003 of $332,539 or $.02
per share. The following unaudited condensed consolidated statements of
operations for the three and six months ended June 30, 2003, reconcile the
restated amounts to the corresponding amounts, as previously reported.
Additionally, the following statement of cash flows for the six months
ended June 30, 2003, reconciles the restated amounts to the previously
reported amounts.
-7-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended June 30, 2003
(Unaudited)
As previously Restatement
reported adjustments Restated
------------- ----------- ------------
NET REVENUES
Ticketing $ 25,379,351 $ 143,937 $ 25,523,288
Other 6,160,579 -- 6,160,579
------------ --------- ------------
Total revenues 31,539,930 143,937 31,683,867
------------ --------- ------------
OPERATING EXPENSES
Cost of revenues - ticketing 22,768,152 (272,379) 22,495,773
Editorial, production, development and
technology (exclusive of depreciation
and amortization shown separately below) 2,437,714 -- 2,437,714
Selling, general and administrative 9,067,195 -- 9,067,195
Amortization of CBS advertising 506,729 -- 506,729
Depreciation and amortization 1,254,393 -- 1,254,393
------------ --------- ------------
Total operating expenses 36,034,183 (272,379) 35,761,804
------------ --------- ------------
Operating loss (4,494,253) 416,316 (4,077,937)
EQUITY IN EARNINGS OF INVESTEE 806,126 -- 806,126
OTHER INCOME (EXPENSE):
Interest, net (664,040) -- (664,040)
Other, net 8,894 -- 8,894
------------ --------- ------------
Loss before minority interest (4,343,273) 416,316 (3,926,957)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (399,588) -- (399,588)
------------ --------- ------------
Net loss $ (4,742,861) $ 416,316 $ (4,326,545)
============ ========= ============
Basic and diluted loss per common share $ (0.23) $ 0.02 $ (0.21)
============ ========= ============
Weighted average common and
common equivalent shares
outstanding - basic and diluted 20,509,155 1,525 20,510,680
============ ========= ============
-8-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended June 30, 2003
(Unaudited)
As previously Restatement
reported adjustments Restated
------------- ----------- ------------
NET REVENUES
Ticketing $ 13,833,974 $ 169,066 $ 14,003,040
Other 3,143,141 -- 3,143,141
------------ --------- ------------
Total revenues 16,977,115 169,066 17,146,181
------------ --------- ------------
OPERATING EXPENSES
Cost of revenues - ticketing 12,620,524 (163,473) 12,457,051
Editorial, production, development and
technology (exclusive of depreciation
and amortization shown separately below) 1,277,979 -- 1,277,979
Selling, general and administrative 4,357,757 -- 4,357,757
Amortization of CBS advertising 316,706 -- 316,706
Depreciation and amortization 614,517 -- 614,517
------------ --------- ------------
Total operating expenses 19,187,483 (163,473) 19,024,010
------------ --------- ------------
Operating loss (2,210,368) 332,539 (1,877,829)
EQUITY IN EARNINGS OF INVESTEE 801,721 -- 801,721
OTHER INCOME (EXPENSE):
Interest, net (323,672) -- (323,672)
Other, net 57,985 -- 57,985
------------ --------- ------------
Loss before minority interest (1,674,334) 332,539 (1,341,795)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (179,015) -- (179,015)
------------ --------- ------------
Net loss $ (1,853,349) $ 332,539 $ (1,520,810)
============ ========= ============
Basic and diluted loss per common share $ (0.09) $ 0.02 $ (0.07)
============ ========= ============
Weighted average common and
common equivalent shares
outstanding - basic and diluted 20,615,978 3,000 20,618,978
============ ========= ============
-9-
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2003
(Unaudited)
As previously Restatement
reported adjustments Restated
----------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(4,742,861) $ 416,316 $(4,326,545)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,254,393 -- 1,254,393
Interest paid in stock 155,783 -- 155,783
Amortization of discount on convertible debentures 372,020 -- 372,020
Amortization of deferred financing costs 64,848 -- 64,848
Equity in earnings of investee,
net of return of invested capital (247,850) -- (247,850)
Issuance of compensatory stock, stock options
and warrants for services rendered 282,366 -- 282,366
Provision for bad debts 124,328 -- 124,328
Amortization of CBS advertising 506,729 -- 506,729
Minority interest in earnings of subsidiary,
net of distribution to minority owners 126,859 -- 126,859
Amortization of put/call option (107,000) -- (107,000)
Changes in assets and liabilities:
Receivables 448,931 -- 448,931
Inventories 973,403 -- 973,403
Prepaid expenses (448,221) -- (448,221)
Other receivables (274,420) -- (274,420)
Other current assets (76,861) -- (76,861)
Restricted cash (250,000) -- (250,000)
Other assets 405,461 -- 405,461
Accounts payable 598,969 -- 598,969
Accrued expenses and other 1,035,022 (272,379) 762,643
Deferred revenue (808,406) (143,937) (952,343)
Other deferred liability 32,753 -- 32,753
----------- --------- -----------
Net cash used in operating activities (573,754) -- (573,754)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (249,550) -- (249,550)
----------- --------- -----------
Net cash used in investing activities (249,550) -- (249,550)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder/officer loan 400,000 -- 400,000
Net advances to third party (217,762) -- (217,762)
Proceeds from private placement warrant exercise -- -- --
Proceeds from issuance of common stock in
private placement, net of issuance costs -- -- --
Payments under capital lease obligations (183,472) -- (183,472)
----------- --------- -----------
Net cash provided (used in) by financing activities (1,234) -- (1,234)
----------- --------- -----------
Net increase (decrease) in cash and cash equivalents (824,538) -- (824,538)
CASH AND CASH EQUIVALENTS, beginning of period 2,342,238 -- 2,342,238
----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,517,700 $ -- $ 1,517,700
=========== ========= ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 69,960 $ -- $ 69,960
=========== ========= ===========
-10-
(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
reported and adjusted information for the three and six months ended June 30,
2004 and 2003 regarding net loss and net loss per share as if the Company had
accounted for all of its employee stock options under the fair value method of
SFAS 123:
Six months ended Three months ended
June 30, (unaudited) June 30, (unaudited)
------------------------------ ------------------------------
Restated Restated
2004 2003 2004 2003
------------ ------------ ------------ ------------
Reported net loss $ (2,890,554) $ (4,326,545) $ (1,234,091) $ (1,520,810)
Stock-based employee compensation expense
under the fair value method (910,413) (1,145,178) (477,327) (559,900)
------------ ------------ ------------ ------------
Adjusted net loss $ (3,800,967) $ (5,471,723) $ (1,711,418) $ (2,080,710)
============ ============ ============ ============
Reported net loss basic and diluted per share $ (0.11) $ (0.21) $ (0.04) $ (0.07)
============ ============ ============ ============
Adjusted net loss basic and diluted per share $ (0.14) $ (0.27) $ (0.06) $ (0.10)
============ ============ ============ ============
Number of ordinary shares used in computation
basic and diluted 26,308,112 20,510,680 27,717,948 20,618,978
============ ============ ============ ============
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.
