U. S. 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, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File No. 0-22908
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HOLLYWOOD MEDIA CORP.
(Exact name of registrant as specified in its charter)
Florida 65-0385686
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2255 Glades Road, Suite 237 West
Boca Raton, Florida 33431
--------------------------------------- -------------------
(Address of principal executive offices) (Zip code)
(561) 998-8000
(Registrant's telephone number)
Hollywood.com, Inc.
(Former Name)
Indicated 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
-------- --------
As of November 12, 2001, the number of shares outstanding of the
issuer's common stock, $.01 par value, was 27,315,489.
HOLLYWOOD MEDIA CORP.
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
------
Condensed Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000 .............................. 3
Condensed Consolidated Statements of Operations for the
Nine and Three Months ended September 30, 2001 and 2000
(unaudited) .................................................... 4
Condensed Consolidated Statement of Shareholders' Equity for
the Nine Months ended September 30, 2001 (unaudited) ........... 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2001 and 2000 (unaudited)............ 6
Notes to Condensed Consolidated Financial Statements
(unaudited) .................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................. 20
PART II OTHER INFORMATION
------- -----------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 32
Signature ............................................................... 34
2
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,950,621 $ 1,911,224
Receivables, net 2,105,893 1,866,565
Inventories 7,244,244 106,700
Prepaid expenses 722,588 687,028
Other receivables 484,820 298,751
Other current assets 231,443 240,450
Deferred advertising - CBS 18,845,194 19,131,714
------------- -------------
Total current assets 31,584,803 24,242,432
PROPERTY AND EQUIPMENT, net 2,747,604 2,802,840
INVESTMENTS AND ADVANCES TO EQUITY METHOD INVESTEES 1,270,482 1,814,214
NONCURRENT DEFERRED ADVERTISING - CBS 77,580,123 91,714,019
INTANGIBLE ASSETS, net 2,766,667 3,745,579
GOODWILL, net 42,163,814 44,231,378
OTHER ASSETS 747,040 727,620
------------- -------------
TOTAL ASSETS $ 158,860,533 $ 169,278,082
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,940,529 $ 3,194,105
Other accrued expenses 2,243,403 2,444,113
Notes payable 400,000 750,000
Accrued reserve for closed stores 324,089 798,362
Deferred revenue 7,469,339 1,556,841
Current portion of capital lease obligations 482,844 627,597
------------- -------------
Total current liabilities 12,860,204 9,371,018
------------- -------------
CAPITAL LEASE OBLIGATIONS, less current portion 260,930 721,521
------------- -------------
DEFERRED REVENUE 1,872,153 331,559
------------- -------------
MINORITY INTEREST -- 160,094
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized; 27,043,795
and 24,730,968 shares issued at September 30, 2001 and
December 31, 2000, respectively 270,437 247,309
Deferred compensation -- (102,067)
Additional paid-in capital 280,954,184 271,339,954
Accumulated deficit (137,357,375) (112,791,306)
------------- -------------
Total shareholders' equity 143,867,246 158,693,890
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 158,860,533 $ 169,278,082
============= =============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET REVENUES $ 37,373,358 $ 18,012,265 $ 11,015,892 $ 8,029,020
COST OF REVENUE 23,461,824 6,374,119 6,402,640 3,494,409
------------ ------------ ------------ ------------
Gross margin 13,911,534 11,638,146 4,613,252 4,534,611
------------ ------------ ------------ ------------
OPERATING EXPENSES:
General and administrative 5,372,297 7,979,538 1,657,287 2,768,025
Selling and marketing 3,163,708 8,057,898 1,131,213 2,760,214
Salaries and benefits 9,335,295 8,364,459 3,111,715 3,203,955
Amortization of CBS advertising 14,571,835 14,855,465 4,761,771 5,479,561
Depreciation and amortization 1,146,867 1,050,316 399,307 391,841
Amortization of goodwill and intangibles 5,480,729 5,065,645 1,840,840 1,735,076
Reserve for closed stores and leased termination
costs (289,801) 9,519 -- (236)
------------ ------------ ------------ ------------
Total operating expenses 38,780,930 45,382,840 12,902,133 16,338,436
------------ ------------ ------------ ------------
Operating loss (24,869,396) (33,744,694) (8,288,881) (11,803,825)
EQUITY IN NET EARNINGS - INVESTMENTS 899,060 2,099,865 422,426 845,906
OTHER:
Interest expense (285,518) (280,269) (50,443) (91,851)
Interest income 104,052 78,382 24,722 5,767
Other, net (147,596) 34,599 20,579 6,192
------------ ------------ ------------ ------------
Loss before minority interest (24,299,398) (31,812,117) (7,871,597) (11,037,811)
MINORITY INTEREST (266,671) (276,996) (164,674) (124,141)
------------ ------------ ------------ ------------
Net loss $(24,566,069) $(32,089,113) $ (8,036,271) $(11,161,952)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.96) $ (1.41) $ (0.30) $ (0.47)
============ ============ ============ ============
Weighted average common and common equivalent
shares outstanding - basic and diluted 25,646,794 22,838,794 26,571,807 23,583,009
============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated statements.
4
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
Common Stock Additional
---------------------------- Deferred Paid-in Accumulated
Shares Amount Compensation Capital Deficit Total
----------- ------------- ------------- ------------- ------------- -------------
Balance - December 31, 2000 24,730,968 $ 247,309 $ (102,067) $ 271,339,954 $(112,791,306) $ 158,693,890
Issuance of common stock
in private placements 1,471,128 14,712 -- 6,371,638 -- 6,386,350
Issuance of stock for
acquisitions 239,303 2,393 -- 2,078,765 -- 2,081,158
Reclassification of liability
for exercised put option -- -- -- (452,187) -- (452,187)
Issuance of common stock for
services rendered 22,469 225 -- 94,819 -- 95,044
Issuance of options and warrants
for services rendered -- -- -- 337,568 -- 337,568
Issuance of stock - note extension 20,931 209 -- 118,763 -- 118,972
Employee stock bonus 4,138 41 -- 14,959 -- 15,000
Issuance of common stock - exercise
of warrants 361,438 3,614 -- (3,614) -- --
Issuance of common stock to pay
obligations of Hollywood Media 283,000 2,830 -- 1,458,429 -- 1,461,259
Amortization of employee stock
bonuses -- -- 102,067 -- -- 102,067
Stock option exercise - net issuance 5,020 50 -- (50) -- --
Shares repurchased and retired (94,600) (946) -- (404,860) -- (405,806)
Net loss -- -- -- -- (24,566,069) (24,566,069)
----------- ------------- ------------- ------------- ------------- -------------
Balance - September 30, 2001 27,043,795 $ 270,437 $ -- $ 280,954,184 $(137,357,375) $ 143,867,246
=========== ============= ============= ============= ============= =============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statement.
5
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
---------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(24,566,069) $(32,089,113)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,627,596 6,115,961
Equity in earnings of investments, net of return of invested capital 468,732 (1,099,427)
Issuance of compensatory stock, stock options and warrants for services rendered 447,612 189,310
Amortization of employee stock bonuses 102,067 153,100
Provision for bad debts 283,930 145,816
Provision for inventory obsolescence -- 95,010
Amortization of deferred financing costs -- 6,435
(Reversal) reserve for closed stores and lease terminations costs (289,801) 9,519
Amortization of CBS advertising 14,571,835 14,855,465
Minority interest 266,671 276,996
Changes in assets and liabilities:
Receivables (1,032,461) (691,061)
Prepaid expenses (35,560) 385,057
Inventories (2,980,076) (3,784)
Other current assets 9,007 (65,031)
Other assets (19,420) (89,181)
Accounts payable (454,012) 403,312
Deferred revenue 2,436,359 1,670,954
Other accrued expenses (516,718) 983,425
------------ ------------
Net cash used in operating activities (4,680,308) (8,747,237)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash received 300,000 (247,862)
Loan to Beach Wrestling, LLC (171,380) --
Purchase of web addresses -- (1,070,000)
Capital expenditures (944,067) (1,410,319)
Return of capital from Tekno Books to minority partner (426,765) (395,779)
Loans to MovieTickets.com, net 499,000 --
------------ ------------
Net cash used in investing activities (743,212) (3,123,960)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder/officer loan 1,120,000 2,050,000
Repayments of shareholder/officer loan (1,120,000) (450,000)
Net proceeds from issuance of common stock 6,386,350 8,209,053
Proceeds from exercise of stock options and warrants -- 7,017,363
Loan to shareholder 59,486 (360,516)
Payments to repurchase common stock (405,806) (1,793,726)
Payments under notes payable (350,000) --
Payments under capital lease obligations (227,113) (388,741)
------------ ------------
Net cash provided by financing activities 5,462,917 14,283,433
------------ ------------
Net increase in cash and cash equivalents 39,397 2,412,236
CASH AND CASH EQUIVALENTS, beginning of period 1,911,224 2,475,345
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,950,621 $ 4,887,581
============ ============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 85,314 $ 320,335
============ ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated 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 condensed consolidated financial
statements have been prepared by Hollywood Media Corp. ("Hollywood Media" or
"we") pursuant to the rules and regulations of the Securities and Exchange
Commission. 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, we believe 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 and cash flows for the nine months ended September 30,
2001 are not necessarily indicative of the results of operations or cash flows
which may be recorded for the remainder of 2001. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
audited consolidated financial statements and notes thereto included in the
Annual Report on Form 10-K/A for the year ended December 31, 2000.
In the event that additional funding is required, the Chairman of the Board and
Chief Executive Officer and the Vice Chairman and President of Hollywood Media,
have indicated their intention to provide to Hollywood Media, if required, with
an amount not to exceed $1.25 million in order to meet its working capital
requirements during 2001; provided, however, that the commitment will terminate
to the extent that Hollywood Media raises no less than $1.25 million from other
sources and such additional funding is not expended on acquisitions.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
We changed the revenue recognition method for Hollywood Media's ticketing
businesses from revenue recognized when collection was assured and ticket
delivery to the customer had occurred, to the date of performance of the show,
effective January 1, 2001. We have made purchase accounting adjustments to our
January 1, 2001 balance sheet to reflect the ticket inventory and deferred
revenue as if our current revenue recognition policy had been followed since the
dates of acquisition of our ticketing businesses. See Note 14.
