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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 10, 2004, the number of shares outstanding of the issuer's common
stock, $.01 par value, was 30,853,707.
HOLLYWOOD MEDIA CORP.
TABLE OF CONTENTS
PAGE(S)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2004
(unaudited) and December 31, 2003 .................................. 3
Condensed Consolidated Statements of Operations (unaudited) for the
Nine and Three Months ended September 30, 2004 and 2003 (restated) . 4
Condensed Consolidated Statement of Shareholders' Equity (unaudited)
for the Nine Months ended September 30, 2004 ....................... 5
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine Months ended September 30, 2004 and 2003 (restated) ........... 6
Notes to Condensed Consolidated Financial Statements (unaudited) ... 7-29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...................... 30-46
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .................................................. 47
ITEM 4. CONTROLS AND PROCEDURES ............................................ 47-48
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................................. 49
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .......................... 49
ITEM 5. OTHER INFORMATION .................................................. 49
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................... 50-51
Signatures .................................................................. 52
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,796,668 $ 1,867,999
Receivables, net 1,313,950 1,496,934
Inventories, net 7,822,598 5,770,289
Prepaid expenses 1,279,282 941,966
Other receivables 1,114,564 654,141
Other current assets 152,854 10,296
Deferred advertising - CBS -- 38,807
------------- -------------
Total current assets 15,479,916 10,780,432
RESTRICTED CASH 782,500 850,000
ACQUISITION ESCROW 920,000 --
PROPERTY AND EQUIPMENT, net 2,348,095 2,236,906
INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES 423,249 164,205
IDENTIFIABLE INTANGIBLE ASSETS, net 1,379,798 1,603,985
GOODWILL 45,081,539 40,813,682
OTHER ASSETS 284,851 431,811
------------- -------------
TOTAL ASSETS $ 66,699,948 $ 56,881,021
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,988,600 $ 2,201,431
Accrued expenses and other 3,868,554 5,178,467
Loan from shareholder/officer 200,000 600,000
Deferred revenue 9,436,149 9,063,317
Current portion of capital lease obligations 198,971 227,538
------------- -------------
Total current liabilities 15,692,274 17,270,753
CAPITAL LEASE OBLIGATIONS, less current portion 147,043 178,790
DEFERRED REVENUE, less current portion 251,687 193,063
MINORITY INTEREST 40,131 21,895
OTHER DEFERRED LIABILITY 103,694 903,192
CONVERTIBLE DEBENTURES, NET 763,708 4,027,629
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized; 30,698,762
and 21,810,266 shares issued and outstanding at September 30, 2004 and
December 31, 2003, respectively 306,988 218,103
Additional paid-in capital 304,534,594 279,087,772
Deferred compensation (2,600,000) (162,500)
Accumulated deficit (252,540,171) (244,857,676)
------------- -------------
Total shareholders' equity 49,701,411 34,285,699
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 66,699,948 $ 56,881,021
============= =============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated financial statements.
3
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(As Restated, (As Restated,
See Note 2) See Note 2)
NET REVENUES:
Ticketing $ 39,604,332 $ 36,525,556 $ 11,654,166 $ 11,002,268
Other 9,667,525 9,084,221 3,448,661 2,923,642
------------ ------------ ------------ ------------
Total revenues 49,271,857 45,609,777 15,102,827 13,925,910
OPERATING EXPENSES:
Cost of revenues - ticketing 34,350,187 31,629,607 10,197,864 9,133,834
Editorial, production, development and
technology (exclusive of depreciation and
amortization shown separately below) 3,868,219 3,758,000 1,363,292 1,320,286
Selling, general and administrative 15,593,379 13,861,932 5,977,937 4,794,737
Amortization of CBS advertising 38,807 609,193 -- 102,464
Depreciation and amortization 1,604,614 1,839,801 562,263 585,408
------------ ------------ ------------ ------------
Total operating expenses 55,455,206 51,698,533 18,101,356 15,936,729
Operating loss (6,183,349) (6,088,756) (2,998,529) (2,010,819)
EQUITY IN EARNINGS (LOSSES) OF INVESTEES 557,713 1,035,605 (30,373) 229,479
OTHER INCOME (EXPENSE):
Interest, net (2,548,460) (1,037,003) (1,762,959) (372,963)
Other, net 786,851 (108,165) 59,178 (117,059)
------------ ------------ ------------ ------------
Loss before minority interest (7,387,245) (6,198,319) (4,732,683) (2,271,362)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (295,250) (449,689) (59,258) (50,101)
------------ ------------ ------------ ------------
Net loss $ (7,682,495) $ (6,648,008) $ (4,791,941) $ (2,321,463)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.28) $ (0.32) $ (0.17) $ (0.11)
============ ============ ============ ============
Weighted average common and common equivalent shares
outstanding - basic and diluted 26,989,284 20,607,249 28,336,820 20,798,722
============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated financial statements.
4
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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
Compensation expense on stock
or stock options -- -- 223,940 -- -- 223,940
Acquisition costs paid with
stock -- -- 158,000 -- -- 158,000
Proceeds from issuance of shares
to consultants 285,211 2,852 667,148 -- -- 670,000
Amortization of deferred compensation -- -- -- 162,500 -- 162,500
Stock options exercised 25,750 258 67,195 -- -- 67,453
Warrants exercised 14,708 147 35,353 -- -- 35,500
Issuance of shares to employees 10,383 104 34,896 -- -- 35,000
Issuance of restricted shares to
officers 800,000 8,000 2,592,000 (2,600,000) -- --
Issuance of stock for acquisitions 164,712 1,647 572,132 -- -- 573,779
Issuance of stock for acquisition
of intangible asset 68,104 681 224,062 -- -- 224,743
Beneficial conversion feature on
convertible debentures -- -- 707,070 -- -- 707,070
401(k) employer match 52,627 526 139,461 -- -- 139,987
Issuance of shares for interest on
convertible debentures 152,661 1,526 341,209 -- -- 342,735
Shares issued upon conversion of
convertible debentures 1,540,985 15,410 4,684,590 -- -- 4,700,000
Private placement 5,773,355 57,734 14,999,766 -- -- 15,057,500
Net loss -- -- -- -- (7,682,495) (7,682,495)
------------- ------------- ------------- ------------- ------------- -------------
Balance - September 30, 2004 30,698,762 $ 306,988 $ 304,534,594 $ (2,600,000) $(252,540,171) $ 49,701,411
============= ============= ============= ============= ============= =============
The accompanying notes to condensed consolidated financial statements
are an integral part of this condensed consolidated financial statement.
5
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-----------------------------
2004 2003
------------ ------------
(As Restated,
see Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,682,495) $ (6,648,008)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,604,614 1,839,801
Interest paid in stock 342,735 233,360
Amortization of discount on convertible debentures 2,096,081 579,290
Amortization of deferred financing costs 165,599 97,272
Equity in earnings of investee, net of return of invested capital (259,044) (162,062)
Compensation expense on stock options and warrants 223,940 304,649
Compensation expense on employee stock issuances 35,000 --
Amortization of deferred compensation 162,500 121,429
Provision for bad debts 184,408 178,950
Amortization of CBS advertising 38,807 609,193
Minority interest in earnings of subsidiary, net of distribution to minority owners 18,236 (130,119)
Amortization of put/call option (719,250) (137,000)
Changes in assets and liabilities:
Receivables 567,056 346,366
Inventories (2,052,309) 273,758
Prepaid expenses (119,592) (409,365)
Other receivables (427,479) (420,402)
Other current assets (142,558) 197,384
Restricted cash 450,000 (550,000)
Other assets (18,639) 174,318
Accounts payable (244,553) 746,815
Accrued expenses and other (1,433,111) 700,321
Deferred revenue (287,967) 71,354
Other deferred liability (80,248) 47,159
------------ ------------
Net cash used in operating activities (7,578,269) (1,935,537)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (937,650) (337,241)
Acquisition of Studio Systems, net of cash acquired (3,578,426) --
Acquisition escrow (920,000) --
Intangible asset acquisition (100,000) --
------------ ------------
Net cash used in investing activities (5,536,076) (337,241)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from (repayment of) shareholder/officer loan (400,000) 700,000
Proceeds from issuance of shares to consultants 670,000 --
Net advances to third party (196,057) (119,248)
Employee stock option exercises 67,453 --
Proceeds from private placement warrant exercise 35,500 --
Proceeds from issuance of common stock in private placement, net of issuance costs 15,057,500 --
Payments under capital lease obligations (191,382) (276,123)
Payments under note payable -- 60,041
------------ ------------
Net cash provided by financing activities 15,043,014 364,670
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,928,669 (1,908,108)
CASH AND CASH EQUIVALENTS, beginning of period 1,867,999 2,342,238
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,796,668 $ 434,130
============ ============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 39,538 $ 93,912
============ ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated financial statements.
6
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared by Hollywood Media Corp.