-11-
(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 basic calculation until vesting
occurs. As of June 30, 2004, there were no unvested restricted shares of
Hollywood Media common stock. There were 6,002,847 and 4,668,004 options and
warrants to purchase common shares outstanding at June 30, 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 a 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 and six months ended June 30, 2004 and
2003 because they are antidilutive for all periods presented.
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 $306,757 and $259,109 at June 30, 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 June 30, 2004 and December 31, 2003, included in
"accrued expenses and other" in the accompanying condensed consolidated balance
sheets is a liability of $0 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.
-12-
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
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 liability of $719,250 on a put and call option obtained by
FMS was relieved through earnings during the first quarter of 2004, and is
included in other, net in the accompanying unaudited condensed consolidated
statement of operations for the six months ended June 30, 2004.
-13-
On June 18, 2004, Hollywood Media acquired the assets of Front Row
Marketing (FRM), a provider of opt-in emails of movie showtimes services for
certain movie theater exhibitors in the United States. In exchange for the
assets of Front Row Marketing, Hollywood Media issued $323,779 in Hollywood
Media common stock, of which 15,243 shares have been escrowed for 90 days to
cover potential price adjustment and indemnity by seller. Front Row Marketing
will be integrated into Hollywood Media's AdSource business unit which is part
of Hollywood Media's Data Business. Hollywood Media will detail the purchase
accounting in subsequent periods as assets must be valued by a third party
valuation expert which has not been performed as of the filing of this Form
10-Q.
(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
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. These obligations were satisfied in full during the
first quarter of 2004, and there was no outstanding balance due at June 30,
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 $400,000, which was loaned by a
wholly-owned limited liability corporation of Hollywood Media's Chairman and
President, was collateralized by Broadway Ticketing inventory and $200,000 was
unsecured. As of June 30, 2004 the balance of $200,000 under this commitment was
unsecured.
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
-14-
"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 an
original conversion price of $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). During the three and six months ended June 30, 2004, $32,425 and
$64,850, respectively, were recognized as interest expense from the amortization
of the debt issuance costs. As of June 30, 2004 and December 31, 2003,
$1,417,054 and $1,672,371, respectively, 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 $263,840
and $549,677, respectively, consisting of stated interest plus discount
amortization was recorded for the three and six months ended June 30, 2004,
respectively. For the three and six months ended June 30, 2003, $192,425 and
$371,810, respectively, was recorded as interest expense for the accretion of
the discount.
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 beneficial conversion feature of the Debenture 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 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 an
additional discount of $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.
-15-
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 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 loan was
repaid in full in the first quarter of 2004, and the outstanding balance of such
loan at June 30, 2004 and December 31, 2003, was $0 and $138,152 respectively
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." 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 June 30, 2004,
Hollywood Media is not aware of any events or changes in circumstance that would
require it to evaluate goodwill for impairment prior to October 1, 2004.
(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 December 31, 2003.
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 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
-16-
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
exchange for services related to the private placement, on May 28, 2004,
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.
On April 16, 2004, Hollywood Media issued 12,500 shares of common stock
valued at $35,500 for an exercise of a warrant by an investor in the February
13, 2004 private placement.
On April 26, 2004, Hollywood Media issued 50,000 shares of common stock
to an independent third party, pursuant to a consulting agreement providing an
option to purchase the shares for $120,000, for services rendered in the 1st
quarter of 2004.
On April 26, 2004, Hollywood Media issued 24,398 shares of common stock
valued at $77,786 to the holders of the Debentures for interest due for the
period January 1, 2004 through March 31, 2004.
On May 13, 2004, Hollywood Media issued 2,208 shares of common stock
for an exercise of a warrant by an investor which was charged to consulting
expense in prior periods.
On June 18, 2004 Hollywood Media issued 91,463 shares of common stock,
valued at $323,779, for the assets of Front Row Marketing.
During the three and six months ended June 30, 2004, Hollywood Media
recorded $27,847 and $159,938, respectively, in consulting expenses on stock
options issued to 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 June 30, 2004, Hollywood
Media amortized $82,500. As of June 30, 2004 there was no unamortized deferred
compensation remaining.
(9) INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES:
Investments in and advances to equity method investees consist of the
following:
JUNE 30 DECEMBER 31,
2004 2003
--------- ------------
(UNAUDITED)
NetCo Partners (a) $ 565,654 $ 169,180
MovieTickets.com (b) (4,975) (4,975)
--------- ---------
$ 560,679 $ 164,205
========= =========
-17-
(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 six and three months ended June 30, 2004 and 2003 are presented
below:
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
(UNAUDITED) (UNAUDITED)
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenues $1,437,631 $2,030,925 $1,423,631 $2,004,222
Gross Profit 1,230,574 1,737,956 1,219,619 1,728,795
Net Income 1,176,172 1,612,252 1,166,784 1,603,443
Hollywood Media's
share of net income 588,086 806,126 583,392 801,721
Hollywood Media and C.P. Group are each 50% partners in NetCo Partners.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement, Hollywood
Media is responsible for developing, producing, manufacturing, advertising,
promoting, marketing and distributing NetCo Partners' illustrated novels and
related products and for advancing all costs incurred in connection therewith.
All amounts advanced by Hollywood Media to fund NetCo Partners' operations are
treated as capital contributions of Hollywood Media and Hollywood Media is
entitled to a return of such capital contributions before distributions of
profits are split equally between Hollywood Media and C.P. Group.