Per Share Amounts
Basic loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. There were
5,583,762 and 3,968,898 options and warrants outstanding at September 30, 2001
and 2000 respectively, that could potentially dilute earnings per share in the
future. Such options and warrants were not included in the computation of
diluted net loss per share because to do so would have been antidilutive for all
periods presented.
7
In addition, the investors of the May 2001 private placement will be entitled to
receive additional shares of common stock upon the exercise of series B
adjustment warrants, for no additional consideration, if the market price
Hollywood Media's common stock falls below $5.19 per share during the stated
adjustment periods. The number of shares issuable during any adjustment period
increases as the average stock price decreases. The maximum number of shares
issuable under the warrants is 1,537,380. These warrants were not included in
the number of outstanding warrants and options disclosed in the preceding
paragraph because the number of adjustment warrants, if any, will be determined
at the conclusion of each adjustment period. See Note 7.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant estimates and assumptions embodied in the accompanying unaudited
condensed financial statements include the adequacy of reserves for accounts
receivables and closed stores and Hollywood Media's ability to realize the
carrying value of goodwill, intangible assets, investments in less than
50%-owned companies and other long-lived assets, including the remaining
carrying value of deferred advertising received from CBS in 2000 in exchange for
shares and warrants of Hollywood Media.
Receivables
Receivables consist of amounts due from customers from the sale of advertising,
syndicated content, live theater tickets, and amounts due from publishers
relating to signed contracts, to the extent that the earnings process is
complete and amounts are realizable. Receivables are net of allowance for
doubtful accounts of $385,008 and $567,702 at September 30, 2001 and December
31, 2000, respectively.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards ("SFAS" 141), Business Combinations and SFAS 142,
Goodwill and Other Intangible Assets. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. SFAS 141 also requires allocation of purchase price to certain
classes of identifiable intangibles. Under SFAS 142, goodwill related to
acquisitions after June 30, 2001 will not be amortized. In addition,
amortization of goodwill related to businesses acquired prior to June 30, 2001
will cease on January 1, 2002. Hollywood Media's annual goodwill amortization is
approximately $5.4 million. Upon adoption of SFAS 142, we will no longer record
goodwill amortization. However, under SFAS 142 recorded goodwill will be subject
to at least an annual assessment for impairment by applying a fair value based
test. The fair value test will first be applied as of the transition date,
January 1, 2002. SFAS 142 requires continued amortization of identifiable
intangibles over their useful lives, except for intangibles with indeterminate
lives, which will not be amortized. The lives of intangibles will no longer be
subject to the 40 year maximum, which exists under the current rules. We are
currently evaluating the provisions of SFAS 141 and 142 and have not yet
determined the effect of these pronouncements on our financial position and
results of operations.
8
In June 2001, the Financial Accounting Standards Board issued Statement 143,
"Accounting for Asset Retirement Obligations". This statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
more significant of these changes includes measuring all future obligations at
fair value and discounting obligations to reflect today's dollars. This
statement requires a cumulative effect approach to recognizing transition
amounts for existing retirement obligations. We do not believe that the adoption
of SFAS 143 will have a material impact on our consolidated results of
operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" and
Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of
Operations - Reporting the Effects of the Disposal of a Segment Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes a single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS 144 retains the
provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001
and the interim periods within. We are currently evaluating the provisions of
SFAS 144 and have not yet determined the effect of this pronouncement on our
financial position and results of operations.
(3) ACQUISITIONS:
In January 2000, we completed the acquisition of the web address Broadway.com
from BroadwayTechnologies Group (seller) for a purchase price of $1.6 million,
paid with $1.0 million in cash and 35,294 shares of common stock, valued at $17
per share, the fair value of the stock on the date of the purchase agreement.
The 35,294 shares of common stock issued were restricted from resale for one
year. Under the terms of the purchase agreement the seller has the right to
require Hollywood Media to repurchase these shares for $17 per share after one
year. The seller exercised this right and Hollywood Media became obligated to
pay $452,187 to the seller. The fair value of the common stock was originally
recorded in equity. Upon exercise of the option we reclassified the amount of
the cash liability from equity to other accrued expenses. The outstanding
balance for this liability at September 30, 2001 was $227,187 and is included in
other accrued expenses. In addition, in April 2001, in exchange for the seller
allowing Hollywood Media to pay the obligation over 12 months, we issued to the
seller a warrant to purchase 40,000 shares of common stock at an exercise price
of $4.15 per share, with a fair value of $170,593, calculated using Black
Scholes. The value of the warrant was expensed in the accompanying condensed
statement of operations as other expense.
On May 1, 2000, we acquired substantially all of the assets of
BroadwayTheater.com, Inc. ("BroadwayTheater.com"), a privately held company, for
$135,000 in cash, 83,214 shares of common stock valued at $14.00 per share, the
closing market price on the date of issuance and options valued at $128,752 to
purchase 12,500 shares of common stock at $9.75 per share. The asset purchase
agreement for BroadwayTheater.com includes an earn-out provision which obligates
Hollywood Media to issue additional shares of common stock to the seller each
year for a three-year period if certain gross profit targets are achieved. The
contingent payment is a fixed number of shares each year (28,571) if gross
profit targets, representing 25% growth over the prior year, are achieved each
year. These gross profit targets were satisfied for year one. As a result, we
issued 28,572 shares of common stock valued at $5.25 per share, the closing
market price on the date of issuance, and recorded the amount as goodwill.
9
Effective September 15, 2000, we acquired Theatre Direct NY, Inc. ("TDI") for
66,291 shares of common stock valued at $505,719 or $7.63 per share and $750,000
in promissory notes. In addition, Hollywood Media issued 195,874 shares of
common stock as contingent consideration to be delivered to the seller if
certain conditions were satisfied at the end of the twelve-month period
following the date of acquisition. On September 26, 2001 these shares were
released from escrow and were valued at $3.63 per share or $711,023, the closing
market price on the date the conditions were satisfied. The value of the shares
was recorded as additional goodwill.
On July 27, 2001 we acquired certain assets of Always Independent Entertainment
Corp. ("AlwaysI"), a privately held company, for 210,731 shares of common stock
valued at $5.79 per share, the closing market price on the date the transaction
closed or $1,220,132. AlwaysI offers independent films to subscribers over the
Internet and licenses films to third parties. Hollywood Media has integrated the
AlwaysI subscription service as a distinct channel on Hollywood.com. Filmmakers
are charged a fee to place their films on the web site and subscribers are
charged a monthly subscription fee to view the films.
The acquisition of BroadwayTheater.com, TDI and AlwaysI were accounted for under
the purchase method of accounting and, accordingly, their operating results have
been included in the consolidated financial statements since the respective
dates of acquisition. The excess of the aggregate purchase price over the fair
value of net assets acquired is being amortized over a useful life of ten years
for acquisitions completed prior to June 30, 2001.
The purchase price was allocated to assets and liabilities as follows:
BroadwayTheater.com
AlwaysI TDI
----------- --------------
2001 2000
----------- -----------
Tangible assets (excluding cash acquired) $ 515,000 $ 1,085,019
Goodwill 405,132 3,150,702
Liabilities assumed -- (2,317,143)
----------- -----------
Total purchase price 920,132 1,918,578
Less value of common stock issued 1,220,132 1,670,716
----------- -----------
Paid, net of cash acquired $ (300,000) $ 247,862
=========== ===========
Purchase price paid as follows:
Net cash acquired $ (300,000) $ (192,938)
Acquisition costs -- 440,800
----------- -----------
$ (300,000) $ 247,862
=========== ===========
The following are unaudited pro forma combined results of operations of
Hollywood Media and TDI for the nine and three months ended September 30, 2000,
as if the acquisition of TDI had occurred on January 1, 2000:
10
Nine Months Three Months
Ended Ended
September 30, September 30,
2000 2000
------------- ------------
Net Revenues $ 35,769,113 $ 13,118,653
============= ============
Net Loss $ (32,059,956) $(11,119,384)
============= ============
Pro Forma Diluted Loss Per Share $ (1.40) $ (.47)
============= ============
Weighted Average Shares Outstanding 22,903,875 23,645,697
============= ============
These unaudited pro forma combined results have been prepared for
comparative purposes only and include certain adjustments, such as additional
goodwill amortization expense. They do not purport to be indicative of the
results of operations which actually would have resulted had the acquired
companies been under common control prior to the date of the acquisition or
which may result in the future. The pre-acquisition results of operations of
BroadwayTheater.com and AlwaysI are not material to the consolidated results of
operations and have therefore been excluded from pro forma combined results of
operations.
(4) DEBT:
In connection with the TDI acquisition on September 15, 2000, Hollywood Media
signed two promissory notes payable to the former owner. The first is an
interest bearing note payable with a face value of $500,000, principal payable
monthly. The note bears interest at Citibank, N.A. prime plus 1% per annum (7.0%
at September 30, 2001). The second promissory note is a one year non-interest
bearing note with a face value of $250,000. The maturity date of both notes has
been extended to March 31, 2002. At September 30, 2001, the outstanding balance
of notes payable is $400,000.
(5) OTHER ACCRUED EXPENSES:
Other Accrued Expenses consist of the following:
September 30, December 31,
2001 2000
---------- ----------
Compensation and benefits $ 750,245 $ 496,032
Insurance 306,690 152,978
Professional fees 184,181 166,182
Licensing fees 47,518 91,800
Interest 140,000 57,159
Royalties 22,597 39,480
Other 792,172 1,440,482
---------- ----------
$2,243,403 $2,444,113
========== ==========
(6) ACCRUED RESERVE FOR CLOSED STORES:
In December 1999, Hollywood Media closed its brick and mortar retail operation
in its entirety and closed its remaining kiosks and in-line stores. Hollywood
Media recorded provisions in 1998, 1999 and 2000 for asset impairments and the
estimated cost of early store lease terminations as a result of exiting the
brick and mortar retail business. The accrued reserve for estimated liabilities
remaining on store lease obligations was $324,089 at September 30, 2001 and
11
$798,362 at December 31, 2000. The accrued reserve was reduced by $289,801
during the nine months ended September 30, 2001 as the result of favorable
settlements related to outstanding lease obligations. Additionally, cash
payments of $184,472 were made during the nine months ended September 30, 2001.