("Hollywood Media") in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to those rules and
regulations. However, management believes that the disclosures contained herein
are adequate to make the information presented not misleading. The financial
statements reflect, in the opinion of management, all material adjustments
(which include only normal recurring adjustments) necessary to present fairly
Hollywood Media's financial position and results of operations. The results of
operations for the three and nine months ended September 30, 2004 are not
necessarily indicative of the results of operations or cash flows that 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 nine and three months ended September 30, 2003,
originally included in Form 10-Q. The restatement was 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 $94,434 or 0.3% in the
restated condensed consolidated financial statements for the
nine months ended September 30, 2003 as a result of an
overstatement of the Broadway Ticketing gift certificate
liability.
o Ticketing revenue has been decreased by $49,503 or 0.4% in the
restated condensed consolidated financial statements for the
three months ended September 30, 2003 as a result of an
understatement of the Broadway Ticketing gift certificate
liability.
7
Cost of Revenues - Ticketing
o Cost of Revenues - Ticketing has been decreased by $82,708 or
0.3% in the restated condensed consolidated financial
statements for the nine months ended September 30, 2003 as a
result of an overstatement of Broadway Ticketing accounts
payable.
o Cost of Revenues - Ticketing has been increased by $189,671 or
2.1%, in the restated condensed consolidated financial
statements for the three months ended September 30, 2003 as a
result of an understatement of Broadway ticketing accounts
payable.
Equity in Earnings - Investments
o Equity in Earnings - Investments has been increased by
$237,875 or 29.8% for the nine months ended September 30, 2003
as a result of equity income improperly recognized.
o Equity in Earnings - Investments has been increased by
$237,875 or 2,833.1% for the three months ended September 30,
2003 as a result of equity income improperly recognized
Weighted Average Shares Outstanding
o The number of weighted average shares outstanding was
decreased by 82,498 shares for the nine months ended September
30, 2003 to exclude unvested restricted shares.
o The number of weighted average shares outstanding was
decreased by 246,321 shares for the three months ended
September 30, 2003 to exclude unvested restricted shares.
The total effect of the errors was a decrease in the net loss for the
nine months ended September 30, 2003 of $415,017, or $0.02 per share,
and an increase in the net loss for the three months ended September
30, 2003 of $1,299, which did not affect loss per common share. The
following unaudited condensed consolidated statements of operations for
the three and nine months ended September 30, 2003 reconcile the
restated amounts to the corresponding amounts, as previously reported.
Additionally, the following statement of cash flows for the nine months
ended September 30, 2003 reconciles the restated amounts to the
previously reported amounts.
8
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2003
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
As previously Restatement
reported adjustments Restated
------------ ------------ ------------
NET REVENUES
Ticketing $ 36,431,122 $ 94,434 $ 36,525,556
Other 9,084,221 -- 9,084,221
------------ ------------ ------------
$ 45,515,343 $ 94,434 $ 45,609,777
OPERATING EXPENSES
Cost of revenues - ticketing 31,712,315 (82,708) 31,629,607
Editorial, production, development and technology (exclusive
of depreciation and amortization shown separately below) 3,758,000 -- 3,758,000
Selling, general and administrative 13,861,932 -- 13,861,932
Amortization of CBS advertising 609,193 -- 609,193
Depreciation and amortization 1,839,801 -- 1,839,801
------------ ------------ ------------
Total operating expenses 51,781,241 (82,708) 51,698,533
Operating loss (6,265,898) 177,142 (6,088,756)
EQUITY IN EARNINGS OF INVESTEE 797,730 237,875 1,035,605
OTHER INCOME (EXPENSE):
Interest, net (1,037,003) -- (1,037,003)
Other, net (108,165) -- (108,165)
------------ ------------ ------------
Loss before minority interest (6,613,336) 415,017 (6,198,319)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (449,689) -- (449,689)
------------ ------------ ------------
Net loss $ (7,063,025) $ 415,017 $ (6,648,008)
============ ============ ============
Basic and diluted loss per common share $ (0.34) $ 0.02 $ (0.32)
============ ============ ============
Weighted average common and common equivalent shares
outstanding - basic and diluted 20,689,747 (82,498) 20,607,249
============ ============ ============
9
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended September 30, 2003
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
As previously Restatement
reported adjustments Restated
------------ ------------ ------------
NET REVENUES
Ticketing $ 11,051,771 $ (49,503) $ 11,002,268
Other 2,923,642 -- 2,923,642
------------ ------------ ------------
Total revenues 13,975,413 (49,503) 13,925,910
------------ ------------ ------------
OPERATING EXPENSES
Cost of revenues - ticketing 8,944,163 189,671 9,133,834
Editorial, production, development and technology (exclusive
of depreciation and amortization shown separately below) 1,320,286 -- 1,320,286
Selling, general and administrative 4,794,737 -- 4,794,737
Amortization of CBS advertising 102,464 -- 102,464
Depreciation and amortization 585,408 -- 585,408
------------ ------------ ------------
Total operating expenses 15,747,058 189,671 15,936,729
------------ ------------ ------------
Operating loss (1,771,645) (239,174) (2,010,819)
EQUITY IN EARNINGS OF INVESTEE (8,396) 237,875 229,479
OTHER INCOME (EXPENSE):
Interest, net (372,963) -- (372,963)
Other, net (117,059) -- (117,059)
------------ ------------ ------------
Loss before minority interest (2,270,063) (1,299) (2,271,362)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (50,101) -- (50,101)
------------ ------------ ------------
Net loss $ (2,320,164) $ (1,299) $ (2,321,463)
============ ============ ============
Basic and diluted loss per common share $ (0.11) $ -- $ (0.11)
============ ============ ============
Weighted average common and common equivalent shares
outstanding - basic and diluted 21,045,043 (246,321) 20,798,722
============ ============ ============
10
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2003
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
As previously Restatement
reported adjustments Restated
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(7,063,025) $ 415,017 $(6,648,008)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,839,801 -- 1,839,801
Interest paid in stock 233,360 -- 233,360
Amortization of discount on convertible Debentures 579,290 -- 579,290
Amortization of deferred financing costs 97,272 -- 97,272
Equity in earnings of investee, net of return of invested capital (162,062) -- (162,062)
Issuance of compensatory stock, stock options and warrants for
services rendered 304,649 -- 304,649
Amortization of deferred compensation costs 121,429 -- 121,429
Provision for bad debts 178,950 -- 178,950
Amortization of CBS advertising 609,193 -- 609,193
Minority interest in earnings of subsidiary, net of distribution
to minority owners 107,756 (237,875) (130,119)
Amortization of put/call option (137,000) -- (137,000)
Changes in assets and liabilities:
Receivables 346,366 -- 346,366
Inventories 273,758 -- 273,758
Prepaid expenses (409,365) -- (409,365)
Other receivables (420,402) -- (420,402)
Other current assets 197,384 -- 197,384
Restricted cash (550,000) -- (550,000)
Other assets 174,318 -- 174,318
Accounts payable 746,815 -- 746,815
Accrued expenses and other 783,029 (82,708) 700,321
Deferred revenue 165,788 (94,434) 71,354
Other deferred liability 47,159 -- 47,159
----------- ----------- -----------
Net cash used in operating activities (1,935,537) -- (1,935,537)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (337,241) -- (337,241)
----------- ----------- -----------
Net cash used in investing activities
(337,241) -- (337,241)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder/officer loan 700,000 -- 700,000
Net advances to third party (119,248) -- (119,248)
Payments under capital lease obligations (276,123) -- (276,123)
Payments under note payable 60,041 -- 60,041
----------- ----------- -----------
Net cash provided (used in) by financing activities 364,670 -- 364,670
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,908,108) -- (1,908,108)
CASH AND CASH EQUIVALENTS, beginning of period 2,342,238 -- 2,342,238
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 434,130 $ -- $ 434,130
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 93,912 $ -- $ 93,912
=========== =========== ===========
11
(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 nine months ended September
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:
Nine months ended Three months ended
September 30, (unaudited) September 30, (unaudited)
---------------------------- ----------------------------
Restated Restated
2004 2003 2004 2003
------------ ------------ ------------ ------------
Reported net loss $ (7,682,495) $ (6,648,008) $ (4,791,941) $ (2,321,463)
Stock-based employee compensation expense
under the fair value method (1,180,639) (1,845,609) (270,226) (700,430)
------------ ------------ ------------ ------------
Adjusted net loss $ (8,863,134) $ (8,493,617) $ (5,062,167) $ (3,021,893)
============ ============ ============ ============
Reported net loss basic and diluted per share $ (0.28) $ (0.32) $ (0.17) $ (0.11)
============ ============ ============ ============
Adjusted net loss basic and diluted per share $ (0.33) $ (0.41) $ (0.18) $ (0.15)
============ ============ ============ ============
Number of ordinary shares used in computation
basic and diluted 26,989,284 20,607,249 28,336,820 20,798,722
============ ============ ============ ============
The fair value of each option grant was determined using the
Black-Scholes option-pricing model. The Black-Scholes model was not developed
for use in valuing employee stock options, but was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, it requires the use of subjective
assumptions including expectations of future dividends and stock price
volatility. Such assumptions are only used for making the required fair value
estimate and should not be considered as indicators of future dividend policy or
stock price appreciation. Because changes in the subjective assumptions can
materially affect the fair value estimate and because employee stock options
have characteristics significantly different from those of traded options, the
use of the Black-Scholes option-pricing model may not provide a reliable
estimate of the fair value of employee stock options.
12
(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 September 30, 2004, there were 800,000 unvested restricted shares,
and as of September 30, 2003, there were 187,500 unvested restricted shares.