NetCo Partners has signed several significant licensing agreements for
Tom Clancy's NetForce. These agreements include book licensing agreements for
North American rights to a series of adult and young adult books, audio book
agreements and licensing agreements with various foreign publishers for rights
to publish Tom Clancy's NetForce books in different languages. These contracts
typically provide for payment of non-refundable advances to NetCo Partners upon
achievement of specific milestones, and for additional royalties based on sales
of the various products at levels in excess of the levels implicit in the
non-refundable advances. NetCo Partners recognizes revenue pursuant to these
contracts when the earnings process has been completed based on performance of
all services and delivery of completed manuscripts.
As of June 30, 2004 and December 31, 2003, NetCo Partners had
$1,471,110 and $850,731 respectively, of accounts receivable. Deferred revenues,
consisting of cash advances received but not yet recognized as revenue,
amounting to $201,565 as of June 30, 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.
-18-
Through June 30, 2004, Hollywood Media has received cumulative profit
distributions from NetCo Partners since its formation totaling $9.7 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. 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 converted into approximately 3%
of the common stock of MovieTickets.com during 2004.
Hollywood Media owns 26.2% of the equity in MovieTickets.com at June
30, 2004, and 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 26.2% 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, if any, 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 six and three months ended June 30, 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/StudioSystems (a flat fee and pay-per-use subscription web
site geared towards businesses and 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 minimal.
-19-
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"
in 2003.
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
(UNAUDITED) (UNAUDITED)
RESTATED RESTATED
2004 2003 2004 2003
------------ ------------ ------------ ------------
NET REVENUES:
Broadway Ticketing $ 27,950,166 $ 25,523,288 $ 16,071,876 $ 14,003,040
Data Business 3,289,528 3,496,233 1,626,730 1,747,120
Internet Ad Sales 1,531,976 1,229,137 759,469 736,685
Intellectual Properties 1,397,360 1,433,889 926,235 658,016
Cable TV -- 1,320 -- 1,320
------------ ------------ ------------ ------------
$ 34,169,030 $ 31,683,867 $ 19,384,310 $ 17,146,181
============ ============ ============ ============
OPERATING INCOME (LOSS):
Broadway Ticketing $ 942,054 $ 72,802 $ 411,454 $ 106,334
Data Business 578,039 335,315 411,702 189,029
Internet Ad Sales (a) (1,078,833) (1,503,279) (422,413) (699,326)
Intellectual Properties 470,071 770,260 334,538 353,382
Cable TV (437,614) (432,830) (208,691) (219,946)
Other (3,658,537) (3,320,205) (1,848,139) (1,607,302)
------------ ------------ ------------ ------------
$ (3,184,820) $ (4,077,937) $ (1,321,549) $ (1,877,829)
============ ============ ============ ============
SEGMENT ASSETS: (b)
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(UNAUDITED)
Broadway Ticketing $12,201,332 $11,802,394
Data Business 18,021,771 18,042,947
Internet Ad Sales 23,962,215 23,713,984
Intellectual Properties 659,674 863,644
Cable TV 301,238 362,149
Other 11,654,687 2,095,903
----------- -----------
$66,800,917 $56,881,021
=========== ===========
(a) Includes $38,807 in amortization of CBS advertising for the six and
three months ended June 30, 2004 and, $506,729 and $316,706 for the
six and three months ended June 30, 2003, respectively used to
promote Hollywood.com and Broadway.com.
(b) Goodwill was originally reported in the "Other" segment through
March 31, 2004. It has been allocated as follows: $3,523,856 to
Broadway Ticketing, $15,852,976 to Data Business, $21,512,572 and
$21,188,793 as of June 30, 2004 and December 31, 2003 respectively,
to Internet Ad Sales and $248,057 to Intellectual Properties.
-20-
(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, on April 29, 2003, the court in this action
(the "Water Garden Lawsuit") entered a money judgment against hollywood.com,
Inc. and Tribune Company, jointly and severally, in the amount of $988,549. 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. Interest
accrues on the judgment at the rate of ten percent per annum until paid.
The California Court of Appeal for the Second District affirmed the
judgment in May 2004, and the California Supreme Court denied hollywood.com's
and Tribune's petition for review on July 28, 2004. Hollywood.com, Inc. and
Tribune plan to file a petition for rehearing by August 12, 2004. If the
petition for rehearing to the California Supreme Court is not successful, then
the judgment will become final. In that event, added to the amount of the
judgment would be the plaintiff's attorneys' fees and costs incurred in opposing
the appeal. It is not possible at this time to estimate the amount of such
additional attorneys' fees and costs.
In May 2003, hollywood.com Inc. and Tribune filed with the court, in
connection with their Notice of Appeal, 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.
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 aggregate amount of the advance
payments to Tribune through the date of this 10-Q Report is $1,075,000. 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. 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
-21-
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 covers rent accruing through
February 13, 2003, under a lease the facial termination date of which is
December 31, 2003. If the appellate court's decision cannot be reversed, then,
pursuant to a written stipulation between the parties to the Water Garden
Lawsuit, the judgment will be modified to add rent accruing between February 13,
2003 and December 31, 2003, together with attorneys' fees and costs, subject to
potential reduction for rent received by the landlord from subsequent tenants as
provided in the stipulation agreement. It is not possible to determine the
increase in the judgment under the stipulation until the judgment becomes final
and is calculated pursuant to the stipulation.
Recognizing that the ultimate outcome of this case is uncertain,
Hollywood Media has accrued as of June 30, 2004, an amount which Hollywood Media
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 which commenced in December
2003. As of June 30, 2004, all payments have been made and there is $67,250 of
advertising remaining under this agreement.
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 including discovery procedures are continuing.
In addition to the legal proceedings described above, Hollywood Media
is from time to time 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.
-22-
(13) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
For The Six Months Ended June 30, 2004:
o 12,500 shares of Hollywood Media common stock were issued, valued at
$35,500 were issued for an exercise of a warrant by an investor in the
February 13, 2004 private placement.
o 50,000 shares of Hollywood Media common stock were issued to an
independent third party, pursuant to a consulting agreement providing
an option to purchase the shares for $120,000, were issued for services
rendered in the 1st quarter of 2004.
o 2,208 shares of Hollywood Media common stock were issued pursuant to an
exercise of a warrant by an investor, which had been previously valued
under the Black-Scholes method and charged to consulting expense in
previous periods.
o 35,211 shares of common stock were issued to an independent third party
for services rendered in conjunction with the handling of the private
placement consummated in the 1st quarter of 2004 valued at $69,717.
o 91,463 shares of Hollywood Media common stock were issued, valued at
$323,779, for the assets of Front Row Marketing.