The reserve for closed stores is reviewed by management on a quarterly basis to
determine the adequacy of the reserves based on pending claims. We anticipate
resolution of all matters within the next three months.
(7) COMMON STOCK:
In January 2001, we issued 4,138 shares of restricted common stock valued at
$15,000 or $3.625 per share, the closing market price on the date of issuance,
as an incentive bonus to an officer of Hollywood Media in accordance with an
employment agreement.
In February 2001, we issued 160,000 shares of common stock valued at $799,564 in
exchange for the payment by a third party of $799,564 of certain media, goods
and services obligations of Hollywood Media. The common stock was valued at the
fair value of the outstanding obligations that were paid by the recipient of the
stock.
In May 2001, we issued 1,252,787 shares of common stock valued at $4.51 per
share in a private placement to three accredited investors (including Viacom)
for gross proceeds of $5,650,000. We incurred $263,650 in transaction costs
which were charged to additional paid-in-capital. The purchase price per share
was 105% of the Market Price of the common stock, which was defined as the
average volume weighted average price for 20 business days prior to the closing
date. We issued series A warrants to these investors to purchase an aggregate of
614,059 shares of common stock at a price of $6.44 per share. These warrants
were valued at $1,902,280 using Black Scholes. If on each of January 30, 2002
and April 30, 2002, any such investor holds at least seventy-five percent of the
investor's shares of common stock issued to it in the transaction, then the
exercise price of the series A warrants as to such investor will be decreased to
an exercise price of $5.37 per share and $4.51 per share, respectively, on such
dates. The investors also received series B adjustment warrants to acquire
additional shares of common stock from time to time in amounts in proportion to
each of their respective investments.
The investors of the May 2001 private placement will be entitled to receive
additional shares of common stock upon exercise of the series B adjustment
warrants for no additional consideration if the average market price of the
common stock (as defined) as of October 30, 2001, January 30, 2002, April 30,
2002 or July 30, 2002 is less than $5.19 per share. The series B warrants are
exercisable on the last day of each twenty trading day period beginning on each
of these four dates. The market price of the common stock under the series B
warrants is defined as the average of the ten lowest closing sale prices of the
common stock during the twenty trading days following each of these four dates,
but can be no less than $2.15. The number of shares issuable upon exercise of a
series B warrant on the first of these four exercise dates is equal to (1) $5.19
minus the market price, divided by (2) the market price, and multiplied by (3) a
number of shares specified in each series B warrant. The number of shares
issuable upon exercise of a series B warrant on each of the subsequent three
exercise dates is equal to (1) the lower of $5.19 and the lowest market price as
of any prior exercise date minus the market price, divided by (2) the market
price, and multiplied by (3) a number of shares specified in each series B
warrant. The maximum number of shares issuable under the warrants is 1,537,380.
In May 2001, we issued 28,572 shares of common stock to the previous owners of
BroadwayTheater.com in accordance with the earn-out provision of the Asset
Purchase Agreement. Pursuant to this provision the previous owners are entitled
to additional consideration if specified gross profit targets are attained in
each of the three years following the acquisition. These targets were satisfied
and we issued 28,572 shares of common stock valued
12
at $5.25 per share, the closing market price on the date the earn out
contingency was satisfied or $150,003. The value of the shares was recorded as
additional goodwill.
In May 2001, we issued 22,469 shares of common stock valued at $4.23 per share,
the closing market price on the date of issuance, for payment of book packaging
fees to the CEO of Tekno Books who is also a director of Hollywood Media.
In June 2001, we issued 88,000 shares of common stock valued at $495,795 as a
payment towards outstanding capital lease obligations related to our former
brick and mortar retail operations, pursuant to the terms of a settlement
agreement. The total settlement was $796,000, payable in common stock with the
balance payable in monthly installments of cash.
In July 2001, we issued 35,000 shares of common stock valued at $165,900 as part
of a settlement of outstanding litigation of Hollywood Media. The shares were
valued at the market price of the common stock on the date the litigation was
settled.
On July 27, 2001 we acquired the assets of AlwaysI by issuing 210,731 shares of
common stock valued at $1,220,132 the closing market price on the date the
transaction closed.
On September 26, 2001, 195,874 shares of common stock were released from escrow
and valued at $3.63 per share or $711,023, the closing market price on the date
various conditions were satisfied relating to the acquisition of TDI on
September 15, 2000. The value of the shares was recorded as additional goodwill.
See Note 3.
In September 2001, we issued 218,341 shares of restricted common stock in a
private placement to an accredited investor and received net proceeds of
$1,000,000.
During the nine months ended September 30, 2001, we issued 361,438 shares of
common stock to investors from the August 2000 private placement pursuant to the
exercise of certain adjustment warrants. The fair value of these adjustment
shares on the various dates of issuance was $1,771,997. Hollywood Media was
obligated to issue additional shares to those selling shareholders for no
consideration if the average of the five lowest volume weighted average prices
of the common stock during the final fifteen days of an adjustment period was
below $9.63. The final adjustment period ended September 4, 2001. The precise
number of shares of common stock which were issued were determined in accordance
with a formula set forth in the adjustment warrants. The shares issued pursuant
to the adjustment warrants were recorded as additional paid-in capital.
We issued a total of 20,931 shares of common stock valued at $118,972 during the
nine months ended September 30, 2001 for the extension of the term of a
promissory note that Hollywood Media guaranteed. The borrower on the note, an
employee of a subsidiary of Hollywood Media, is obligated to pay to Hollywood
Media an amount equal to 50% of the value of the shares issued to extend the
maturity date of the note. We recorded $59,486 as interest expense and $59,486
as other receivables.
Additionally, during the nine months ended September 30, 2001, we issued stock
options and warrants valued at $337,568 for services rendered. We recorded
$146,408 as consulting expense, $20,567 as cost of sales and $170,593 as other
expense for the nine months ended September 30, 2001.
13
During the three months ended September 30, 2001, Hollywood Media completed a
net issuance of 5,020 shares of common stock upon the exercise of outstanding
stock options for which no proceeds were received.
Pursuant to Hollywood Media's stock repurchase plan, during the nine months
ended September 30, 2001, we repurchased 94,600 shares of common stock for an
aggregate consideration of $405,806, or an average purchase price of $4.29 per
share.
(8) INVESTMENTS AND ADVANCES TO EQUITY METHOD INVESTEES:
Investments and advances to equity method investees consist of the following:
September 30, December 31,
2001 2000
----------- -----------
NetCo Partners (a) $ 1,082,156 $ 699,331
MovieTickets.com, Inc. (b) 96,699 1,047,383
Beach Wrestling LLC (c) 91,627 67,500
----------- -----------
$ 1,270,482 $ 1,814,214
=========== ===========
(a) NETCO PARTNERS:
Hollywood Media owns a 50% interest in a joint venture called NetCo Partners.
This investment is recorded under the equity method of accounting, recognizing
50% of NetCo Partners' income or loss as Equity in Net Earnings - Investments.
The revenues, gross profit and net income of NetCo Partners for the nine and
three months ended September 30, 2001 and 2000 are presented below:
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues $3,518,245 $5,556,639 $1,591,054 $2,483,866
Gross Profit 2,916,109 4,560,878 1,339,265 1,984,960
Net Income 2,845,994 4,546,059 1,280,393 1,952,583
Company's Share of
Net income 1,422,997 2,273,030 640,196 976,292
As of September 30, 2001, NetCo Partners has $1,724,818 in accounts receivable.
Management of NetCo Partners believes that these receivables will be collected
in full and no reserves have been established. These accounts receivable are not
included in the Hollywood Media's condensed consolidated balance sheets.
NetCo Partners' deferred revenues, consisting of cash advances received but not
yet recognized as revenue, amounted to $105,859 as of September 30, 2001. These
deferred revenues are not included in Hollywood Media's condensed consolidated
balance sheets.
As of September 30, 2001, we received cumulative profit distributions from NetCo
Partners since its formation totaling $6,715,415, in addition to reimbursement
of substantially all amounts advanced by us to fund the operations of NetCo
Partners.
14
(b) MOVIETICKETS.COM, INC.:
Hollywood Media entered into a joint venture agreement on February 29, 2000 with
the movie theater chains AMC Entertainment Inc. and National Amusements, Inc. to
form MovieTickets.com, Inc. ("MovieTickets.com"), in which each venture partner
initially acquired a 33.33% interest in the joint venture. In August 2000, the
joint venture sold a five percent interest in the joint venture to Viacom Inc.
in exchange for $25 million of advertising over 5 years. In 2000, Hollywood
Media issued warrants to acquire 90,573 shares of common stock at an exercise
price of $17.875 per share valued at $1,000,000 to AMC Entertainment Inc. The
fair value of the warrant was recorded as additional investment and is being
amortized over a period of ten years. In March 2001, America Online, Inc.
purchased a 3% (non-dividend) convertible preferred equity interest in
MovieTickets.com for $8.5 million in cash. Hollywood Media owned 31.67% of the
common stock of MovieTickets.com at September 30, 2001.
The investment is accounted for under the equity method of accounting,
recognizing 31.67% of MovieTickets.com income or loss as Equity in Earnings -
Investments. For the nine and three months ended September 30, 2001, we recorded
a loss of $376,684 and $197,770, respectively, from our investment in
MovieTickets.com. For the nine and three months ended September 30, 2000, we
recorded a loss of $173,165 and $130,386, respectively from our investment in
MovieTickets.com. In 2000, we loaned MovieTickets.com $499,000. In 2001, we
loaned MovieTickets.com $100,000. All loans made to MovieTickets.com were repaid
in cash with interest in March 2001.