There were 5,913,997 and 5,200,133 options and warrants to purchase common
shares outstanding at September 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 312,500 shares of common
stock at a conversion price of $3.20 per share as of September 30, 2004, and
into 1,647,399 shares of common stock at a conversion price of $3.46 as of
September 30, 2003. 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 nine
months ended September 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, other long-lived assets and
calculation of Hollywood Media's self-insurance group medical liability.
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) are 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 $440,839 and $259,109 at
September 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 received an initial advance of 85% of the invoice amount, with
the remaining 15%, less fees, transferred to Hollywood Media upon payment by the
customer to the third party. At September 30, 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
13
for advances that had been paid to Hollywood Media but remain payable by
Hollywood Media's customers to the third party. In April 2004, Hollywood Media
terminated the agreement.
Recent Accounting Pronouncements
In March 2004, the 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:
FOUNTAINHEAD MEDIA SERVICES
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 Services 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 the subsidiary that
14
owns Baseline. In conjunction with the exchange of the promissory note, the
negative fair value of $719,250 on a put and call option obtained by FMS was
relieved through earnings during the first quarter of 2004, and is included in
other, net in the accompanying unaudited condensed consolidated statement of
operations for the nine months ended September 30, 2004.
FRONT ROW MARKETING
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, which consisted primarily of customer contracts,
Hollywood Media issued 91,463 shares in Hollywood Media common stock valued at
$323,779. Front Row Marketing was integrated into Hollywood Media's ExhibitorAds
business unit which is part of Hollywood Media's Data Business. The entire
purchase price has been allocated to goodwill pending valuation by a third party
expert, which has not been performed as of the filing of this Form 10-Q.
STUDIO SYSTEMS, INC. ("SSI")
On July 1, 2004, Hollywood Media consummated its acquisition by merger
of 100% of the outstanding common stock of Studio Systems, Inc., one of the
leading entertainment industry database and information service providers,
pursuant to a definitive purchase agreement. As a result of the acquisition,
Studio Systems, Inc. became a subsidiary of Hollywood Media and its business was
integrated with Hollywood Media's Baseline/FilmTracker subsidiary now known as
Baseline/StudioSystems. The aggregate purchase consideration was $5,014,027,
including $153,625 of acquisition costs, of which $920,000 is being held in an
escrow account pending the final working capital adjustment. The $920,000 is not
included in the allocation of the cost of the assets acquired and liabilities
assumed as it represents contingent consideration for which the contingency has
not been resolved beyond a reasonable doubt. As part of the consideration paid
to the former owners of Studio Systems, Inc., Hollywood Media issued 73,249
shares of its common stock valued at $250,000, and agreed to make 12 monthly
payments of $42,500 each. Hollywood Media funded the closing payments with cash
on hand. In addition, as part of the consideration paid for the acquisition,
Hollywood Media paid $150,000 to satisfy certain employment agreements for
former SSI senior management. The results of operations of Studio Systems, Inc.
have been included in Hollywood Media's third quarter 2004 results from the date
of acquisition. In addition, pro forma disclosures are provided below.
15
The following are the amounts assigned to the acquired assets and
assumed liabilities at the acquisition date:
Purchase consideration $ 5,014,027
Less cash in escrow (920,000)
-----------
Adjusted purchase consideration $ 4,094,027
===========
Cash acquired $ 265,601
Accounts receivable 568,480
Other current assets 45,601
Property, plant and equipment, net 177,363
-----------
Total assets $ 1,057,045
===========
Current liabilities $ (142,653)
Other long-term liabilities (764,442)
-----------
Total liabilities $ (907,095)
===========
Net assets $ 149,950
-----------
Excess of the purchase consideration over
fair value of net assets acquired $ 3,944,077
===========
The excess of the purchase price over the fair value of net assets
acquired has been classified preliminarily in goodwill in the accompanying
condensed consolidated balance sheet as of September 30, 2004. The allocation of
purchase price is preliminary pending valuations and other determinations that
are expected to be completed during 2004. The Company is obtaining valuations
from third party experts and finalizing estimates related to taxes and certain
restructuring liabilities.
16
The results of operations of Studio Systems, Inc. have been included in
the Company's results of operations since the date of acquisition (July 1,
2004). The following are the pro forma results for each applicable period
assuming that the acquisition had occurred on the first day of each period
presented:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------
2004 2003 2003
------------ ------------ ------------
Net sales $ 50,627,984 $ 47,571,046 $ 14,566,206
Net loss $ (7,394,790) $ (7,575,131) $ (2,416,716)
Loss per share $ (0.27) $ (0.37) $ (0.12)
Weighted average common and
common equivalent shares
outstanding - basic and diluted 27,037,938 20,680,998 20,871,971
(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, or contingent
obligation at September 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 September 30, 2004, the balance of $200,000 under this
17
commitment was unsecured. As of September 30, 2004 and December 31, 2003,
Hollywood Media has accrued interest on this commitment of $3,052 and $16,682,
respectively. In addition, interest expense for the three and nine months ended
September 30, 2004 was $2,445 and $4,688, respectively, and $7,270 and $7,270
for the three and nine months ended September 30, 2003, respectively.
MAY 2002 CONVERTIBLE DEBENTURES
On May 22, 2002, Hollywood Media issued an aggregate of $5.7 million in
principal amount of 6% Senior Convertible Debentures due May 22, 2005 (the
"Debentures") to a group of investors, upon payment of an aggregate $5.7 million
cash investment from such investors. The Debentures are convertible at the
option of the investors at any time through the maturity date into shares of
common stock of Hollywood Media. Prior to conversion, the Debentures bore
interest at 6% per annum, payable quarterly in cash or common stock. 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. The original conversion price of $3.46 per share has been
adjusted and amended 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. 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. As a result of the reduction of the
conversion price, additional beneficial conversion of $294,360 was recorded. 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.
During August and September of 2004, $4.7 million principal amount of
the Debentures was converted into shares of Hollywood Media's common stock at a
conversion price of $3.05 per share, including the $500,000 Debenture held by
Mr. Rubenstein and Ms. Silvers. Prior to such conversions, the prevailing
conversion price of the converted Debentures was reduced from $3.30 per share to
$3.05 per share pursuant to Hollywood Media's negotiations and agreements with
the converting investors for the purpose of facilitating such conversions.
Following such conversions, the remaining $1.0 million Debenture still
outstanding was amended to extend the maturity date to May 22, 2006 and to
remove restrictive covenants, and the conversion price of this Debenture was
reduced from $3.30 per share to $3.20 per share. As a result of the reduction in
conversion price, additional beneficial conversion of $412,710 was recorded.
As of September 30, 2004 and December 31, 2003, $236,292 and
$1,672,371, respectively, of unamortized discount on the Debentures was reducing
the face amount of
18
Debentures, and will be amortized to interest expense over the remaining term of
the outstanding Debentures, which were not converted during the quarter.
A total of $389,095 in deferred finance 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
nine months ended September 30, 2004, $100,749 and $165,599, respectively, were
recognized as interest expense from the amortization of the debt issuance costs.
For the three and nine months ended September 30, 2003, $32,424 and $97,272,
respectively, were recorded as interest expense for the deferred financing
costs.
Interest expense of $1,546,404 and $2,096,081 was recorded for the
three and nine months ended September 30, 2004, respectively, consisting of
stated interest, discount amortization for the beneficial conversion feature for
the reduction in conversion prices on the Debentures, and the original
discounts. For the three and nine months ended September 20, 2003, $207,270 and
$579,290, respectively, was recorded as interest expense for the accretion of
the discount.
The Warrants granted to these investors in May 2002 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 were 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 original beneficial conversion feature of the
Debentures was valued at $1,295,416. The recorded values of the Warrants and the
beneficial conversion feature are being amortized to interest expense over 3
years, using the effective interest method or sooner if converted prior to
maturity. The value of the Warrants and the beneficial conversion feature of the
Debentures were recorded as a discount to the convertible Debenture and included
in additional paid-in capital.
CINEMASOURCE GUARANTY
In 1999, Hollywood Media loaned approximately $1.7 million to the
former owner ("borrower") of CinemaSource (currently an employee of
CinemaSource) so that he could pay a portion of the taxes due resulting from the
sale of CinemaSource to Hollywood Media. Hollywood Media was obligated to make
this loan as part of the original purchase agreement to acquire CinemaSource.
Hollywood Media sold the note to an independent third party in 2000 and
guaranteed payment of the note. In April 2003, Hollywood Media entered into an
agreement with the holder of the note to satisfy Hollywood Media's obligations
under its guaranty of the note. Pursuant to such agreement, Hollywood Media
agreed to pay the holder an aggregate of $462,269 in nine monthly installments
commencing April 2003. In July 2003, pursuant to an agreement with the holder,
the Company had the right, at its election, to pay the holder half of any
monthly payment in restricted stock 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 of 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 December 31, 2003 was $138,152, and is
included in accrued expenses and other in the accompanying unaudited condensed
consolidated balance sheet. Subsequent to this guaranty being paid in full,
19
amounts were fully recovered from the borrower, and Hollywood Media recorded a
credit to selling, general and administrative expenses of $302,859 during the
quarter ended June 30, 2004.