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 57,095 shares of Hollywood Media common stock, valued at $156,427 for
interest due to the holders of the debentures.
o Options valued at $159,938 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. 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.
-23-
For The Six Months Ended June 30, 2003:
o 155,783 shares of Hollywood Media common stock valued at $155,783 were
issued as payment of Hollywood Media's 401(k) employer match for
calendar year 2002.
o Hollywood Media issued 192,898 shares of common stock, valued at
$155,573 for interest due to the holders of the convertible debentures.
o Options and warrants valued at $123,583, under Black Scholes, were
granted for services rendered.
o Hollywood Media issued 28,571 shares of common stock valued at $39,714
under terms of an earn-out provision in accordance with the acquisition
of BroadwayTheater.com.
(14) SUBSEQUENT EVENTS
On July 1, 2004 Hollywood Media consummated its acquisition of Studio
Systems, Inc., pursuant to a definitive purchase agreement. As a result of the
acquisition, Studio Systems, Inc. became a subsidiary of Hollywood Media and its
business will be integrated with Hollywood Media's Baseline/Filmtracker
subsidiary now known as Baseline/StudioSystems. In closing the acquisition,
Hollywood Media made cash payments aggregating $3,950,000 (of which $769,000 was
paid as a deposit during the period and is recorded as "acquisition deposit" in
the accompanying condensed consolidated balance sheet as of June 30, 2004),
issued 73,249 shares of its common stock, and agreed to make 12 monthly payments
of $42,500 each. A portion of the cash paid at closing was deposited in escrow
to cover potential post-closing adjustments and indemnities. Hollywood Media
funded the closing payments with cash on hand.
-24-
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
person assumes responsibility for the accuracy and completeness of such
statements.
-25-
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/StudioSystems (formerly known as 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. 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,
Earthlink, VoltDelta and Cox Communications. Through annual and multi-year
contracts, EventSource generates recurring revenues from licensing fees.
-26-
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 mission critical
data services to our movie-exhibitor customers. The services include: 1) movie
showtimes directory advertising creation for insertion in newspapers around the
country, 2) Turn-key weekly movie showtimes and loyalty promotional e-mail
services to theatre patrons, and 3) Weekly in-theatre movie showtimes brochure
creation and printing. In June 2004, AdSource acquired Front Row Marketing which
is the industry leader in weekly showtime email data services to movie
exhibitors. AdSource has more than 60 exhibitor customers including AMC
Theatres, Consolidated Theatres, Pacific Theatres, Crown Theatres, Harkins
Theatres, GKC Theatres, Jack Loeks Theatres, Krikorian Theatres, Wallace
Theatres, Key Cinemas and Rave Motion Pictures.
Baseline/StudioSystems ("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 customer base includes the seven major U.S. movie studios, numerous
production companies, law firms, investment banks, news agencies, magazines,
advertising agencies, consulting firms and other professionals in the
entertainment industry. Baseline/StudioSystem's customers include MGM, Disney,
Sony, Fox, DreamWorks, Universal Studios, Paramount, Viacom, Bloomberg, People
Magazine, Lexis-Nexis, Showtime, HBO, Viacom, the Directors Guild of America,
Miramax Films, Warner Brothers and many more.
In July 2004, Baseline's business and assets were substantially
increased as a result of the closing of Hollywood Media's acquisition of Studio
Systems, Inc., one of the leading entertainment industry database and
information services providers. As a result of the acquisition, Studio Systems,
Inc. became a subsidiary of Hollywood Media Corp. and its business is being
integrated with Hollywood Media's Baseline/Filmtracker subsidiary. The combined
business is now known as Baseline/StudioSystems.
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.
-27-
TDI sells tickets directly to group buyers including travel agents and tour
groups. TDI also manages a marketing cooperative that represents
participating Broadway shows to the travel industry around the world.
Recent Broadway shows marketed by this cooperative include Aida, Avenue Q,
Beauty and the Beast, Bombay Dreams, Chicago, Dracula, Fame, 42nd Street,
Hairspray, Little Shop of Horrors, Rent, The Lion King, The Phantom of the
Opera and The Producers. 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 comprehensive destination for movie
event and TV content and information. 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.
-28-
Broadway.com. We launched Broadway.com on May 1, 2000. Broadway.com
features: the ability to purchase Broadway, off-Broadway and London's West End
theater tickets online; theater showtimes; the latest theater news; interviews
with stage actors and playwrights; opening-night coverage; original theater
reviews; and video excerpts from selected shows. Broadway.com also offers
current box office results, show synopses, cast and crew credits and
biographies, digitized show previews, digitized showtunes, and an in-depth Tony
Awards(R) area. Broadway.com generates revenue from the sale of both tickets and
advertising, with its principal business purpose being to generate ticket sales.
CABLE TV DIVISION
Cable TV Network 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, which is
in the process of changing its name to Hollywood.com Television, is pursuing a
national roll-out strategy and is currently available on certain cable TV
systems of Cablevision Systems Corporation, Cox Communications, Comcast, Media
Com, and Insight Communications. Totally Broadway TV, which is in the process of
changing its name to Broadway.com TV is distributed on Cablevision Systems' New
York area systems. To date, only $1,320 has been generated from advertising on
these cable networks in test with various advertisers, and Hollywood Media
expects future revenue to be derived from ad sales as their subscriber
distribution grows.
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 1,588 books that have been published. Another 3,370 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 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
-29-
backlog and anticipated books for future publishing include more than 300 books
under contract or in final negotiations, including more than 50 books by New
York Times best-selling authors. We are expanding into one of the largest areas
of publishing, which is romance fiction, and one of the fastest growing areas of
publishing, which is the Christian book market. In January 2003, Tekno Books was
engaged to create two new spin-off series based on the best-selling Left Behind
series. The Chief Executive Officer and founder of Tekno Books, Dr. Martin H.
Greenberg, is the owner of the remaining 49% interest in Tekno Books.