(c) BEACH WRESTLING LLC:
On November 10, 2000, an indirect wholly owned subsidiary of Hollywood Media
entered into an agreement with Cisneros Television Group ("CTG") and Siegel
Partners to form Beach Wrestling LLC, each having a one-third ownership
interest. Beach Wrestling LLC was formed to develop, market and distribute
wrestling events via television and the Internet under the "Beach Wrestling"
brand. This investment is recorded under the equity method of accounting,
recognizing one-third of Beach Wrestling LLC's income or loss as Equity in
Earnings - Investments. For the nine and three months ended September 30, 2001,
we recorded a loss of $147,253 and $20,000, respectively, from our investment in
Beach Wrestling LLC. At September 30, 2001, the indirect wholly owned subsidiary
of Hollywood Media had loaned $238,880 to Beach Wrestling LLC. All payments by
Hollywood Media's indirect wholly owned subsidiary to Beach Wrestling LLC are
treated as loans and bear interest at the Bank of America reference rate plus 2%
per annum. The loan is included in the investment balance.
(9) BARTER TRANSACTIONS:
Barter arrangements are periodically entered into with other companies to
exchange advertising on each other's web sites. In January 2000, the Emerging
Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB")
reached consensus on EITF Issue No. 99-17, "Accounting for Advertising Barter
Transactions." As permitted under EITF 99-17, we adopted the consensus
prospectively for transactions occurring after January 20, 2000. EITF 99-17
allows gross reporting of advertising barter transactions only where barter
transactions can be supported by an equivalent quantity of similar cash
transactions.
We also record barter revenue and expense under a contract with the National
Association of Theatre Owners ("NATO"). In connection with the NATO contract, we
also acquired rights and obligations under ancillary agreements with individual
theaters that are members of the NATO organization. Pursuant to these
agreements, we provide them with movie showtime information and content, and we
host web sites for the theaters. In addition, we provide ongoing web site
15
maintenance services for the theaters, including providing promotional
materials, movie and theater information and editorial content. In exchange, the
theaters promote the Hollywood.com web site to movie audiences by airing movie
trailers about Hollywood.com 40 out of 52 weeks per year, before feature films
that play in most NATO-member theaters. Hollywood Media records revenue and
expense from these activities measured at the fair value of the services
exchanged.
Barter transactions by type for the nine and three months ended September 30,
2001 and 2000 are as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Barter Advertising $ 104,730 $ 1,464,229 $ 27,591 $ 655,453
Barter - NATO 2,236,313 2,236,313 745,438 745,438
----------- ----------- ----------- -----------
$ 2,341,043 $ 3,700,542 $ 773,029 $ 1,400,891
=========== =========== =========== ===========
Barter transactions accounted for approximately 50% and 49% of net Internet ad
sales revenues for the nine months ended September 30, 2001 and 2000,
respectively, and 47% and 52% of net Internet ad sales revenues for the three
months ended September 30, 2001 and 2000, respectively.
Barter transactions accounted for 6% and 7% of net revenues for the nine and
three months ended September 30, 2001, respectively. Barter transactions
accounted for 21% and 17% of net revenues for the nine and three months ended
September 30, 2000, respectively.
(10) REPORTABLE SEGMENT:
Hollywood Media's reportable segments are ticketing, business to business,
Internet ad sales and other, intellectual properties, e-commerce and retail. The
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 traveling consumers. The business to business segment licenses
entertainment content and data. The business to business segment includes
Baseline (a pay-per-use subscription web site geared towards professionals in
the entertainment industry), CinemaSource (which licenses movie showtimes and
other movie content) and EventSource (which licenses local listings of events
around the country) to media, wireless and Internet companies. The Internet ad
sales and other segment sells advertising on the Hollywood.com and Broadway.com
web sites and offers 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 e-commerce segment, which closed in
January 2001, sold entertainment-related merchandise over the Internet. The
retail segment operated retail studio stores that sold entertainment-related
merchandise and was closed in December 1999.
Management evaluates performance based on a comparison of actual profit or loss
from operations before income taxes, depreciation, amortization, interest, and
nonrecurring gains and losses to budgeted amounts. There are no intersegment
sales or transfers.
The following table illustrates the financial information regarding Hollywood
Media's reportable segments.
16
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net Revenues:
Ticketing (a) $ 26,757,424 $ 4,382,367 $ 7,596,999 $ 3,021,517
Business to Business 4,532,642 3,872,023 1,300,373 1,515,674
Internet Ad Sales and Other 4,638,165 7,548,400 1,644,276 2,679,901
Intellectual Properties 1,429,628 1,389,595 474,244 461,461
E-Commerce (b) 15,499 796,510 -- 350,467
Retail (d) - 23,370 -- --
------------ ------------ ------------ ------------
$ 37,373,358 $ 18,012,265 $ 11,015,892 $ 8,029,020
============ ============ ============ ============
Gross Margin:
Ticketing (a) $ 4,460,544 $ 535,070 $ 1,439,958 $ 322,594
Business to Business 4,323,385 3,682,912 1,242,824 1,465,483
Internet Ad Sales and Other 4,448,102 6,832,485 1,579,622 2,443,624
Intellectual Properties 689,899 543,928 350,648 270,418
E-Commerce (b) (10,396) 88,751 200 77,492
Retail (d) -- (45,000) -- (45,000)
------------ ------------ ------------ ------------
$ 13,911,534 $ 11,638,146 $ 4,613,252 $ 4,534,611
============ ============ ============ ============
Operating Income (Loss):
Ticketing (a) $ 831,866 $ 204,489 $ 285,714 $ 79,088
Business to Business 170,849 281,967 (202,678) 159,661
Internet Ad Sales and other (c) (17,438,556) (24,003,727) (5,614,092) (8,472,163)
Intellectual Properties 411,319 558,036 272,065 309,133
E-Commerce (b) 25,226 (2,021,911) 14,096 (637,756)
Retail (d) 296,349 (91,129) 10,409 (49,071)
Other (Corporate and other) (9,166,449) (8,672,419) (3,054,395) (3,192,717)
------------ ------------ ------------ ------------
$(24,869,396) $(33,744,694) $ (8,288,881) $(11,803,825)
============ ============ ============ ============
Capital Expenditures:
Ticketing (a) $ 51,373 $ -- $ 15,917 $ --
Business to Business 155,846 180,593 29,971 49,858
Internet Ad Sales and Other 463,741 1,074,532 61,933 180,682
Intellectual Properties -- 5,188 -- --
E-Commerce (b) -- 13,347 -- 969
Other (Corporate and other) 273,107 136,659 192,735 --
------------ ------------ ------------ ------------
$ 944,067 $ 1,410,319 $ 330,556 $ 231,509
============ ============ ============ ============
Depreciation and
Amortization Expense:
Ticketing (a) $ 47,833 $ 3,975 17,904 $ 3,975
Business to Business 142,976 86,768 50,654 32,714
Internet Ad Sales and Other 2,295,794 2,020,084 784,889 708,267
Intellectual Properties 3,722 5,355 572 1,575
E- Commerce (b) 1,551 12,831 -- 4,653
Other (Corporate and other) 4,135,720 3,986,948 1,386,128 1,375,733
------------ ------------ ------------ ------------
$ 6,627,596 $ 6,115,961 $ 2,240,147 $ 2,126,917
============ ============ ============ ============
(a) TDI and BroadwayTheater.com, our ticketing businesses, were acquired on
September 15, 2000 and May 1, 2000, respectively. Reported amounts
include results from the dates of acquisition.
(b) The e-commerce segment was closed in January 2001.
(c) Includes $14,571,835 and $14,855,465 in amortization of CBS advertising for
the nine months ended September 30, 2001 and 2000, respectively, and
$4,761,771 and $5,479,561 for the three months ended September 30, 2001 and
2000, respectively.
(d) The retail segment was closed on December 31, 1999.
17
(11) COMMITMENTS AND CONTINGENCIES:
Hollywood Media is a party to various legal proceedings arising in the ordinary
course of business, none of which are expected to have a material adverse impact
on the financial condition or results of operations.
Steven B. Katinsky v. The Times Mirror Company, Hollywood.com, Inc. and
Hollywood Online Inc. filed on September 8, 2000 in Superior Court of the State
of California for the County of Los Angeles. Claim against Tribune Company
(formerly The Times Mirror Company) and the Company seeking a performance cycle
bonus allegedly owing to the plaintiff by Tribune Company in connection with the
sale of Hollywood Online Inc. from Tribune Company to the Company. The claimant
is seeking monetary damages in excess of $19.8 million for alleged fraud by the
defendants in connection with the sale of Hollywood Online Inc. to us. The
lawsuit was dismissed in December 2000 and the parties were ordered to arbitrate
the dispute. The lawsuit is presently in consolidated arbitration with the
Interviews.com v. Hollywood Online, Inc. arbitration referenced below. Hollywood
Media is indemnified by Tribune Company for the amount of any such performance
cycle bonus payable to the plaintiff. We believe that all claims by the claimant
against us are without merit and we intend to defend them vigorously.
Interviews.com v. Hollywood Online, Inc. filed on August 17, 2000 in Superior
Court of the State of California for the County of Los Angeles. The claim was
dismissed in January 2001 and the parties were given the right to arbitrate the
dispute. The lawsuit is presently in consolidated arbitration with the Steven B.
Katinsky v. The Times Mirror Company arbitration referenced above. This dispute
involves a claim by Interviews.com that Hollywood Media's wholly owned
subsidiary, hollywood.com, Inc. (formerly known as Hollywood Online, Inc.), did
not timely perform its obligations with respect to the transfer of several
domain names under an Assignment Agreement dated December 17, 1997.
Interviews.com is owned and controlled by Steven Katinsky, the claimant in the
matter described above. All matters related to this claim occurred prior to the
acquisition of Hollywood Online, Inc. in May 1999 and all domain names subject
to the dispute have been transferred to the claimant. The domain names
transferred were not being utilized by us and were not related to our business.