(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 of each year as its annual impairment test
date and conducted required testing on that date in 2002 and 2003. As of
September 30, 2004, Hollywood Media was not aware of any events or changes in
circumstance that would require it to evaluate goodwill for impairment prior to
October 1, 2004. As of November 15, 2004, Hollywood Media has begun its
evaluation as of October 1, 2004, which will be completed during the quarter
ending December 31, 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 26, 2004, Hollywood Media issued 750 shares of common stock
valued at $953, pursuant to an agreement with an employee for an exercise of an
incentive stock option.
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 sold 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 received
proceeds of $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
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 and recorded stock-based compensation expense of $70,500.
20
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.
On July 1, 2004 Hollywood Media issued 73,249 shares of common stock,
valued at $250,000, as partial consideration for the acquisition of Studio
Systems, Inc., pursuant to a definitive purchase agreement (see Note 5).
On July 7, 2004, Hollywood Media issued 23,597 shares of common stock
valued at $77,786 to the holders of the Debentures for interest due for the
period April 30, 2004 through June 30, 2004.
On July 22, 2004, Hollywood Media issued 68,104 shares of common stock
valued at $224,743, in connection with utilization of a third party's services
to obtain certain intangible assets for the Broadway Ticketing division.
On August 13, 2004, Hollywood Media issued 2,857 shares of common stock
valued at $10,000, to an employee as additional compensation.
On September 8, 2004, Hollywood Media issued 25,000 shares of common
stock valued at $66,500, pursuant to an agreement with an employee for an
exercise of an incentive stock option.
On September 23, 2004, Hollywood Media issued 200,000 shares of common
stock to an independent third party, pursuant to a consulting agreement
providing an option to purchase the shares for $500,000, for services rendered
in connection with a proposed accretive acquisition. This agreement included
$158,000 of stock-based compensation, which is recorded as prepaid acquisition
costs.
On September 8, 2004, Hollywood Media issued 7,526 shares of common
stock valued at $25,000, to an employee as additional compensation pursuant to
an employment agreement.
During the quarter, $4.7 million principal amount of the Debentures,
was converted into shares of Hollywood Media's common stock at a conversion
price of $3.05 per share, including the $500,000 Debenture held by Mr.
Rubenstein and Ms. Silvers. In connection with these conversions, Hollywood
Media issued 1,540,985 shares of common stock valued at $4,700,000. In addition,
Hollywood Media issued 71,969 shares of common stock valued at $108,522 for
accrued interest due on the Debentures for the period from July 1, 2004 through
the conversion dates.
In August 2004, pursuant to the extensions and amendments to
employment agreements for each of Hollywood Media's Chairman of the Board and
Chief Executive Officer and Hollywood Media's Vice Chairman and President,
Hollywood Media issued 400,000 shares, or a total of 800,000 shares, of
restricted common stock valued at $2,600,000 which is recognized
21
quarterly as shares vest over a 4 year period beginning in October 2004. During
the quarter ended September 30, 2004, Hollywood Media amortized $0. As of
September 30, 2004 there was $2,600,000 of 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:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------- ---------
(UNAUDITED)
NetCo Partners (a) $ 428,224 $ 169,180
MovieTickets.com (b) (4,975) (4,975)
--------- ---------
$ 423,249 $ 164,205
========= =========
(a) NETCO PARTNERS
Hollywood Media owns a 50% interest in a joint venture called NetCo
Partners. NetCo Partners is engaged in the development and licensing of TOM
CLANCY'S NET FORCE. This investment is recorded under the equity method of
accounting, recognizing 50% of NetCo Partners' income or loss as Equity in
Earnings of Investees. The revenues, gross profit and net income of NetCo
Partners for the nine and three months ended September 30, 2004 and 2003 are
presented below:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
(RESTATED) (RESTATED)
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenues $1,437,631 $2,544,941 $ -- $ 514,016
Gross Profit 1,230,574 2,197,268 -- 459,311
Net Income (loss) 1,115,426 2,071,210 (60,746) 458,959
Hollywood Media's
share of net income (loss) $ 557,713 $1,035,605 $ (30,373) $ 229,479
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
22
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.
Summary balance sheet data for NetCo Partners is provided below:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ---------------
(UNAUDITED)
Accounts receivable (net of allowance) $ 755,558 $ 512,871
Total assets 907,401 729,279
Deferred revenues 203,765 569,333
Total liabilities 663,507 1,003,471
Partners' capital $ 243,894 $ (274,192)
Through September 30, 2004, Hollywood Media has received cumulative
profit distributions from NetCo Partners since its formation totaling $9.8
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 was 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
September 30, 2004, and shares in 26.2% 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 approximately
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 has
recorded no income (losses) on its investment in MovieTickets.com for the nine
and three months ended September 30, 2004, and 2003, has received no
distributions, and has not made any capital contributions or advances.
23
(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), ExhibitorAds (which creates exhibitor
paid directory ads for insertion in newspapers around the country) and
Baseline/StudioSystems (a data licensing, and flat fee and pay-per-use
subscription web site geared toward businesses and professionals in the feature
film and television industries).
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, Hollywood.com Television and Broadway.com Television, that provide
on-demand content and are distributed on certain cable TV systems. The Cable TV
division is in the development stage and, as a result, revenues since inception
are minimal.
The Other segment is comprised of Company-wide expenses such as
insurance, accounting, centralized information technology, and consulting fees
relating to compliance for Sarbanes-Oxley.
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.
24
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.
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(UNAUDITED) (UNAUDITED)
RESTATED RESTATED
2004 2003 2004 2003
------------ ------------ ------------ ------------
NET REVENUES:
Broadway Ticketing $ 39,604,332 $ 36,525,556 $ 11,654,166 $ 11,002,268
Data Business 5,669,060 5,227,476 2,379,532 1,731,244
Internet Ad Sales 2,046,835 1,923,737 514,859 694,599
Intellectual Properties 1,951,630 1,930,008 554,270 496,119
Cable TV -- 3,000 -- 1,680
------------ ------------ ------------ ------------
$ 49,271,857 $ 45,609,777 $ 15,102,827 $ 13,925,910
============ ============ ============ ============
OPERATING INCOME (LOSS):
Broadway Ticketing $ 1,054,541 $ 558,005 $ 112,487 $ 485,202
Data Business 835,648 501,510 257,609 166,196
Internet Ad Sales (a) (1,834,439) (2,186,869) (755,606) (683,591)
Intellectual Properties 586,094 881,625 116,023 111,364
Cable TV (665,819) (675,650) (228,205) (242,820)
Other (6,159,374) (5,167,377) (2,500,837) (1,847,170)
------------ ------------ ------------ ------------
$ (6,183,349) $ (6,088,756) $ (2,998,529) $ (2,010,819)
============ ============ ============ ============
SEGMENT ASSETS: (b)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(UNAUDITED)
Broadway Ticketing $14,503,265 $11,802,394
Data Business 22,782,366 18,042,947
Internet Ad Sales 23,384,804 23,713,984
Intellectual Properties 659,100 863,644
Cable TV 203,311 362,149
Other 5,167,102 2,095,903
----------- -----------
$66,699,948 $56,881,021
=========== ===========
(a) Includes $0 and $38,807, in amortization of CBS advertising for the
three and nine months ended September 30, 2004 respectively and,
$102,464 and $609,193 the three and nine months ended September 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, $20,120,833 to Data Business, $21,188,793 to Internet Ad
Sales and $248,057 to Intellectual Properties, as of September 30,
2004. The allocation as of December 31, 2003 was the same, except for
Data Business, which had a goodwill allocation of $15,852,976. The
September 30, 2004 increase in the Data Business goodwill allocation
was due to the July 1, 2004 acquisition of SSI
25
($4,864,078) and the July acquisition of Front Row Marketing
($323,779), as described in Note 5.
(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., were dismissed. As indicated
below, this litigation was settled in November 2004 and upon payment as agreed,
all claims against hollywood.com, Inc. have been satisfied and there are no
remaining obligations of Hollywood Media or hollywood.com, Inc.
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, jointly and severally, in the amount of $998,549 plus certain
costs, fees and interest.
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. On or about August 30, 2004,
hollywood.com, Inc. and Tribune satisfied the judgment as entered by payment of
$1,244,832 to Water Garden, of which $750,000 was paid out of funds that
Hollywood Media had previously deposited with Tribune pursuant to the appeal
bond arrangements described below, and $494,832 was paid by Hollywood Media
directly to Water Garden. Hollywood Media directly paid an additional sum of
$52,972 in September 2004 to Water Garden with respect to its outstanding claims
for additional costs and attorneys' fees, and received written notice from Water
Garden that the judgment was fully satisfied. Hollywood Media has recorded
provisions within selling, general and administrative expenses related to this
litigation of $330,805 and $805,805 during the three and nine months ended
September 30, 2004, respectively, and $0 during the three and nine months ended
September 30, 2003.
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 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
26
is $1,150,000, of which $750,000 has been paid to Water Garden to satisfy the
judgment as described above. The balance of such advance payments held by
Tribune is being used by Hollywood Media to pay the settlement in the Water
Garden Lawsuit described below, and the balance that exceeds the settlement
amount is to be returned to Hollywood Media.