Intellectual Properties. Our Intellectual Properties division also owns
the exclusive rights to intellectual properties that are complete stories and
ideas for stories, created by best-selling authors and media celebrities. Some
examples of our intellectual properties are Issac Asimov's I-Bots, 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 two leading destinations for the
purchase of movie tickets through the Internet; its principal competitor (other
than some theaters that may conduct their own Internet ticket sales) is
Fandango. 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
-30-
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. MovieTickets.com has been
selected by AOL's Moviefone, MSN Network, Lycos Entertainment, Real Networks,
and several other premier online destinations as the exclusive provider for
online movie ticketing services.
Hollywood Media launched the MovieTickets.com web site in May 2000 with
several major theater exhibitors. Hollywood Media currently owns 26.2% 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 (now 4.1%) 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 was convertible into common stock of MovieTickets.com, Inc. In
connection with the 2001 transaction with AOL, MovieTickets.com's ticket
inventory began to be promoted throughout America Online's interactive
properties and ticket inventory of AOL's Moviefone became available through
MovieTickets.com. Through an agreement announced in August 2004 between
MovieTickets.com and America Online's Moviefone, MovieTickets.com is assuming
the ticketing agreements that Moviefone had with its movie theater exhibitors,
bringing the number of exhibitors MovieTickets.com will directly ticket for to
32. The Moviefone exhibitor agreements assumed by MovieTickets.com include
agreements with Clearview Cinemas, Landmark Theatres and Mann Theatres.
Without taking into account the exhibitor agreements being assumed from
Moviefone, MovieTickets.com, Inc.'s current participating exhibitors include AMC
Entertainment Inc., National Amusements, Inc., Famous Players Inc., Hoyts
Cinemas, Marcus Theatres, Consolidated Theatres, Consolidated Theatres Hawaii,
Crown Theatres, Krikorian Premiere Theatres, Metropolitan Theatres, Northeast
Cinemas, Pacific Theatres, Rave Motion Pictures, Ritz Theatres and Spotlight
Theatres. Sayville Theatres, Baederwood Movie Theatre Co., Bryn Mawr Movie
Theatre Co., the Narberth Theatre, and Cinemagic Movies have recently joined
MovieTickets.com. MovieTickets.com exhibitors operate theaters located in all of
the top 20 markets and approximately 70% of the top 50 markets in the United
States and Canada, and represent approximately 50% of the top 50 and top 100
grossing theaters in North America. Additionally, MovieTickets.com launched in
the United Kingdom in July of 2003.
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.
-31-
RESULTS OF OPERATIONS
The following table summarizes Hollywood Media's revenues, operating
expenses and operating income (loss) by reportable segment for the six months
ended June 30, 2004 ("Y2-04") and 2003 ("Y2-03"), and the three months ended
June 30, 2004 ("Q2-04") and 2003 ("Q2-03") respectively:
BROADWAY DATA INTERNET INTELLECTUAL CABLE
TICKETING BUSINESS AD SALES PROPERTIES(a) TV OTHER TOTAL
----------- ---------- ----------- ------------- --------- ----------- ------------
Y2-04
Net Revenues $27,950,166 $3,289,528 $ 1,531,976 $1,397,360 $ -- $ -- $ 34,169,030
Operating Expenses 27,008,112 2,711,489 2,610,809 927,289 437,614 3,658,537 37,353,850
----------- ---------- ----------- ---------- --------- ----------- ------------
Operating Income
(loss) $ 942,054 $ 578,039 $(1,078,833) $ 470,071 $(437,614) $(3,658,537) $ (3,184,820)
=========== ========== =========== ========== ========= =========== ============
% of Net Revenues 82% 10% 4% 4% -- -- 100%
Y2-03 (RESTATED)
Net Revenues $25,523,288 $3,496,233 $ 1,229,137 $1,433,889 $ 1,320 $ -- $ 31,683,867
Operating Expenses 25,450,486 3,160,918 2,732,416 663,629 434,150 3,320,205 35,761,804
----------- ---------- ----------- ---------- --------- ----------- ------------
Operating Income
(loss) $ 72,802 $ 335,315 $(1,503,279) $ 770,260 $(432,830) $(3,320,205) $ (4,077,937)
=========== ========== =========== ========== ========= =========== ============
% of Net Revenues 81% 11% 4% 4% -- -- 100%
BROADWAY DATA INTERNET INTELLECTUAL CABLE
TICKETING BUSINESS AD SALES PROPERTIES(a) TV OTHER(a) TOTAL
----------- ---------- ----------- ------------- --------- ----------- ------------
Q2-04
Net Revenues $16,071,876 $1,626,730 $ 759,469 $ 926,235 $ -- $ -- $ 19,384,310
Operating Expenses 15,660,422 1,215,028 1,181,882 591,697 208,691 1,848,139 20,705,859
----------- ---------- ----------- ---------- --------- ----------- ------------
Operating Income
(loss) $ 411,454 $ 411,702 $ (422,413) $ 334,538 $(208,691) $(1,848,139) $ (1,321,549)
=========== ========== =========== ========== ========= =========== ============
% of Net Revenues 83% 8% 4% 5% -- -- 100%
Q2-03 (RESTATED)
Net Revenues $14,003,040 $1,747,120 $ 736,685 $ 658,016 $ 1,320 $ -- $ 17,146,181
Operating Expenses 13,896,706 1,558,091 1,436,011 304,634 221,266 1,607,302 19,024,010
----------- ---------- ----------- ---------- --------- ----------- ------------
Operating Income
(loss) $ 106,334 $ 189,029 $ (699,326) $ 353,382 $(219,946) $(1,607,302) $ (1,877,829)
=========== ========== =========== ========== ========= =========== ============
% of Net Revenues 82% 10% 4% 4% -- -- 100%
- ----------
a. Hollywood Media's 50% interest in NetCo Partners, which is accounted for
under the equity method of accounting, is reported as equity in earnings of
investees below "Operating income (loss)" on the condensed consolidated
statement of operations.
-32-
COMPOSITION OF OUR SEGMENTS IS AS FOLLOWS:
o BROADWAY TICKETING - Includes our TDI ticketing business as well as our
Broadway.com online ticketing operations and ticket sales through
1-800-BROADWAY.
o DATA BUSINESS - Includes our CinemaSource, EventSource, AdSource and
Baseline/FilmTracker operations.
o INTERNET AD SALES - Includes advertising sold on the web sites
Hollywood.com, Broadway.com and Movietickets.com, and the AlwaysI
subscription service which offers films to subscribers over the
Internet. Hollywood Media earns a proprietary commission on monies
collected for advertising sold on Movietickets.com's website.