The claimant is seeking monetary damages in excess of $5 million. We believe
that this claim is without merit and we intend to defend it vigorously.
(12) RECLASSIFICATION:
Certain amounts in the 2000 financial statements have been reclassified to
conform with the 2001 classification.
(13) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
For the Nine Months ended September 30, 2001:
o Warrants to acquire 70,000 shares of common stock at exercise prices of
$3.00 and $4.25 per share and valued at $266,322 were granted to placement
agents for proceeds raised in August of 2000.
o We issued 160,000 shares of common stock valued at $799,564 in exchange for
payment of $799,564 in certain media, goods and services statements of
Hollywood Media by a third party.
o Capital lease transactions totaled $117,564.
18
o We issued 88,000 shares of common stock, valued at $495,795, as a payment
towards outstanding capital lease obligations.
o We issued 20,931 shares of common stock, valued at $118,972 for the
extension of a promissory note. We recorded $59,486 as interest expense and
$59,486 as other receivables.
o We issued 28,572 shares of common stock valued at $150,003 under the terms
of an earnout arrangement.
o Pursuant to the exercise of certain adjustment warrants Hollywood Media
issued 361,438 shares of common stock.
o We issued 35,000 shares of common stock valued at $165,900 to satisfy an
outstanding claim against Hollywood Media.
o We issued 4,138 shares of restricted common stock valued at $15,000, as an
incentive stock bonus to an officer of Hollywood Media.
For the Nine Months ended September 30, 2000:
o Hollywood Media issued 100,000 shares of common stock, valued at
$1,650,000. This amount was accrued for at December 31, 1999 in accrued
reserve for closed stores.
o Warrants to acquire 90,573 shares of common stock at an exercise price of
$17.875 valued at $1.0 million were issued in connection with Hollywood
Media's investment in MovieTickets.com, Inc.
o Hollywood Media recorded $5,468,501 in deferred advertising in connection
with the exercise of warrants by CBS.
o Capital lease transactions totaled $266,822.
o A note payable for $1,928,138 was paid by issuing 152,548 shares of common
stock valued at approximately $12.64 per share.
(14) CHANGE IN METHOD OF REVENUE RECOGNITION FOR TICKETING BUSINESSES:
We acquired our ticketing businesses, BroadwayTheater.com and TDI, in May and
September of 2000, respectively. These businesses generally acquire blocks of
theater tickets for resale to groups and individuals. Post acquisition and
through the first quarter of 2001, consistent with the revenue recognition
methods utilized by both companies prior to our acquisition, we have recognized
revenue generally at the time when collection was assured and ticket delivery to
the customer had occurred. During the second quarter of 2001, we concluded that
in many instances the earnings process for the ticketing businesses was not
completed until the performance of the show, as the businesses provide other
ancillary services up to the date of performance. As a result, effective January
1, 2001, we changed our method of revenue recognition to defer recognition of
revenue on ticket sales until the performance takes place.
Management of Hollywood Media does not believe the effect of the change in
revenue recognition on our previously reported consolidated financial result for
the year ended December 31, 2000 was material (reduction in revenue of
approximately $350,000 or 1.2% and an increase in net loss of $46,000 or ,09%)
to our reported results of operation or financial position.
If the current policy had been applied during 2000, reported ticketing revenues
for the three and nine month period ended September 30, 2000 would have
(increased/decreased) by $433,934 and $(114,357), respectively and reported
gross margin would have increased by $112,291 and $16,164, respectively.
We have made purchase accounting adjustments to record the proceeds received on
ticket sales prior to performance as deferred revenue and payments made to
purchase tickets for performances that have not taken place as inventory in
Hollywood Media's consolidated balance sheet at January 1, 2001.
19
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
"forward-looking statements" with respect to Hollywood Media Corp. which
represent Hollywood Media's expectations or beliefs, including, but not limited
to, statements concerning industry performance, operations, performance,
financial condition, growth, acquisition, and divestiture strategies, margins,
and growth in sales of our products. For this purpose, any statements contained
in this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "estimate," or "continue" or the negative or other variations thereof
or comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond our control, and actual results may differ
materially depending on a variety of important factors. Factors that may affect
Hollywood Media's results include, but are not limited to, our continuing
operating losses and accumulated deficit, our limited operating history, the
need for additional capital to finance our operations, the need to manage our
growth and integrate new businesses, our ability to develop strategic
relationships, our ability to compete with other Internet companies, technology
risks and the general risk of doing business over the Internet, future
government regulation, dependence on our founders, the interests of our largest
shareholder, Viacom Inc., accounting considerations related to our strategic
alliance with Viacom Inc., the volatility of our stock price and the effects of
outstanding warrants that include market-based adjustment features. Hollywood
Media is also subject to other risks detailed herein or detailed in the Annual
Report on Form 10-K/A for the year ended December 31, 2000 and in other filings
by us with the Securities and Exchange Commission.
Overview
We are an entertainment-focused media and Internet company that offers
widely recognized brands and a broad collection of entertainment content data
and related information in the industry, which we license to media and other
companies including The New York Times, AOL Time Warner, Yahoo!, Sprint, AT&T
Wireless, Verizon and others. Hollywood Media owns an extensive ticketing
network and is engaged in the development and licensing of intellectual
properties and licensing of books. We generate revenues through the
business-to-business syndication of entertainment-related content, the sale of
live theater tickets, the sale of advertising and from advances paid by
publishers and royalties received from our library of book titles.
Business to Business Syndication Divisions
CinemaSource. CinemaSource is the largest supplier of movie showtimes
as measured by market share and compiles movie showtimes for every movie theater
in the United States and Canada, representing approximately 36,000 movie
screens. Since its start in 1995, CinemaSource has substantially increased its
operations and currently provides movie showtime listings to more than 200
newspapers, wireless companies, Internet sites, and other media outlets,
including newspapers such as The New York Times and Newsday, Internet companies
including AOL's Digital City, Yahoo!, Lycos, Excite, Ticketmaster, and wireless
providers such as Sprint PCS, AT&T Wireless and Verizon.
20
CinemaSource also syndicates entertainment news, movie reviews, and
celebrity biographies. In addition to charging guaranteed amounts for the data
that it provides to its customers, CinemaSource often shares in the advertising
revenue generated by its customers in connection with the data.
EventSource. We launched the EventSource business in mid-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 live theater.
EventSource entered into an agreement with AOL's Digital City in April 2000 to
provide event listings for up to 200 cities nationwide. In addition to Digital
City, other EventSource customers include the web sites of The New York Times
and Knight Ridder.
TheaterSource. We launched the TheaterSource business in mid-2000 as a
further expansion of the operations of EventSource. TheaterSource compiles and
syndicates a comprehensive database of theater productions and showtimes,
covering shows on Broadway, Off-Broadway, touring companies, community
playhouses, dinner theaters throughout North America and in London's West End
theater district.
ConcertSource. We launched this business in October 2000. ConcertSource
offers extensive local listings of concerts and music-related events from major
arenas to small local jazz clubs, including a complete listing of every
performance from major touring groups to hometown bands. ConcertSource currently
covers concert and event listings for the top 60 markets in the United States.
Baseline. We own and operate Baseline, a business which includes a
pay-per-use subscription web site (located at Baseline.hollywood.com) and
various publications geared to movie studios, investment banks, news agencies,
consulting firms and other professionals in the entertainment industry. We
acquired Baseline from media analyst Paul Kagan. Based on its 16-year history,
we believe that the Baseline business maintains one of the most comprehensive
movie and television-related databases. Baseline is a comprehensive database of
information on over 67,000 films and television programs, as well as biographies
on entertainment industry professionals. This rich, interactive database is
accessible online to our subscribers and includes credits, synopses, reviews and
box office statistics. Baseline continuously tracks production, distribution,
and exhibition of feature films worldwide, including box office projections,
budgets, and trends. Baseline customers include Bloomberg, Daily Variety, People
Magazine, Lexis-Nexis, 20th Century Fox, DreamWorks, Paramount Pictures, Sony
Pictures, MGM, Warner Bros., E! Entertainment Television, Boston Consulting
Group and Booz, Allen, Hamilton.
Ticketing Divisions
Theatre Direct International and Broadway.com. We acquired Theatre Direct
International (TDI) as of September 15, 2000. Founded in 1990, TDI is a live
theater marketing and sales agency serving over 40,000 domestic and
international travel professionals, traveling consumers and New York-area
theater patrons. TDI is a ticketing wholesaler to the travel industry that
provides groups and individuals with access to theater tickets and knowledgeable
service, covering shows on Broadway, long running shows Off-Broadway and shows
in London and Toronto. TDI sells tickets through the 800-Broadway toll-free
number 1-800-BROADWAY, via the Broadway.com web site and by fax. As a marketing
agency, TDI represents 10 producers and 14 Broadway shows to the travel industry
around the world. The 14 Broadway shows are Aida, Beauty and the Beast, Cabaret,
Chicago, Contact, 42nd Street, Mamma Mia!, Kiss Me Kate, Les Miserables, Rent,
The Full Monty, The Lion King, The Music Man and The Phantom of the Opera. In
addition, TDI's education division, Broadway Classroom, markets group tickets to
schools across the country. TDI's offline ticketing service complements the
online
21
ticketing services available on Broadway.com. The combined companies provide
live theater ticketing and related content for all Broadway shows and most shows
running off-Broadway and in London's West End at over 200 venues in multiple
markets to a customer base consisting of over 40,000 travel agencies, tour
operators, corporations and educational institutions, in addition to numerous
newspapers and web site.
MovieTickets.com. MovieTickets.com was launched in late May 2000. At
September 30, 2001, each of Hollywood Media, AMC Entertainment, Inc. and
National Amusements, Inc. owns approximately 31.67% of the outstanding common
stock of MovieTickets.com. MovieTickets.com entered into an agreement with
Viacom Inc. effective August 2000 whereby Viacom acquired a five percent
interest in MovieTickets.com for $25 million of advertising over five years.