The judgment in the Water Garden Lawsuit covered rent accruing through
February 13, 2003, under a lease the facial termination date of which was
December 31, 2003. Pursuant to a written stipulation agreement between the
parties to the Water Garden Lawsuit, as a result of the denial of hollywood.com,
Inc.'s and Tribune's appeals, hollywood.com, Inc. and Tribune were also liable
for rent accruing between February 13, 2003 and December 31, 2003, together with
attorneys' fees and costs, subject to reduction for rent received by the
landlord from subsequent tenants as provided in the stipulation agreement. The
parties to the Water Garden Lawsuit have reached a settlement agreement to
resolve Water Garden's outstanding claims under the written stipulation by
payment of $358,000 to Water Garden from funds already deposited with Tribune,
in return for full releases for hollywood.com, Inc., Hollywood Media and
Tribune. Upon payment to Water Garden from the funds held by Tribune, which is
expected to take place during November 2004, none of hollywood.com, Inc.,
Hollywood Media or Tribune has any outstanding liability with respect to this
matter. Hollywood Media accrued $358,000 and $850,000 as of September 30, 2004
and December 31, 2003, respectively, as part of accrued expenses and other in
the accompanying condensed consolidated balance sheets.
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 September 30, 2004, all payments have been made and there is $60,750
of prepaid advertising remaining under this agreement.
In a separate matter, a lawsuit pertaining to an advertising insertion
order was filed against Hollywood Media in May 2003, seeking damages of $161,000
plus interest and costs. Hollywood Media and the plaintiff in this matter have
reached an agreement in principle to settle this litigation whereby Hollywood
Media will purchase $119,000 (at what the Company believes to be market rates)
in advertising on plaintiff's various websites to promote Hollywood Media's
various web properties over the period of December 1, 2004 through July 30,
2005, payable over 8 months.
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 to the 2004 presentation.
27
(13) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004:
o 12,500 shares of Hollywood Media common stock were issued,
valued at $35,500 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. In
connection with this option $70,500 was recorded to expense as
stock based compensation.
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 152,661 shares of Hollywood Media common stock, valued at
$342,735 were issued for interest due to the holders of the
Debentures.
o An adjustment of the beneficial conversion feature of the
Debentures in the amount of $707,070 was made pursuant to
certain anti-dilution provisions.
o 73,249 shares of Hollywood Media common stock, valued at
$250,000, were issued for the 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. The aggregate purchase price was
approximately $5,014,027 of which $920,000 is being held in an
escrow account pending the final working capital adjustment.
The $920,000 is not included in the allocation of the cost of
the assets acquired and liabilities assumed as it represents
contingent consideration for which the contingency has not
been resolved. The consideration was applied to the purchase
of all common stock and common stock equivalents. In addition,
Hollywood Media agreed to make 12 monthly payments of $42,500
each. Hollywood
28
Media funded the closing payments with cash on hand. In
addition, Hollywood Media paid $150,000 to satisfy certain
employment agreements for former SSI senior management.
o 68,104 shares of Hollywood Media common stock valued at
$224,743, were issued in connection with utilization of a
third parties services to obtain certain intangible assets for
the Broadway Ticketing division.
o 200,000 shares of Hollywood Media common stock to an
independent third party, pursuant to a consulting agreement
providing an option to purchase the shares for $500,000, for
services rendered in connection with a proposed accretive
acquisition for the Broadway Ticketing division. This
agreement included $158,000 of stock based compensation, which
was recorded to prepaid acquisition costs.
o During the quarter, $4.7 million principal amount of the
Debentures was converted into shares of Hollywood Media's
common stock at a conversion price of $3.05 per share. Prior
to such conversions, the prevailing conversion price of the
converted Debentures was reduced from $3.30 per share to $3.05
per share pursuant to Hollywood Media's negotiations and
agreements with the converting investors for the purpose of
facilitating such conversions. In connection with these
conversions Hollywood Media issued 1,540,985 shares of common
stock valued at $4,700,000. In addition, Hollywood Media
issued 71,969 shares of common stock valued at $108,522.
29
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.
30
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 ExhibitorAds.
CINEMASOURCE. CinemaSource is the largest supplier of movie showtimes
as measured by market share. CinemaSource compiles movie showtimes data for
approximately 40,000 movie screens throughout the United States, Canada, and the
United Kingdom. Since its start in 1995, CinemaSource has substantially
increased its operations and currently provides movie showtimes listings to more
than 250 newspapers, wireless companies, Internet sites, and other media
outlets, including: The New York Times; 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. In addition, 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.
31
EXHIBITORADS. Hollywood Media launched ExhibitorAds during the first
quarter of 2002 as yet another expansion of the CinemaSource operations.
ExhibitorAds 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, 3) Weekly in-theatre
movie showtimes brochure creation and printing, and 4) web site creation and
hosting services for the movie exhibition industry. In June 2004, we acquired
Front Row Marketing, which is the industry leader in weekly showtime email data
services to movie exhibitors and which business has been integrated into our
ExhibitorAds business unit. ExhibitorAds 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, the Directors Guild of America, Miramax
Films, Warner Brothers, NYU, UCLA, USC, Writers Guild of America and 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 our leading competitors in the entertainment industry
database and information services provider business. 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
32
End. TDI sells tickets directly to group buyers including travel agents and tour
groups. TDI also manages a marketing cooperative that represents participating
Broadway shows to the travel industry around the world. Recent Broadway shows
marketed by this cooperative include Aida, 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 website 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 showtime listings,
entertainment news and an extensive multimedia library containing hundreds of
hours of celebrity interviews, premier coverage and behind-the-scenes footage.
Hollywood.com provides premier content and online ticketing services for movies
creating a "one-stop destination" for movie information. Some of the largest
advertisers who have advertised on Hollywood.com include Walt Disney Studios,
New Line Cinema, Sony Studios, General Motors, Universal Studios, Visa, Colgate,
HBO, A&E, British Airways, MGM, US Army, AT&T, Chase, Ford, Kodak, Fox and
Warner Bros.
As a result of its relationship with Hollywood Media's Data Business
(CinemaSource and Baseline), Hollywood.com has access to a constantly updated
database of information related to movies and entertainment. We believe these
sources of content provide Hollywood.com with a competitive advantage over other
entertainment-related websites that incur significant costs to create content of
comparable quality and scope.
Hollywood.com has further established its presence in the wireless
arena. Through agreements with wireless carriers (AT&T, Cingular, Sprint, and
Verizon), Hollywood.com provides a movie and entertainment destination on a
variety of mobile phones.
BROADWAY.COM. We launched Broadway.com on May 1, 2000. Broadway.com
features: the ability to purchase Broadway, off-Broadway and London's West End
theater tickets online;
33
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 show tunes, and an in-depth Tony Awards(R) area.
Broadway.com generates revenue from the sale of Broadway Theater tickets,
packages of hotel rooms and theater tickets and advertising, with its principal
business purpose being to generate ticket sales. In addition, this site was
redesigned during 2004 and the redesigned site debuted in November 2004.
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: "Hollywood.com Television" and "Broadway.com Television." 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. Hollywood.com Television
and Broadway.com Television offer audiences interactive entertainment and
information, with on-demand video content including premieres, 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. Hollywood.com
Television, (formerly called Totally Hollywood TV), is pursuing a national
roll-out strategy and is currently available on certain cable TV systems of
Cablevision Systems Corporation, Cox Communications, Comcast, Media Com, and
Insight Communications. Broadway.com Television, (formerly called Totally
Broadway 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
tests 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 1,640 books that have been published. Another 3,415 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 backlog
and anticipated books for future publishing include more than 300 books under
contract or in final
34
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 ISAAC 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 website 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
future release movies, movie reviews and synopses, digitized movie trailers and
photos, and box office results. The web site generates revenues from service
35
fees charged to users for the purchase of tickets and the sale of advertising.
MovieTickets.com has been selected by AOL, Moviefone, MSN Network, Lycos
Entertainment, Real Networks, Earthlink, 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. and
which was converted in 2004. 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
has assumed the ticketing agreements that Moviefone had with its movie theater
exhibitors, bringing the number of exhibitors MovieTickets.com will directly
ticket for to over 30. 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, Pacific
Theatres, Rave Motion Pictures, Ritz Theatres, Spotlight Theatres, Sayville
Theatres, Baederwood Movie Theatre Co., Bryn Mawr Movie Theatre Co., the
Narberth Theatre, and Cinemagic Movies. 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.