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 $34,169,030 for Y2-04 as compared to
$31,683,867 for Y2-03, an increase of $2,485,163 or 8% and $19,384,310 for Q2-04
as compared to $17,146,181 for Q2-03, an increase of $2,238,129 or 13%. The
increase in revenue from Y2-03 to Y2-04 was primarily due to a 10% increase in
Broadway Ticketing and a 25% increase in Internet Ad Sales, which was offset by
a 3% decrease in Intellectual Properties and a 6% decrease in Data Business
revenue. The increase in revenue from Q2-03 to Q2-04 was primarily due to a 15%
increase in Broadway Ticketing, 41% increase in Intellectual Properties and a 3%
increase in Internet Ad Sales which was offset by a 7% decrease in Data
Business.
Broadway Ticketing revenues were $27,950,166 and $25,523,288 for Y2-04
and Y2-03, respectively, an increase of $2,426,878 or 10% and $16,071,876 for
Q2-04 compared to $14,003,040 for Q2-03, respectively, an increase of $2,068,836
or 15%. Broadway Ticketing revenues increased due to a 23% increase in
individual ticket sales primarily on Broadway.com, which was partially offset by
a 2% decrease in wholesale group ticket sales. Broadway Ticketing revenue is
generated from the sale of live theater tickets for Broadway, off-Broadway and
London based live theater performances 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 in Q1-04. Ticket sales collected
in advance of the date of performance are recorded as deferred revenues on our
balance sheet and recognized as income upon performance date.
-33-
Data Business revenues (which includes our Source businesses
[CinemaSource, EventSource and AdSource], and Baseline/FilmTracker which changed
its name on July 1, 2004 to Baseline/StudioSystems to reflect our acquisition of
Studio Systems, Inc.) were $3,289,528 for Y2-04 as compared to $3,496,233 for
Y2-03, a decrease of $206,705 or 6% and $1,626,730 for Q2-04 as compared to
$1,747,120 for Q2-03, a decrease of $120,390 or 7%. Although such revenues
declined, the operating income for the Data Business increased $242,724 in Y2-04
over Y2-03, and $222,673 from Q2-03 to Q2-04 due in part to the cost adjustments
referenced below. The decrease in Data Business revenues was attributable in
large part to a decrease in Source Business revenue of $346,744 in Y2-04 as
compared to Y2-03 and $178,730 in Q2-04 as compared to Q2-03 following a
measured 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, there was a 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 continuing to
increase. Our Baseline business revenues increased $140,039 in Y2-04 as compared
to Y2-03 and increased $58,340 in Q2-04 as compared to Q2-03 due to a high
retainage of Baseline's current customers and continued expansion of Baseline's
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,
Yahoo!, MSN, and Lycos and wireless providers such as AT&T Wireless, Sprint PCS
and Verizon. Revenue for AdSource is primarily 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 $1,531,976 for Y2-04 as compared to
$1,229,137 for Y2-03, an increase of $302,839 or 25%. The increase in
revenues was attributable to an increase in national movie studio and other
Internet advertising on Hollywood.com and commissions in connection with
sales of advertising for Movietickets.com. Internet Ad Sales revenue was
$759,469 and $736,685 for Q2-04 and Q2-03, respectively, an increase of
$22,784 or 3%. The increase was minimal due to the launch of Phase I of the
Hollywood.com redesign, which launched in June of 2004 and will undergo two
more phases before year end. Internet Ad Sales revenue is primarily
generated from the sale of sponsorships and banner advertisements on
Hollywood.com and Broadway.com.
Revenue from our Intellectual Properties division was $1,397,360 for
Y2-04 as compared to $1,433,889 for Y2-03 a decrease of $36,529 or 3% and
$926,235 and $658,016 for Q2-04 and Q2-03 respectively, an increase of $268,219
or 41%. The increase in revenues was attributable to the timing of the delivery
of manuscripts resulting in more manuscripts delivered in Q2-04 as compared to
Q2-03. 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 revenue
does 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.
-34-
EQUITY IN EARNINGS OF INVESTEES
Equity in earnings of investees consisted of the following:
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2004 2003 2004 2003
-------- -------- -------- --------
NetCo Partners (a) $588,086 $806,126 $583,392 $801,721
MovieTickets.com (b) -- -- -- --
-------- -------- -------- --------
$588,086 $806,126 $583,392 $801,721
======== ======== ======== ========
(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 $583,392 for Q2-04 as compared to $801,721 for Q2-03, and $588,086
for Y2-04 as compared to $806,126 for Y2-03. Revenues vary quarter-to-quarter
dependent on timing of deliveries of various manuscripts to the publisher
although, notwithstanding the timing of manuscript deliveries, one NetForce book
is typically published each year in North America.
(b) MovieTickets.com
Hollywood Media owned 26.2% of the total equity in MovieTickets.com,
Inc. joint venture at June 30, 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. Hollywood Media shares in 26.2% of the losses or income generated
by the joint venture. 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. As a result, we have not recorded any share
of the joint venture's results of operations in Y2-04 and Y2-03 related to our
investment in 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
$24,152,323 for Y2-04 as compared to $22,495,773 for Y2-03 for an increase of
$1,656,550 or 7%. The cost of revenue for Q2-04 was $14,200,783 compared to
$12,457,051 for Q2-03 for an increase of $1,743,732 or 14%. 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 86% and 88% for Y2-04 and Y2-03 and 88% and 89% for Q2-04 and
-35-
Q2-03 respectively. The reduction in cost of revenue as a percentage of
ticketing revenue in Y2-04 compared to Y2-03 was due in part to a greater
proportion of higher margin consumer ticket sales in Y2-04 and an increase in
higher margin hotel packages sales.
The reduction in cost of revenue as a percentage of ticketing revenue
in Q2-04 compared to Q2-03 was due to sales of higher margin hotel packages in
Q2-04 that did not exist in Q2-03.