MovieTickets.com is promoted through on-screen advertising in each participating
exhibitor's movie screens and through Viacom advertising and promotion. In March
2001, America Online Inc. purchased a 3% (non-dividend) preferred equity
interest in MovieTickets.com for $8.5 million in cash. In connection with that
transaction, MovieTickets.com's ticket inventory is promoted throughout America
Online's interactive properties and AOL Moviefone's ticket inventory is featured
on MovieTickets.com.
MovieTickets.com's current participating exhibitors include AMC
Entertainment Inc., National Amusements, Inc., Famous Players Inc., Hoyts
Cinemas, Marcus Theaters, and several regional exhibitors. These 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 100 grossing theaters in North America. AMC Entertainment Inc. is
the largest movie theater operator in the United States based on box office
sales and Famous Players generates approximately half of all box office sales in
Canada. The MovieTickets.com web site allows users to purchase movie tickets and
retrieve them at "will call" windows or kiosks at theaters. MovieTickets.com
entered into an agreement with Yahoo! Inc. in October 2001, which enables people
to purchase movie tickets online through Yahoo!(R) Movies. The web site also
features bar coded tickets that can be printed at home and presented directly to
the ticket taker at the theater. The web site contains movie content from
Hollywood Media's various divisions for all current and future release movies,
including movie reviews and synopses, digitized movie trailers and photos, and
box office results. The web site generates revenues from service fees charged to
users for the purchase of tickets and the sale of advertising on both the web
site and on the print-at-home ticket. MovieTickets.com has also entered into an
affiliation agreement with Knight Ridder Digital, a subsidiary of Knight Ridder.
Internet Divisions
Hollywood.com. Hollywood.com is a premier entertainment related web
site featuring over one million pages of in-depth movie, television and other
entertainment content, including movie descriptions and reviews, digitized movie
trailers and photos, movie showtimes listings, entertainment news, box office
results, interactive games, movie soundtracks, television listings, concert
information, celebrity profiles and biographies, comprehensive coverage of
entertainment awards shows and film festivals and exclusive video coverage of
movie premieres. In addition, Hollywood.com features content from the Baseline
database. Through the acquisition of AlwaysI in July 2001, the web site now
features a subscription service offering viewers a collection of over 2,000
independent films.
22
We sell banner advertising and sponsorships on Hollywood.com through
relationships with advertising rep. firms and through an internal sales staff.
Some of our recent advertisers include Sony, General Motors, Universal Studios,
The Food Network, Ben & Jerry's Ice Cream, Microsoft, American Movie Classics,
Verizon, HBO, Fox, Proctor & Gamble, Visa, Lion's Gate Films, Diet Coke, New
Line Cinema, MGM, US Army, AT&T and Warner Brothers.
We promote Hollywood.com through our strategic relationships with
Viacom Inc. and NATO. Through exclusive contracts with NATO and 73 of its member
theater exhibitors, we promote the Hollywood.com web site to movie audiences by
airing trailers about Hollywood.com before feature films that play in
participating theaters and by displaying posters and other promotional materials
in those theaters. In exchange, we provide them with movie showtime information
and content as well as develop and maintain the web sites for many theater
exhibitors.
In January 2000 we entered into a strategic, seven-year relationship
with Viacom Inc. that provides for extensive promotion of Hollywood.com and
Broadway.com. Viacom has agreed to provide Hollywood.com and Broadway.com with
$105 million of promotion across its full range of CBS media properties,
including the CBS television network, CBS owned and operated television
stations, CBS cable networks, Infinity Broadcasting Corporation's radio stations
and outdoor billboards and CBS syndicated television and radio programs. The
promotion provided by Viacom is valued based upon the average price charged by
Viacom for similar promotions during the applicable time period. Viacom has
agreed to include Hollywood.com in all advertising sale programs and
presentations that are appropriate for the sale of advertising on the web site.
At September 30, 2001, we had approximately $72 million of advertising
remaining with CBS.
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 (See - Ticketing Divisions); theater showtimes for
virtually all professional live theater venues in the U.S. as well as London's
West End and hundreds of college and local live theater venues; the latest
theater news; interviews with stage actors and playwrights; opening-night
coverage; original theater reviews; and video excerpts from selected shows.
Broadway.com also offers current box office results, show synopses, cast and
crew credits and biographies, digitized show previews, digitized showtunes, and
an in-depth Tony Awards(R) area. Broadway.com generates revenue from ticket
sales, advertising sales, and syndication of its content to other media
companies.
We launched 1-800-BROADWAY on November 2, 2001. By calling
1-800-BROADWAY, consumers can now purchase live theater tickets via their
telephone. We will also be integrating 1-800-BROADWAY into future Broadway.com
marketing initiatives, including radio and television.
23
Intellectual Properties Business
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
is engaged in the development and licensing of 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. NetCo Partners owns Tom Clancy's NetForce which was
licensed to Putnam Berkley for a series of mass market paperbacks and to ABC
Television for a television mini-series and video distribution in accordance
with the terms of the partnership agreement, and the other properties have
reverted back to Hollywood Media.
Book Development and Book Licensing. Our intellectual properties
division also includes a book development and book licensing operation through
our 51% owned subsidiary, Tekno Books, that develops and executes book projects,
typically with best-selling authors and then licenses them to publishers who
publish the books and pay license fees in the form of advances and royalties to
Tekno Books. Tekno Books has worked with approximately 50 New York Times
best-selling authors, including Tom Clancy, Elizabeth George, Nora Roberts,
Jonathan Kellerman, Dean Koontz, Tony Hillerman, Robert Ludlum and Scott Turow,
and numerous media celebrities, including David Copperfield, Louis Rukeyser and
Willard Scott. Our intellectual properties division has licensed books for
publication with more than 60 book publishers, including HarperCollins, Bantam
Doubleday Dell, Random House, Simon & Schuster, Penguin Putnum and Warner Books.
The book development and book licensing division has developed and executed book
projects for approximately 1,300 books. The Chief Executive Officer of Tekno
Books, Dr. Martin H. Greenberg, is also a director of Hollywood Media and owner
of the remaining 49% interest in Tekno Books.
Tekno Books also owns a 50% interest in Mystery Scene Magazine, a trade journal
of the mystery genre of which Dr. Greenberg is co-publisher. During 1995,
Hollywood Media directly acquired an additional 25% interest in the magazine.
Intellectual Properties. Our intellectual properties division owns the
exclusive rights to intellectual properties, which are complete stories and
ideas for stories, created by best-selling authors and media celebrities. Some
examples of our intellectual properties are Anne McCaffrey's Acorna the Unicorn
Girl, Leonard Nimoy's Primortals, and Mickey Spillane's Mike Danger. We license
rights to our intellectual properties to companies such as book publishers, film
and television studios, multimedia software companies and producers of other
products. These licensees develop books, television series and other products
based on the intellectual properties licensed from us. 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).
Results of Operations
The following table summarizes Hollywood Media's net revenues, cost of revenues
and gross margin by division for the nine months ended September 30, 2001
("Y3-01") and 2000 ("Y3-00") and the three months ended September 30, 2001
("Q3-01") and 2000 ("Q3-00"), respectively:
24
Internet Ad
Business to Sales and Intellectual E-
Ticketing Business Other Properties Commerce Retail Total
----------- ---------- ---------- ---------- --------- -------- -----------
Y3-01
-----
Net Revenues $26,757,424 $4,532,642 $4,638,165 $1,429,628 $ 15,499 $ -- $37,373,358
Cost of Revenues 22,296,880 209,257 190,063 739,729 25,895 -- 23,461,824
----------- ---------- ---------- ---------- --------- -------- -----------
Gross Margin $ 4,460,544 $4,323,385 $4,448,102 $ 689,899 $ (10,396) $ -- $13,911,534
=========== ========== ========== ========== ========= ======== ===========
Y3-00
-----
Net Revenues $ 4,382,367 $3,872,023 $7,548,400 $1,389,595 $ 796,510 $ 23,370 $18,012,265
Cost of Revenues 3,847,297 189,111 715,915 845,667 707,759 68,370 6,374,119
----------- ---------- ---------- ---------- --------- -------- -----------
Gross Margin $ 535,070 $3,682,912 $6,832,485 $ 543,928 $ 88,751 $(45,000) $11,638,146
=========== ========== ========== ========== ========= ======== ===========
Q3-01
-----
Net Revenues $ 7,596,999 $1,300,373 $1,644,276 $ 474,244 $ -- $ -- $11,015,892
Cost of Revenues 6,157,041 57,549 64,654 123,596 (200) -- 6,402,640
----------- ---------- ---------- ---------- --------- -------- -----------
Gross Margin $ 1,439,958 $1,242,824 $1,579,622 $ 350,648 $ 200 $ -- $ 4,613,252
=========== ========== ========== ========== ========= ======== ===========
Q3-00
-----
Net Revenues $ 3,021,517 $1,515,674 $2,679,901 $ 461,461 $ 350,467 $ -- $ 8,029,020
Cost of Revenues 2,698,923 50,191 236,277 191,043 272,975 45,000 3,494,409
----------- ---------- ---------- ---------- --------- -------- -----------
Gross Margin $ 322,594 $1,465,483 $2,443,624 $ 270,418 $ 77,492 $(45,000) $ 4,534,611
=========== ========== ========== ========== ========= ======== ===========
Composition of our segments is as follows:
o Ticketing - Includes our TDI ticketing business as well as our Broadway.com
online ticketing operations and 1-800-BROADWAY. TDI and BroadwayTheater.com
were acquired on September 15, 2000 and May 1, 2000, respectively therefore
the reported numbers presented include ticketing revenue and expenses from
the date of acquisition.
o Business to Business (b2b) - Includes our CinemaSource, EventSource,
TheaterSource, ConcertSource and Baseline syndication operations.
o Internet ad sales and other - Includes advertising sold on the web sites
Hollywood.com and Broadway.com and the AlwaysI subscription service which
offers films to subscribers over the Internet.
o Intellectual Properties - Includes our book development and book licensing
operation through our 51% owned subsidiary Tekno Books and our 50.5%
interest in Fedora, publisher of Mystery Scene Magazine. Does not include
our 50% interest in NetCo Partners.
o E-Commerce - We exited the e-commerce business in January 2001.
o Retail - We exited the brick and mortar retail business on
December 31, 1999.