36
RESULTS OF OPERATIONS
The following table summarizes Hollywood Media's revenues, operating
expenses and operating income (loss) by reportable segment for the nine months
ended September 30, 2004 ("Y3-04") and 2003 ("Y3-03"), and the three months
ended September 30, 2004 ("Q3-04") and 2003 ("Q3-03"):
BROADWAY DATA INTERNET INTELLECTUAL CABLE
TICKETING BUSINESS AD SALES PROPERTIES TV OTHER TOTAL
(a) (b)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Y3-04
Net Revenues $ 39,604,332 $ 5,669,060 $ 2,046,835 $ 1,951,630 $ -- $ -- $ 49,271,857
Operating Expenses 38,549,791 4,833,412 3,881,274 1,365,536 665,819 6,159,374 55,455,206
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating Income (loss) $ 1,054,541 $ 835,648 $ (1,834,439) $ 586,094 $ (665,819) $ (6,159,374) $ (6,183,349)
============ ============ ============ ============ ============ ============ ============
% of Total Net Revenues 80% 12% 4% 4% -- -- 100%
Y3-03 (RESTATED)
Net Revenues $ 36,525,556 $ 5,227,476 $ 1,923,737 $ 1,930,008 $ 3,000 $ -- $ 45,609,777
Operating Expenses 35,967,551 4,725,966 4,110,606 1,048,383 678,650 5,167,377 $ 51,698,533
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating Income (loss) $ 558,005 $ 501,510 $ (2,186,869) $ 881,625 (675,650) $ (5,167,377) $ (6,088,756)
============ ============ ============ ============ ============ ============ ============
% of Total Net Revenues 80% 12% 4% 4% -- -- 100%
BROADWAY DATA INTERNET INTELLECTUAL CABLE
TICKETING BUSINESS AD SALES PROPERTIES TV OTHER TOTAL
(a) (b)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Q3-04
Net Revenues $ 11,654,166 $ 2,379,532 $ 514,859 $ 554,270 $ -- $ -- $ 15,102,827
Operating Expenses 11,541,679 2,121,923 1,270,465 438,247 228,205 2,500,837 18,101,356
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating Income (loss) $ 112,487 $ 257,609 $ (755,606) $ 116,023 $ (228,205) $ (2,500,837) $ (2,998,529)
============ ============ ============ ============ ============ ============ ============
% of Total Net Revenues 77% 16% 3% 4% -- -- 100%
Q3-03 (RESTATED)
Net Revenues $ 11,002,268 $ 1,731,244 $ 694,599 $ 496,119 $ 1,680 $ -- $ 13,925,910
Operating Expenses 10,517,066 1,565,048 1,378,190 384,755 244,500 1,847,170 15,936,729
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating Income (loss) $ 485,202 $ 166,196 $ (683,591) $ 111,364 $ (242,820) $ (1,847,170) $ (2,010,819)
============ ============ ============ ============ ============ ============ ============
% of Total Net Revenues 79% 12% 5% 4% -- -- 100%
37
a. Includes operating results for Studio Systems, Inc. which was acquired
on July 1, 2004.
b. 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)" in the condensed
consolidated statement of operations.
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,
ExhibitorAds and Baseline/StudioSystems 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,
"Hollywood.com Television" and "Broadway.com Television".
NET REVENUES
Total net revenues were $49,271,857 for Y3-04 as compared to
$45,609,777 for Y3-03, an increase of $3,662,080 or 8% and $15,102,827 for Q3-04
as compared to $13,925,910 for Q3-03, an increase of $1,176,917 or 8%. The
increase in revenue from Y3-03 to Y3-04 was primarily due to an 8% increase in
both Broadway Ticketing and Data Business revenue as well as a 6% increase in
Internet Ad Sales, and a 1% increase in Intellectual Properties revenue. The
increase in revenue from Q3-03 to Q3-04 was primarily due to a 37% increase in
revenue in the Data Business, primarily attributable to the July 1, 2004
acquisition of Studio Systems, Inc., a 12% increase in Intellectual Properties
revenue and a 6% increase in Broadway Ticketing revenue, which were partially
offset by a 26% decrease in Internet Ad Sales.
Broadway Ticketing revenues were $39,604,332 and $36,525,556 for Y3-04
and Y3-03, respectively, an increase of $3,078,776 or 8% for Y3-04, and
$11,654,166 for Q3-04 compared to $11,002,268 for Q3-03, respectively, an
increase of $651,898 or 6%. Broadway Ticketing revenues increased Y3-04 versus
Y3-03 due to an 18% increase in individual ticket sales primarily on
Broadway.com, which was partially offset by a 3% decrease in wholesale group
ticket sales. Broadway Ticketing revenues increased in Q3-04 over Q3-03 due to
an 11% increase in individual ticket sales primarily on Broadway.com, which was
partially offset by a 4% decrease in wholesale group ticket sales. The
Broadway.com website was redesigned during 2004 and the redesigned site launched
on November 3, 2004. Based on initial results, the launching of the redesigned
Broadway.com is expected to have a significant positive impact on
38
future sales, as we are experiencing a sales increase since launch, which we
believe is driven in part by website improvements which better facilitate the
purchase process for customers. 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, and schools.
Broadway Ticketing revenue is recognized on the date of performance of the show.
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. The third quarter is generally seasonally slow in our Broadway Ticketing
division. In addition to this seasonal trend, the GOP Convention was held in New
York City during Q3-04, which management believes reduced the level of tourists
and others entering the city for entertainment purposes. 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
Y3-04.
Data Business revenues (which includes our Source businesses
[CinemaSource, EventSource and ExhibitorAds], and Baseline/FilmTracker which
changed its name on July 1, 2004 to Baseline/StudioSystems to reflect our
acquisition of Studio Systems, Inc. ("SSI")), were $5,669,060 for Y3-04 as
compared to $5,227,476 for Y3-03, an increase of $441,584 or 8% and $2,379,532
for Q3-04 as compared to $1,731,244 for Q3-03, an increase of $648,288 or 37%.
The increase in Data Business revenues was primarily due to the July 1, 2004
acquisition of SSI.
Our Baseline Business, division included in the Data Business, revenues
(not including revenues from the SSI acquisition) increased from $1,416,140 in
Y3-03 to $1,610,543 in Y3-04, an increase of $194,403 or 14% as compared to
Y3-03. SSI added $672,192 in revenue during Q3-04. These revenue gains were
offset by a decrease in Source Business revenue of $425,011 or 11% for the same
nine month period. The increase in revenue from Q3-03 to Q3-04 was due to the
SSI acquisition and a 12% increase in Baseline Business revenue, which were
partially offset by a 6% decrease in Source Business revenue. The decrease in
Source Business revenue in Y3-04 as compared to Y3-03, as well as in Q3-04 as
compared to Q3-03, was, as previously reported, the result of 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 revenue increase in Y3-04 as compared to Y3-03 and Q3-04 as
compared to Q3-03 is due to a high retainage of Baseline's current customers and
continued expansion of Baseline's customer base.
Internet Ad Sales revenue was $2,046,835 for Y3-04 as compared to
$1,923,737 for Y3-03, an increase of $123,098 or 6%. Internet Ad Sales revenue
was $514,859 and $694,599 for Q3-04 and Q3-03, respectively, a decrease of
$179,740 or 26%. The decrease was due in large part to the following factors: a
"soft" Q3-04 movie box office and the related reduction in movie studio
advertising, transitioning of the ad sales team during Q3-04 to a new management
structure as the result of our hiring of a new head of ad sales, and a new
website launch. Internet Ad Sales revenue is primarily generated from the sale
of sponsorships and banner advertisements on Hollywood.com.
Revenue from our Intellectual Properties division was $1,951,630 for
Y3-04 as compared to $1,930,008 for Y3-03 an increase of $21,622 or 1% and
$554,270 and $496,119 for Q3-04 and Q3-03, respectively, an increase of $58,151
or 12%. The increase in revenues was attributable to the timing of the delivery
of manuscripts resulting in more manuscripts delivered in Q3-04 as
39
compared to Q3-03. 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.
EQUITY IN EARNINGS (LOSSES) OF INVESTEES
Equity in earnings (losses) of investees consisted of the following:
Nine Months Ended Three Months Ended
-------------------------- ---------------------------
September 30, September 30,
-------------------------- ---------------------------
Restated Restated
2004 2003 2004 2003
----------- ----------- ----------- -----------
NetCo Partners (a) $ 557,713 $ 1,035,605 $ (30,373) $ 229,479
MovieTickets.com (b) -- -- -- --
----------- ----------- ----------- -----------
$ 557,713 $ 1,035,605 $ (30,373) $ 229,479
=========== =========== =========== ===========
(a) NetCo Partners
NetCo Partners owns 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 (losses)
was $(30,373) for Q3-04 as compared to $229,479 for Q3-03, and $557,713 for
Y3-04 as compared to $1,035,605 for Y3-03. 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 September 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. The investment had been reduced to approximately zero by
Hollywood Media because it had recognized previous losses and it had received a
100% return of its investment in MovieTickets.com. 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 Movietickets.com web site generates revenues from service
fees charged to users for the purchase of tickets and the sale of advertising.
40
OPERATING EXPENSES
COST OF REVENUE - TICKETING. Cost of revenue - ticketing was
$34,350,187 for Y3-04 as compared to $31,629,607 for Y3-03 for an increase of
$2,720,580 or 9%. The cost of revenue for Q3-04 was $10,197,864 compared to
$9,133,834 for Q3-03 for an increase of $1,064,030 or 12%. 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 87% for both Y3-04 and Y3-03 and 88% and 83% for Q3-04 and Q3-03
respectively. The increase in cost of revenue as a percentage of ticketing
revenue in Q3-04 compared to Q3-03 was primarily attributable to an increase in
unsold inventory and charge backs resulting from the holding of the GOP
convention in NYC and a shift in overall product mix.
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 Y3-04 were
$3,868,219 compared to $3,758,000 for Y3-03 for an increase of $110,219 or 3%.
Q3-04 costs were $1,363,292 compared to $1,320,286 for Q3-03, an increase of
$43,006 or 3%. As a percentage of revenues from our Internet Ad Sales, Data
Business, Intellectual Properties and Cable TV segments, these costs were 40%
and 41% for Y3-04 and Y3-03 and 40% and 45% for Q3-04 and Q3-03, respectively.