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 and developing products for our Internet Ad Sales, Data Business,
Intellectual Properties and Cable TV 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 Y2-04 were $2,504,927 compared to $2,437,714 for
Y2-03 for an increase of $67,213 or 3%. Q2-04 costs were $1,316,906
compared to $1,277,979 for Q2-03, an increase of $38,927 or 3%. As a
percentage of revenues from our Internet Ad Sales, Data Business,
Intellectual Properties and Cable TV segments, these costs were 40% for
Y2-04 and Y2-03 and 40% and 41% for Q2-04 and Q2-03 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 Y2-04 were $9,615,442 compared to $9,067,195 for Y2-03 for an
increase of $548,247 or 6%. The increase is primarily due to an accrual for the
Water Garden litigation along with an increase in advertising for Broadway.com
offset partially by a decrease in accounting/legal expenses. The SG&A costs for
Q2-04 were $4,637,129 compared to $4,357,757 for Q2-03, an increase of $279,372
or 6%. As a percentage of net revenues, selling, general and administrative
expenses were 28% and 29% for Y2-04 and Y2-03 respectively and 24% and 25% for
Q2-04 and Q2-03 respectively. The increase in Q2-04 as compared to Q2-03 is due
primarily to an increase in advertising costs, accrual for the Water Garden
litigation along with a slight increase in travel expense, all which were offset
partially by a decrease in insurance and legal expenses (See Note 11 of
Unaudited Condensed Consolidated Financial Statements).
AMORTIZATION OF CBS ADVERTISING. Amortization of CBS advertising
relating to our agreements with Viacom was $38,807 and $506,729 for Y2-04 and
Y2-03 and $38,807 for Q2-04 compared to $316,706 for Q2-03. 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. As of June 30, 2004, the deferred advertising is zero.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists of depreciation of property and equipment, furniture and fixtures,
website development, leasehold improvements, capital leases and amortization of
goodwill and intangibles. Depreciation and amortization expense was $1,042,351
for Y2-04 as compared to $1,254,393 for Y2-03 for a decrease of $212,042 or 17%.
-36-
Q2-04 depreciation and amortization expense was $512,234 compared to $614,517
for Q2-03, a decrease of $102,283 or 17%. The decrease was primarily
attributable to certain tangible assets that became fully amortized during 2003.
INTEREST, NET. Interest, net was $785,501 for Y2-04 as compared to
$664,040 for Y2-03 and $367,546 for Q2-04, as compared to $323,672 for Q2-03.
The increase of $121,461 in interest, net in Y2-04 over Y2-03, was primarily
attributable to interest charges and an increase in the amortization of the
beneficial conversion feature related to the convertible debentures of $294,360
due to an anti-dilution provision in the Debentures. (See Note 6 of Unaudited
Condensed Consolidated Financial statements).
OTHER INCOME (EXPENSE), NET. Other, net was $727,673 for Y2-04 as
compared to $8,894 for Y2-03 and $37,112 for Q2-04 as compared to $57,985 for
Q2-03. The increase of $718,779 in other income (expense) for Y2-04 to Y2-03,
net was primarily attributable to a gain recognized upon termination of a
put-call option held by a former minority shareholder of Baseline. (See Note 5
of Unaudited Condensed Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had cash and cash equivalents of $9,297,242
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 June
30, 2004 was $1,900,550 as compared to a working capital deficit of $6,490,321
at December 31, 2003. During the six months ended June 30, 2004, net cash used
in operating activities was $5,695,317, which cash usage included $1,191,215 to
purchase Broadway ticketing inventory to be held for sale during 2004 offset by
$998,800 of deferred costs associated with Broadway ticket sales, payment of
$1,478,848 on various outstanding payables and other current liabilities, and
$225,000 expended for the Water Garden bond deposit; net cash provided by
investing activities was $1,355,990; and net cash provided by financing
activities was $14,480,550, comprised primarily of net proceeds resulting from
the private placement of common stock during the first quarter of 2004 (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 $7,429,243 for the six months ended June 30, 2004. In comparison, during the
six months ended June 30, 2003, net cash used in operating activities was
$573,754, net cash used in investing activities was $249,550, and net cash used
in financing activities was $1,234.
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 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,
-37-
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.
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. As of June 30, 2004, there was no liability
remaining since the agreement was terminated in April 2004.
As of the date of this Form 10-Q report, we currently anticipate
capital expenditures during the remainder of 2004 of approximately $300,000, 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 have not been quantified
at this time.
CRITICAL ACCOUNTING POLICIES
In response to the Security and Exchange Commission (SEC) Release
Number 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies" and SEC Release Number 33-8056, "Commission Statement about
Management's Discussion and Analysis of Financial Condition and Results of
Operations," we have identified the following critical accounting policies that
affect the more significant judgments and estimates used in the preparation of
the consolidated financial statements. The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires that we make estimates and judgments that affect
the reported amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis,
we will evaluate our estimates, including those related to asset impairment,
accruals for compensation and related benefits, revenue recognition, allowance
for doubtful accounts, and contingencies and litigation. These estimates are
based on the information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could vary from those estimates under different assumptions or
conditions. For additional information on 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.
-38-
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
properties to be received over a period of seven years. Hollywood Media was
entitled to utilize a specified portion of this advertising each contract year.
The deferred advertising is carried on Hollywood Media's balance sheet as a
deferred asset and is being amortized over the contract period as the
advertising is utilized. Advertising expense recorded related to CBS advertising
for the six months ended June 30, 2004 and 2003 was $38,807 and $506,729
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
-39-
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 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 June 30, 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.
-40-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in our
assets or liabilities that might occur due to changes in market rates and
prices, such as interest or foreign currency exchange rates, as well as other
relevant market rate or price changes.
Interest rates charged on Hollywood Media's debt instruments are
primarily fixed in nature. We therefore do not believe that the risk of loss
relating to the effect of changes in market interest rates is material.
We purchase and sell tickets to live theater shows in London's West
End. We minimize our exposure to adverse changes in currency exchange rates by
taking steps to reduce the time lag between the purchase and payment of tickets
for the London shows and the collection of related sales proceeds. We further
reduce our exposure by setting favorable currency conversion rates in our
foreign ticket pricing. We do not believe the risk of loss relating to adverse
changes in currency conversion rates to be material.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of Hollywood Media's management, including the Chief Executive
Officer and the Vice President of Finance and Accounting (principal financial
and accounting officer), of the effectiveness of Hollywood Media's disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, Hollywood Media's management, including the Chief
Executive Officer and the Vice President of Finance and Accounting, concluded
that Hollywood Media's disclosure controls and procedures were effective as of
the end of the period covered by this Form 10-Q. There have been no changes in
Hollywood Media's internal controls over financial reporting that occurred
during the fiscal quarter covered by this Form 10-Q that have materially
affected, or are reasonably likely to materially affect, Hollywood Media's
internal control over financial reporting.