NET REVENUES
Total net revenues for the nine months ended September 30, 2001 and 2000 were
$37,373,358 and $18,012,265 respectively, an increase of $19,361,093 or 107%.
Net revenue for the three months ended September 30, 2001 increased to
$11,015,892 from $8,029,020 for the three months ended September 30, 2000, an
increase of $2,986,872 or 37%. The increase in revenue is primarily the result
25
of ticketing revenue reported resulting from the acquisitions of TDI on
September 15, 2000 and BroadwayTheater.com on May 1, 2000 and additional
business to business revenues generated because of the launch of EventSource on
April 1, 2000 offset by a decrease in Internet ad sales of $2,910,235 and
$1,035,625 for the nine and three months ended September 30, 2001, respectively.
Ticketing revenue for Y3-01 and Y3-00 was $26,757,424 and $4,382,367
respectively, an increase of $22,375,057. Ticketing revenue for Q3-01 and Q3-00
was $7,596,999 and $3,021,517 respectively, an increase of $4,575,482. Hollywood
Media acquired TDI on September 15, 2000 and BroadwayTheater.com on May 1, 2000;
therefore reportable revenues are from the dates of acquisition. Ticketing
revenue is generated from the sales of live theater tickets for Broadway,
Off-Broadway, London's West End and Toronto both online and offline, to domestic
and international travel professionals, traveling consumers and New York area
theater patrons. In addition, tickets can be purchased on the Broadway.com web
site.
Revenues from our business to business segment (which includes CinemaSource,
EventSource, and Baseline) increased $660,619 or 17% from $3,872,023 for Y3-00
to $4,532,642 for Y3-01 and decreased $215,301 or 14% from $1,515,674 for Q3-00
to $1,300,373 for Q3-01. The increase in revenue in Y3-01 is attributable to a
growth in our EventSource division which launched on April 1, 2000 when we
entered into a contract with AOL's Digital City to provide event listings for up
to 200 markets nationwide. Revenue decreased in Q3-01 as compared to Q3-00 due
to a temporary decrease in revenues in our Baseline operations due to the impact
of the events of September 11, 2001. Baseline, which operates a pay-per use
subscription Web site geared towards professionals in the entertainment
industry,is located in lower Manhattan and lost internet connectivity for a
period of time following the September 11th events. Internet connectivity has
since been restored. The events of September 11 did not impact our CinemaSource
or EventSource business as these business units are located in Connecticut.
Revenue for CinemaSource and EventSource is generated by the licensing of movie,
event and theater showtimes and other information to newspapers such as The New
York Times, Internet companies including AOL's Digital City, Yahoo!, Excite and
Lycos and wireless providers such as Sprint PCS, AT&T Wireless and Verizon.
Baseline, which operates a pay-per use subscription Web site geared towards
professionals in the entertainment industry,
Internet ad sales and other revenue for Y3-01 decreased to $4,638,165 from
$7,548,400 for Y3-00, a decrease of $2,910,235 or 39%; and decreased $1,035,625
or 39% from $2,679,901 for Q3-00 to $1,644,276 for Q3-01. The decreases in
Internet ad sales and other revenue is primarily the result of a decrease in
barter transactions due to a decision by Hollywood Media to accept less barter,
and the softening of the online advertising market as a whole. Internet ad sales
and other revenue is derived from the sale of banner advertisements and
sponsorships on the Hollywood.com and Broadway.com web sites.
Barter transactions that generate non-cash advertising revenue, (included in
Internet ad sales and other revenues), in which we received advertising or other
services in exchange for content or advertising on its websites was $104,730 for
Y3-01 and $1,464,229 for Y3-00, a decrease of $1,359,499, or 93%, and accounted
for 0.3% and 8% of total net revenue for Y3-01 and Y3-00, respectively. Barter
revenue for Q3-01 was $27,591 as compared to $655,453 for Q3-00, a decrease of
$627,862, or 96%, and accounted for 0.3% and 8% of net revenues for Q3-01 and
Q3-00, respectively. In future periods, management intends to maximize cash
advertising revenue, although we will continue to enter into barter
relationships when deemed appropriate as a cashless method for us to market our
business.
Hollywood Media also records barter revenue earned under a contract with NATO.
This revenue is included in Internet ad sales and other revenue. An equal amount
of expense is recorded each period in selling and marketing expenses. Through
the NATO contract, Hollywood Media promotes its web site to movie audiences by
airing movie trailers about Hollywood.com, 40 out of 52 weeks per year, before
the feature films that play in most NATO-member theaters. In exchange, we
provide them with movie showtime information and content, host and maintain the
web sites for the exhibiting NATO members, and provide promotional materials,
movie
26
information and editorial content. Barter revenue of $2,236,313 was recorded
under the NATO contract for Y3-01 and Y3-00, and accounted for 6% and 12% of
total net revenue for Y3-01 and Y3-00, respectively. In Q3-01 and Q3-00 we
recorded $745,438 in revenue under the NATO contract or 7% and 9% of total net
revenue, respectively.
Total barter transactions accounted for approximately 50% and 49% of net
Internet ad sales and other revenue for Y3-01 and Y3-00, respectively, and 47%
and 52% of net Internet ad sales and other revenue for Q3-01 and Q3-00,
respectively.
Revenues from our intellectual properties segment increased $40,033 or 3% to
$1,429,628 for Y3-01 from $1,389,595 for Y3-00 and increased $12,783 or 3% from
$461,461 for Q3-00 to $474,244 for Q3-01. The increase in revenues is
attributable to a greater number of manuscripts being delivered for Y3-01 and
Q3-01 as compared to Y3-00 and Q3-00. The intellectual properties division
generates revenues from several different activities including book development
and licensing, intellectual property licensing, and publishing Mystery Scene
Magazine. Revenues vary quarter to quarter dependent on the various stages of
the book projects. Revenues are recognized when the earnings process has been
completed based on the terms of the various agreements and when ultimate
collection of such revenues is no longer subject to contingencies.
E-commerce revenue decreased $781,011 or 98% from $796,510 for Y3-00 to $15,499
for Y3-01 as a result of the closure of our e-commerce business in January 2001.
Retail revenues were $23,370 for Y3-00 and Q3-00. The revenue recognized in
Y3-00 and Q3-00 represents proceeds received for the liquidation of inventory
remaining after the closure of all the retail locations in December 1999.
COST OF REVENUE
Cost of revenue increased to $23,461,824 for Y3-01 from $6,374,119 for Y3-00 and
increased to $6,402,640 for Q3-01 from $3,494,409 for Q3-00. As a percentage of
net revenues, cost of revenues was 63% for Y3-01 as compared to 35% for Y3-00
and 58% for Q3-01 as compared to 44% for Q3-00. The increase in the cost of
revenues is primarily the result of the addition of ticketing cost to our cost
of revenues following the acquisitions of TDI on September 15, 2000 and
BroadwayTheater.com on May 1, 2000; therefore ticket cost is included in
reported numbers from the dates of acquisition. The ticketing segment accounts
for 95% and 96% of the cost of revenues for Y3-01 and Q3-01, respectively. Cost
of revenues consists primarily of the cost of tickets for the ticketing segment;
commissions due to advertising agencies, ad rep firms and other third parties
for revenue generated from the business to business and Internet ad sales
segments and fees and royalties paid to authors and co-editors for the
intellectual properties segment.
GROSS MARGIN
Gross margin for Y3-01 was $13,911,534 as compared to $11,638,146 for Y3-00 an
increase of $2,273,388 or 20%. Gross margin for Q3-01 was $4,613,252 as compared
to $4,534,611 for Q3-00, an increase of $78,641 or 2%. Gross margins primarily
increased because of the increase in revenue from our ticketing segment which
was partially offset by decreased margins in our internet ad sales segment. As a
percentage of net revenues, the gross margin percentage in Y3-01 was 37% as
compared to 65% in Y3-00, and 42% for Q3-01 as compared to 56% for Q3-00. The
decrease in gross margin percentage is attributable to our ticketing segment
which was added as a new business segment through the acquisitions of TDI on
September 15, 2000 and BroadwayTheater.com, Inc on May 1, 2000. The ticketing
segment generates gross margin percentages of approximately 17% while our
27
business to business and Internet ad sales segments generate gross margin
percentages of greater than 90%. The addition of ticketing revenue into our mix
of revenue streams has therefore reduced the overall gross margin percentage.
EQUITY IN NET EARNINGS - INVESTMENTS
Equity in net earnings of investments consists of the Company's 50% interest in
NetCo Partners, 31.67% interest in MovieTickets.com and 33.33% interest in Beach
Wrestling LLC.
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- ----------------------
2001 2000 2001 2000
---------- ---------- --------- ---------
NetCo Partners (a) $1,422,997 $2,273,030 $ 640,196 $ 976,292
MovieTickets.com (b) (376,684) (173,165) (197,770) (130,386)
Beach Wrestling LLC (c) (147,253) -- (20,000) --
---------- ---------- --------- ---------
$ 899,060 $2,099,865 $ 422,426 $ 845,906
=========== ========== ========= =========
(a) NetCo Partners:
Our 50% share in the earnings of NetCo Partners decreased $850,033 or 37% to
$1,422,997 for Y3-01 from $2,273,030 for Y3-00. Equity in earnings for Q3-01 was
$640,196 as compared to $976,292 for Q3-00 a decrease of $336,096 or 34%.
Revenue is recognized on book contracts when the earnings process is complete
based on the terms of the contracts and at the point where ultimate collection
is substantially assured.
(b) MovieTickets.com:
We own approximately 31.67% of the outstanding common stock of MovieTickets.com
Inc. at September 30, 2001. The MovieTickets.com web site launched in May 2000.
We recorded our 31.67% share of losses generated of $376,684 and $173,165 for
Y3-01 and Y3-00, respectively, and $197,770 and $130,386 for Q3-01 and Q3-00,
respectively. MovieTickets.com generates revenues from service fees charged to
users for the purchase of tickets and the sale of advertising on its web site
and on print-at-home tickets. Service fees were introduced in November 2000.