Revenues from Internet Ad Sales decreased due to the launching of the new
website and other factors discussed above, while fixed costs remained the same.
This increase in the cost of Ad Sales revenue was offset by a decrease in the
cost of Data Business revenues. Revenues increased 37% in the Data Business,
while cost of revenues in the Data Business increased 2% from Q3-04 to Q3-03
primarily due to a savings in payroll expense as a percentage of revenue.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") 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. SG&A expenses for Y3-04 were
$15,593,379 compared to $13,861,932 for Y3-03 for an increase of $1,731,447 or
12%. The increase is primarily due to operating expenses for SSI (we are in the
process of developing a plan to eliminate a significant portion of SSI's fixed
expenses through an integration process), an accrual of $330,800 in Q3-04 for
the final settlement of the Water Garden lease litigation, an increase in fees
relating to compliance for Sarbanes-Oxley, an increase in occupancy costs due to
an early termination of a lease, an increase in accounting fees relating
primarily to compliance with Sarbanes Oxley and an increase in affiliate
advertising costs, offset partially by a decrease in legal expenses. The SG&A
costs for Q3-04 were $5,977,937 compared to $4,794,737 for Q3-03, an increase of
$1,183,200 or 25%. The increase in Q3-04 as compared to Q3-03 in SG&A is due
primarily to the additional operating expenses of SSI as described above, an
increase of $330,800 in the accrual for the final settlement of the Water Garden
lease litigation, an increase in ad sales salaries as we added to our ad sales
team, an increase in accounting fees relating to Sarbanes Oxley compliance,
along with the increase in occupancy costs for the early termination of a lease.
As a percentage of net revenues, selling, general and administrative expenses
were 32% and 30% for Y3-04 and Y3-03, respectively, and 40% and
41
34% for Q3-04 and Q3-03, respectively. (See Note 11 of Unaudited Condensed
Consolidated Financial Statements for more information on the Water Garden lease
litigation).
AMORTIZATION OF CBS ADVERTISING. Amortization of CBS advertising
relating to our agreements with Viacom was $38,807 and $609,193 for Y3-04 and
Y3-03, respectively, and $0 for Q3-04 compared to $102,464 for Q3-03. 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. Since June 30, 2004, unamortized deferred advertising has been
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 $1,604,614
for Y3-04 as compared to $1,839,801 for Y3-03 for a decrease of $235,187 or 13%.
Q3-04 depreciation and amortization expense was $562,263 compared to $585,408
for Q3-03, a decrease of $23,145 or 4%. The decrease was primarily attributable
to certain tangible assets that became fully amortized during 2003.
INTEREST, NET. Interest, net was $2,548,460 for Y3-04 as compared to
$1,037,003 for Y3-03 and $1,762,959 for Q3-04, as compared to $372,963 for
Q3-03. The increase of $1,511,457 in interest, net in Y3-04 over Y3-03, was
primarily attributable to interest charges on the early conversion of $4.7
million in principal of convertible Debentures, on which the conversion price
was reduced, resulting in an increase in the beneficial conversion feature and
the associated amortization. For Q3-04 and Y3-04, $1,768,041 and $2,261,680,
respectively, was recorded in interest expense for the amortization of the
deferred finance costs and discount. Included in the interest expense was
$1,332,811 directly attributable to the conversion. (See Note 6 of Unaudited
Condensed Consolidated Financial statements).
OTHER INCOME (EXPENSE), NET. Other, net was $786,851 for Y3-04 as
compared to $(108,165) for Y3-03 and $59,178 for Q3-04 as compared to $(117,059)
for Q3-03. The increase of $895,016 in other income (expense) for Y3-04 to
Y3-03, net was primarily attributable to a gain recognized upon termination of a
put-call option held by a former minority shareholder of Baseline in 2004, along
with other expenses recognized in Q3-03 for the settlement of a guarantee and
debt (See Note 5 of Unaudited Condensed Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had cash and cash equivalents of $3,796,668
compared to cash and cash equivalents of $1,867,999 at December 31, 2003. Our
net working capital deficit (current assets less current liabilities) at
September 30, 2004 was $212,358 as compared to a working capital deficit of
$6,490,321 at December 31, 2003. During the nine months ended September 30,
2004, net cash used in operating activities was $7,578,269, which cash usage
included $2,970,474 to purchase Broadway ticketing inventory to be held for sale
during 2004 along with an increase of $355,533 in deferred costs associated with
Broadway ticket inventory, payment of $1,677,664 on various outstanding payables
and other current liabilities. In addition, Hollywood Media made payments
aggregating $847,805 during Y3-04 to settle the WaterGarden litigation, which
will require no further payments from the Company. Net cash used in investing
activities was $5,536,076; and net cash provided by financing activities was
42
$15,043,014, 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
$1,928,669 for the nine months ended September 30, 2004. In comparison, during
the nine months ended September 30, 2003, net cash used in operating activities
was $1,935,537, net cash used in investing activities was $337,241, and net cash
provided by financing activities was $364,670.
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 investors, upon payment of an aggregate $5.7 million
cash investment from such investors. The Debentures are convertible at the
option of the investors at any time through the maturity date into shares of
common stock of Hollywood Media. Prior to conversion, the Debentures bear
interest at 6% per annum, payable quarterly in cash or common stock. 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. The original conversion price of $3.46 per share has been
adjusted and amended 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. 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.
During August and September of 2004, $4.7 million principal amount of
the Debentures was converted into shares of Hollywood Media's common stock at a
conversion price of $3.05 per share, including the $500,000 Debenture held by
Mr. Rubenstein and Ms. Silvers. Prior to such conversions, the prevailing
conversion price of the converted Debentures was reduced from $3.30 per share to
$3.05 per share pursuant to Hollywood Media's negotiations and agreements with
the converting investors for the purpose of facilitating such conversions.
Following such conversions, the remaining $1.0 million Debenture still
outstanding was amended to extend the maturity date to May 22, 2006 and to
remove restrictive covenants, and the conversion price of this Debenture was
reduced from $3.30 per share to $3.20 per share.
During the fourth quarter of 2004, the Data Business is expected to
sign approximately $1.8 million in annual contracts further solidifying the
business's revenue run rate and providing an increase in sustained cash flow. In
addition, SSI is being integrated into the Data Business and is expected to
provide approximately $2.0 million in additional annual cash flow after
efficiencies from the integration into Baseline, which is expected to be
substantially completed in December 2004. Furthermore, based upon the critical
mass we have achieved through this acquisition, we expect additional data
customers to be added throughout 2005 providing additional sustained cash flows
43
without significant increases in costs. Hollywood Media invested approximately
$4.8 million in cash to consummate the SSI acquisition on July 1, 2004. This
amount could be reduced pending resolution of the $920,000 portion of the
purchase price held currently held in escrow (see Note (5)). There can be no
assurance that the new Data Business contracts or such cash flow improvements
from the SSI integration will be realized to the extent anticipated.
Based in part on the anticipated realization of the expected positive
developments described in the preceding paragraph, including increasing Data
Business cash flow from new and renewing contracts, and expected cost reductions
in the Baseline/StudioSystems unit (and the corresponding increases in positive
cash flow anticipated to result), we believe that our cash and cash equivalents,
short-term investments, anticipated cash flow from operations, and potential
amounts available if we undertake further equity or debt financing, should
provide sufficient liquidity and capital resources through the end of the
twelve-month period ending September 30, 2005. We have from time to time held
discussions and negotiations with lending institutions about borrowing funds to
finance our growth opportunities.
As of the date of this Form 10-Q report, we currently anticipate
capital expenditures during the remainder of 2004 of approximately $0.2 million
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 an additional $0.3
million for consulting expertise and $0.4 million for audit expenses. 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.
44
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 nine months ended September 30, 2004 and 2003 was $38,807 and $609,193
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.
45
We evaluate the recoverability of long-lived assets not held for sale
by comparing the carrying amount of the assets to the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the carrying values of such assets, the assets are
adjusted to their fair values. We determined fair value as the net present value
of future cash flows.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets." ("SFAS No. 142"). Under SFAS No.
142, goodwill and intangible assets acquired after June 30, 2001 were no longer
subject to amortization. Goodwill and intangibles with indefinite lives acquired
prior to June 30, 2001 ceased to be amortized beginning January 1, 2002. In
addition, SFAS 142 changed the way we evaluated goodwill and intangibles for
impairment. Beginning January 1, 2002, goodwill and certain intangibles are no
longer amortized; however, they are subject to evaluation for impairment at
least annually using a fair value based test. The fair value based test is a
two-step test. The first step involved comparing the fair value of each of our
reporting units to the carrying value of those reporting units. If the carrying
value of a reporting unit exceeds the fair value of the reporting unit, we are
required to proceed to the second step. In the second step, the fair value of
the reporting unit would be allocated to the assets (including unrecognized
intangibles) and liabilities of the reporting unit, with any residual
representing the implied 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 of September 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. Hollywood Media is
now in the process of performing its 2004 impairment test.
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.
46
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
CHIEF EXECUTIVE OFFICER AND VICE PRESIDENT OF FINANCE AND ACCOUNTING
CERTIFICATIONS. The certifications of the Chief Executive Officer and the Vice
President of Finance and Accounting required by Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended (the "Certifications") are filed as
exhibits to this Form 10-Q. This section of the Form 10-Q contains the
information concerning the evaluation of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) ("Disclosure
Controls") and changes to internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) ("Internal Controls") referred to
in the Certifications and this information should be read in conjunction with
the Certifications for a more complete understanding of the topics presented.