-41-
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, on April 29, 2003, the court in this action
(the "Water Garden Lawsuit") entered a money judgment against hollywood.com,
Inc. and Tribune Company, jointly and severally, in the amount of $988,549. 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. Interest
accrues on the judgment at the rate of ten percent per annum until paid.
The California Court of Appeal for the Second District affirmed the
judgment in May 2004, and the California Supreme Court denied hollywood.com's
and Tribune's petition for review on July 28, 2004. Hollywood.com, Inc. and
Tribune plan to file a petition for rehearing by August 12, 2004. If the
petition for rehearing to the California Supreme Court is not successful, then
the judgment will become final. In that event, added to the amount of the
judgment would be the plaintiff's attorneys' fees and costs incurred in opposing
the appeal. It is not possible at this time to estimate the amount of such
additional attorneys' fees and costs.
In May 2003, hollywood.com Inc. and Tribune filed with the court, in
connection with their Notice of Appeal, 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.
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 aggregate amount of the advance
payments to Tribune through the date of this 10-Q Report is $1,075,000. 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. 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.
-42-
The judgment in the Water Garden Lawsuit covers rent accruing through
February 13, 2003, under a lease the facial termination date of which is
December 31, 2003. If the appellate court's decision cannot be reversed, then,
pursuant to a written stipulation between the parties to the Water Garden
Lawsuit, the judgment will be modified to add rent accruing between February 13,
2003 and December 31, 2003, together with attorneys' fees and costs, subject to
potential reduction for rent received by the landlord from subsequent tenants as
provided in the stipulation agreement. It is not possible to determine the
increase in the judgment under the stipulation until the judgment becomes final
and is calculated pursuant to the stipulation.
Recognizing that the ultimate outcome of this case is uncertain,
Hollywood Media has accrued on its books, as of June 30, 2004, an amount which
Hollywood Media 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 addition to the legal proceedings described above, Hollywood Media
is from time to time 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. Certain other legal proceedings involving
Hollywood Media are described in Note 11 to the Condensed Consolidated Financial
Statements included in this Form 10-Q Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following securities were issued by Hollywood Media during the
quarter ended June 30, 2004, in transactions that were not registered under the
Securities Act of 1933.
On April 16, 2004, Hollywood Media issued 12,500 shares of common stock
valued at $35,500 upon exercise of a warrant by an investor in the February 13,
2004 private placement.
On April 26, 2004, Hollywood Media issued 24,398 shares of common stock
valued at $77,786 to the holders of the Debentures for interest due for the
period January 1, 2004 through March 31, 2004.
On May 13, 2004, Hollywood Media issued 2,208 shares of common stock
upon the cashless exercise of a warrant.
On May 28, 2004, Hollywood Media issued 35,211 shares of common stock
valued at $69,717 in connection with compensation of a third party consulting
firm for services rendered in the first quarter of 2004.
On June 18, 2004 Hollywood Media issued 91,463 shares of common stock,
valued at $323,779, in payment for the purchase of assets of the Front Row
Marketing business.
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.
-43-
Hollywood Media did not repurchase any shares of its common stock
during the quarter ended June 30, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Incorporated by
Exhibit Description Reference From
- ------- ----------- ---------------
10.1 Asset Purchase Agreement dated as of June 15, 2004, by and between (*)
Merchant Internet Group, Inc., Showtimes.Com, Inc., and Hollywood
Media Corp.
10.2 Agreement and Plan of Merger dated as of June 14, 2004, by and (*)
among Studio Systems, Inc., Hollywood Media Corp., SSI Acquisition
Sub, Inc. and SSI Investments LLC.
10.3 Extension and Amendment Agreement dated as of May 31, 2004 between (*)
Hollywood Media Corp. and Mitchell Rubenstein.
10.4 Extension and Amendment Agreement dated as of May 31, 2004 between (*)
Hollywood Media Corp. and Laurie S. Silvers.
10.5 Extension and Amendment Agreement dated as of July 1, 2003 between (*)
Hollywood Media Corp. and Mitchell Rubenstein.
10.6 Extension and Amendment Agreement dated as of July 1, 2003 between (*)
Hollywood Media Corp. and Laurie S. Silvers.
31.1 Certification of Chief Executive Officer. (Section 302) (*)
31.2 Certification of Vice President of Finance and Accounting (*)
(Principal financial and accounting officer). (Section 302)
32.1 Certification of Chief Executive Officer. (Section 906) (*)
32.2 Certification of Vice President of Finance and Accounting (*)
(Principal financial and accounting officer). (Section 906)
- ---------
* Filed as an exhibit to this Form 10-Q
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by Hollywood Media
during the quarter ended June 30, 2004:
Form 8-K filed April 5, 2004: Item 5 of the Form 8-K reported that
Hollywood Media's registration statement on Form S-3 filed on March 12, 2004, as
amended, has been declared effective by the SEC; Item 12 of the Form 8-K
reported that on March 30, 2004 we issued a press release announcing Hollywood
Media's 2003 financial results, and a copy of the press release was included
with the filing.
Form 8-K filed May 19, 2004: Item 12 of the Form 8-K reported that on
May 17, 2004 we issued a press release announcing Hollywood Media's financial
results for the first quarter of fiscal 2004, and a copy of the press release
was included with the filing.
Form 8-K filed June 23, 2004: Item 5 of the Form 8-K reported that
Hollywood Media signed a definitive agreement to acquire Studio Systems, Inc.,
including a summary of certain material terms of the transaction. A copy of
Hollywood Media's press release announcing the agreement was filed as an
exhibit.
-44-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD MEDIA CORP.
Date: August 11, 2004 By: /s/ Mitchell Rubenstein
---------------------------------------------
Mitchell Rubenstein, Chief Executive Officer
(Principal executive officer)
Date: August 11, 2004 By: /s/ Scott Gomez
---------------------------------------------
Scott Gomez, Vice President of Finance
and Accounting
(Principal accounting officer)
-45-