Our management, including the principal executive officer and principal
financial officer, does not expect that our Disclosure Controls or Internal
Controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the
limitations in any and all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
EVALUATION OF DISCLOSURE CONTROLS. 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 (the principal financial and accounting officer), of the
effectiveness of Hollywood Media's Disclosure Controls as of the end of the
47
period covered by this Form 10-Q. Based on that evaluation, Hollywood Media's
management, including the Chief Executive Officer and the Vice President of
Finance and Accounting, concluded that, as of the end of the period covered by
this Form 10-Q, Hollywood Media's Disclosure Controls were designed to provide
reasonable assurance of achieving their objectives and, at the "reasonable
assurance" level, were effective to ensure that information required to be
disclosed by us in reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.
CHANGES IN INTERNAL CONTROLS. There have been no changes in Hollywood
Media's Internal Controls 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 Controls.
We are in the process of documenting and testing our Internal Controls
in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act,
which requires annual management assessments of the effectiveness of our
Internal Controls and a report by our auditors addressing these assessments.
During the course of our testing we may identify deficiencies which we may not
be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley
Act for compliance with the requirements of Section 404. In addition, if we fail
to maintain the adequacy of our Internal Controls, as such standards are
modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act.
48
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Note (11) - COMMITMENTS AND CONTINGENCIES - Litigation" in the
Notes to Condensed Consolidated Financial Statements contained in Part I of this
10-Q Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following securities were issued by Hollywood Media during the
quarter ended September 30, 2004, in transactions that were not registered under
the Securities Act of 1933.
On July 1, 2004, Hollywood Media issued 73,249 shares of common stock,
valued at $250,000, as part the purchase price for the acquisition of Studio
Systems, Inc.
On July 7, 2004, Hollywood Media issued 23,597 shares of common stock
valued at $77,786 to the holders of the Debentures for interest due for the
period April 30, 2004 through June 30, 2004.
During the quarter, Hollywood Media issued 1,540,985 shares of common
stock upon conversions of an aggregate of $4.7 million principal amount of the
Debentures at a conversion price of $3.05 per share. In addition, Hollywood
Media issued 71,969 shares of common stock valued at $108,522 for interest due
on the Debentures.
The securities described above were issued without registration under
the Securities Act of 1933 by reason of the exemption from registration afforded
by the provisions of Section 4 (2) thereof and/or Regulation D thereunder, based
upon investment representations to Hollywood Media relating thereto.
Hollywood Media did not repurchase any shares of its common stock
during the quarter ended September 30, 2004.
ITEM 5. OTHER INFORMATION
The employment agreements with each of Mitchell Rubenstein, Hollywood
Media's Chief Executive Officer, and Laurie Silvers, the President, were amended
pursuant to agreements dated November 15, 2004, for the purpose of clarifying
the requirements under which their respective restricted stock grants made to
them by Hollywood Media in August 2004 would vest in the event of termination of
employment. The amendments specify the requirement of "good reason" (or cause)
for accelerated vesting upon termination due to resignation. These restricted
stock grants were 400,000 shares each, and vest over four years on a quarterly
basis, beginning on October 1, 2004, unless vesting is accelerated upon
specified events.
49
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Incorporated by
Exhibit Description Reference From
3.1 Articles of Amendment to Articles of Incorporation of Hollywood Media Corp. (*)
for Designation of Preferences, Rights and Limitations of Series E Junior
Preferred Stock.
10.1 Amendment to Debenture Agreement, dated as of September 29, 2004, by and (*)
between Hollywood Media Corp. and Portside Growth & Opportunity Fund Ltd.
10.2 Amended and Restated 6% Senior Convertible Debenture Due May 22, 2006 (*)
issued by Hollywood Media Corp. to Portside Growth & Opportunity Fund Ltd.,
dated October 15, 2004.
10.3 Warrant No. W-A-5 dated as of August 31, 2004 issued to CD Investment Partners, Ltd. (*)
in replacement of Warrant No. W-A-4.
10.4 Agreement to Convert Debenture, dated as of August 30, 2004, by and between (*)
Hollywood Media Corp. and Leonardo, L.P.
10.5 Conversion Notice, dated September 28, 2004, for 6% Senior Convertible (*)
Debenture due May 22, 2005 held by Leonardo, L.P.
10.6 Agreement to Convert Debenture, dated as of August 31, 2004, by and between (*)
Hollywood Media Corp. and CD Investment Partners, Ltd.
10.7 Conversion Notice, dated September 30, 2004, for 6% Senior Convertible (*)
Debenture due May 22, 2005 held by CD Investment Partners, Ltd.
10.8 Conversion Notice, dated August 20, 2004, for 6% Senior Convertible (*)
Debenture due May 22, 2005 held by Federated Kaufmann Fund.
10.9 Conversion Notice, dated August 20, 2004, for 6% Senior
Convertible Debenture due May 22, 2005 held by
Mitchell Rubenstein and Laurie Silvers. (*)
10.10 Employment Letter, dated as of April 2, 2003, by and between Hollywood (*)
Media Corp. and Scott Gomez.
10.11 Amendment Agreement, dated as of November 15, 2004, to Employment Agreement (*)
between Hollywood Media Corp. and Mitchell Rubenstein.
10.12 Amendment Agreement, dated as of November 15, 2004, to Employment Agreement (*)
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
50
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by Hollywood Media
during the quarter ended September 30, 2004:
Form 8-K filed July 2, 2004: Item 5 of the Form 8-K reported that on
July 2, 2004 we issued a press release announcing that Hollywood Media
consummated its acquisition of Studio Systems, Inc. in a transaction that closed
on July 1, 2004, and a copy of the press release was included with the filing.
Form 8-K filed July 16, 2004: Item 11 of the Form 8-K reported a
temporary blackout period for the Hollywood Media Corp. 401(k) Retirement
Savings Plan due to changes being made to the Plan, including changing the
recordkeeper and investment options. The blackout period was expected to begin
on August 24, 2004 and expected to end by September 20, 2004.
Form 8-K filed August 11, 2004: Item 12 of the Form 8-K reported that
on August 11, 2004 we issued a press release announcing Hollywood Media's
financial results for the second quarter of fiscal 2004, and a copy of the press
release was included with the filing.
Form 8-K filed August 24, 2004: Item 1.01 of the Form 8-K reported that
on August 20, 2004, Hollywood Media agreed to convert, and thereupon converted,
an aggregate of $1.5 million principal amount of its 6% Convertible Debentures
held by two holders into shares of Hollywood Media's common stock at a
conversion price of $3.05 per share. Additional shares of common stock were to
be issued upon such conversions in payment of accrued interest on the converted
Debentures as provided under the terms of the Debentures. Item 3.02 of the Form
8-K reported the following issuances of equity securities by Hollywood Media in
transactions that were not registered under the Securities Act of 1933: (1)
73,249 shares of common stock valued at $250,000 issued on July 1, 2004 in
connection with the acquisition of Studio Systems, Inc.; (2) 23,597 shares of
common stock valued at $77,786 issued on July 8, 2004 to the holders of the
Debentures for interest due pursuant to the terms of the Debentures; and (3)
534,335 shares of common stock issued on August 20, 2004 upon conversion of $1.5
million aggregate principal amount of Debentures and as payment of interest due
pursuant to the terms of the Debentures, as further described in Item 1.01 of
the Form 8-K.
Form 8-K filed September 1, 2004: Item 1.01 of the Form 8-K reported
that on August 30, 2004, Hollywood Media entered into an agreement to convert
$3.2 million principal amount of its 6% Senior Convertible Debentures held by
two holders into shares of Hollywood Media's common stock at a conversion price
of $3.05 per share on dates to be selected by the holders no later than
September 30, 2004 (with respect to $200,000 of the Debentures) or December 31,
2004 (with respect to $3.0 million of the Debentures). Additional shares of
common stock were to be issued upon such conversions in payment of accrued
interest on the converted Debentures as provided under the terms of the
Debentures. Item 3.02 of the Form 8-K reported that, as further described in
Item 1.01 of the Form 8-K, Hollywood Media agreed to issue shares of its common
stock upon conversion of $3.2 million aggregate principal amount of Debentures
and as payment of interest due pursuant to the terms of the Debentures, pursuant
to transactions not registered under the Securities Act of 1933.
Form 8-K filed September 17, 2004: Item 1.01 of the Form 8-K reported
that on September 16, 2004, Hollywood Media amended and restated its previously
established 401(k) plan, known as the Hollywood Media Corp. 401(k) Retirement
Savings Plan, in connection with Hollywood Media's appointment of Sentinel
Benefits Group, Inc. as the administrator for the Plan. The restated Plan
documents were included with the filing and replaced the prior corresponding
Plan documents.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD MEDIA CORP.
Date: November 15, 2004 By: /s/ Mitchell Rubenstein
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Mitchell Rubenstein, Chief Executive Officer (Principal executive
officer)
Date: November 15, 2004 By: /s/ Scott Gomez
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Scott Gomez, Vice President of Finance and Accounting
(Principal accounting officer)
52