(c) Beach Wrestling LLC:
We own 33.33% of Beach Wrestling LLC ("Beach Wrestling") and recorded our share
of losses generated of $147,253 and $20,000 for the nine and three months ended
September 30, 2001, respectively. Beach Wrestling was formed to develop, market
and distribute wrestling events via television and the Internet. Beach Wrestling
is currently in the developmental stage.
OPERATING EXPENSES
General and administrative expenses. General and administrative expenses
decreased $2,607,241 or 33% to $5,372,297 for Y3-01 from $7,979,538 for Y3-00,
and $1,110,738 or 40% to $1,657,287 for Q3-01 from $2,768,025 for Q3-00. These
decreases are primarily attributable to cost savings and consolidation measures
implemented company-wide, including closing our Santa Monica, California office
in January 2001 as well as closing our e-commerce division in January 2001 and
savings in the areas of recruitment, consulting and freelance fees of $3,393,113
and $1,058,892 for Y3-01 and Q3-01, respectively. The reductions in general and
administrative expenses were offset by an increase in general and administrative
expenses of $916,646 and $191,288 for Y3-01 and Q3-01, respectively, in our
ticketing businesses as a result of the acquisitions of the ticketing businesses
28
in May and September of 2000. As a percentage of revenue, general and
administrative expenses decreased to 14% for Y3-01 from 44% for Y3-00 and
decreased to 15% for Q3-01 from 34% for Q3-00.
Selling and marketing expenses. Selling and marketing expenses decreased
$4,894,190 or 61% to $3,163,708 for Y3-01 from $8,057,898 for Y3-00 and
decreased $1,629,001 or 59% to $1,131,213 for Q3-01 from $2,760,214 for Q3-00.
Included in selling and marketing are non-cash barter transactions of $2,341,043
and $3,700,542 for Y3-01 and Y3-00, respectively, and $773,029 and $1,400,891
for Q3-01 and Q3-00, respectively. Barter transactions accounted for
approximately 74% and 46% of selling and marketing expense for Y3-01 and Y3-00,
respectively, and 68% and 51% for Q3-01 and Q3-00, respectively. The decrease in
selling and marketing was primarily due to the reductions of on-line advertising
and media production. As a percentage of revenue, selling and marketing expenses
decreased to 8% for Y3-01 from 45% for Y3-00 and decreased to 10% for Q3-01 from
34% for Q3-00.
Salaries and benefits. Salaries and benefits increased $970,836 or 12% to
$9,335,295 for Y3-01 from $8,364,459 for Y3-00 and decreased $92,240 or 3% to
$3,111,715 for Q3-01 from $3,203,955 for Q3-00. The increase for the nine months
ended is primarily attributable to payroll costs of $1,715,361 associated with
TDI, which we acquired on September 15, 2000 and the launch of our EventSource
business in April 2000, and an increase in personnel at the corporate offices to
support the growth of Hollywood Media, offset by reductions in salaries from
consolidation of technology and production from our Santa Monica, California
location into our South Florida location and the closing of our e-commerce
division. As a percentage of revenue, salaries and benefits decreased to 25% for
Y3-01 from 46% for Y3-00 and decreased to 28% for Q3-01 from 40% to Q3-00.
Amortization. Amortization of goodwill and intangibles was $5,480,729 and
$5,065,645 for Y3-01 and Y3-00, respectively, an increase of $415,084 or 8%, and
$1,840,840 and $1,735,076 for Q3-01 and Q3-00, respectively, an increase of
$105,764 or 6%. The increases in amortization are primarily attributable to
goodwill amortization related to acquisitions made in 2000.
Amortization of CBS advertising relating to the agreement with Viacom was
$14,571,835 for Y3-01 and $14,855,465 for Y3-00, respectively, and $4,761,771
and $5,479,561 for Q3-01 and Q3-00 respectively. Under the agreement with
Viacom, we issued shares of Common Stock and warrants in consideration for CBS's
advertising and promotional efforts over seven years across its full range of
media properties. The value of the common stock and warrants issued to Viacom
have been recorded in the balance sheet as deferred advertising and is being
amortized over each related contract year.
Depreciation and amortization. Depreciation and amortization was $1,146,867 for
Y3-01 and $1,050,316 for Y3-00, an increase of $96,551 or 9%, and $399,307 for
Q3-01 and $391,841 for Q3-00, an increase of $7,466 or 2%. The increases are
attributable to an increased level of property and equipment from September 30,
2000 to September 30, 2001 of approximately $1.3 million.
Interest Expense. Interest expense for Y3-01 was $285,518 compared to $280,269
for Y3-00 and $50,443 for Q3-01 as compared to $91,851 for Q3-00.
29
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, Hollywood Media had cash and cash equivalents of
$1,950,621 and working capital of $18,724,599 compared to cash and cash
equivalents of $1,911,224 and a working capital of $14,871,414 at December 31,
2000. Net cash used in operating activities during Y3-01 was $4,680,308
primarily representing cash used to fund Hollywood Media's net loss and
additions to ticketing inventory, excluding non-cash expenses and amortization
of CBS advertising. Net cash used in investing activities was $743,212,
primarily capital expenditures, while $5,462,917 in cash was provided by
financing activities, primarily proceeds from issuance of common stock. As a
result of the above, cash and cash equivalents increased by $39,397 for the nine
months ended September 30, 2001. During the nine months ended September 30,
2000, net cash used in operating activities was $8,747,237, net cash used in
investing activities was $3,123,960, and $14,283,433 in cash was provided by
financing activities.
Pursuant to Hollywood Media's stock repurchase plan 94,600 shares of its common
stock were repurchased during the nine months ended September 30, 2001 for an
aggregate consideration of $405,806 or an average purchase price of $4.29 per
share.
In May 2001, we issued 1,252,787 shares of common stock valued at $4.51 per
share in a private placement to three accredited investors (including Viacom)
for gross proceeds of $5,650,000. We incurred $263,650 in transaction costs
which were charged to additional paid-in-capital. The purchase price per share
was 105% of the Market Price of the common stock, which was defined as the
average volume weighted average price for 20 business days prior to the closing
date. We issued Series A warrants to these investors to purchase an aggregate of
614,059 shares of common stock at a price of $6.44 per share. These warrants
were valued at $1,902,280. If on each of January 30, 2002 and April 30, 2002,
any investor holds at least seventy-five percent of any of the investor's shares
of common stock issued to it in the transaction, then the exercise price of the
Series A warrants as to such investor will be decreased to an exercise price of
$5.37 per share and $4.51 per share, respectively, on such dates. The investors
also received Series B adjustment warrants to acquire additional shares of
common stock from time to time in amounts in proportion to each of their
respective investments.
In September 2001, we issued 218,341 shares of common stock in a private
placement to an accredited investor and received net proceeds of $1,000,000.
In the event that Hollywood Media requires additional funding, the Chairman of
the Board and Chief Executive Officer and the Vice Chairman and President, have
indicated their intention to provide, if required, an amount not to exceed $1.25
million in order to enable Hollywood Media to meet its working capital
requirements during 2001; provided, however, that the commitment will terminate
to the extent that Hollywood Media raises no less than $1.25 million from other
sources and such additional funding is not expended on acquisitions. During
2001, we drew $1,120,000 of such funding which was repaid during 2001.
INFLATION AND SEASONALITY
Although Hollywood Media cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on its revenues
or results of operations. We consider our businesses to be somewhat seasonal and
expect net revenues to be generally higher during the second and fourth quarters
of each fiscal year for its Tekno Books book development and licensing operation
as a result of the general publishing industry practice of paying royalties
semi-annually. In addition, although not seasonal, our intellectual properties
division and NetCo Partners both experience significant fluctuations in their
respective revenue streams, earnings and cash flow as a result of the
significant amount of time that is expended in the creation and development of
the intellectual properties and their respective licensing agreements. While
certain of the development costs are incurred as normal recurring operating
expenses, the recognition of licensing revenue is typically triggered by
specific contractual events which occur at different points in time rather than
on an evenly recurring basis. We believe that advertising sales in traditional
media, such as television generally are lower in the first and third quarters of
each year, and that advertising fluctuates with economic cycles.
30
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2001, we issued 91,228
shares of common stock to investors from the August 2000 private placement
pursuant to the exercise of certain adjustment warrants. The final adjustment
period ended September 4, 2001. The precise number of shares of common stock
which were issued were determined in accordance with a formula set forth in the
adjustment warrants.
We issued a total of 5,316 shares of common stock valued at $31,790
during the three months ended September 30, 2001 for the extension of the term
of a promissory note that Hollywood Media guaranteed. The borrower on the note,
an employee of a subsidiary of Hollywood Media, is obligated to pay to Hollywood
Media an amount equal to 50% of the costs incurred for payment of the extension
by Hollywood Media.
In July 2001, we issued 35,000 shares of common stock as part of a
settlement of outstanding litigation valued at $165,900.
On July 27, 2001, we acquired the assets of AlwaysI by issuing 210,731
shares of common stock valued at $1,220,132.
In September 2001, we issued 218,341 shares of common stock in a
private placement to an accredited investor and received net proceeds of
$1,000,000.
During the quarter ended September 30, 2001, we issued stock options to
purchase an aggregate of 62,000 shares of common stock, at exercise prices
ranging from $4.71 per share to $6.18 per share. Options granted to employees
are subject to vesting periods ranging from six months to four years and
generally expire five years from the date of issuance.
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, as transactions by an issuer not
involving a public offering, each recipient of securities having delivered
appropriate investment representations to the Company with respect thereto and
having consented to the imposition of restrictive legends upon the certificates
evidencing such securities.
31
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Incorporated by
Exhibit Description Reference From
------- ----------- --------------
3.1 Third Amended and Restated Articles of Incorporation (1)
3.2 Articles of Amendment to Articles of Incorporation of
the Company for Designation of Preferences, Rights
and Limitations of 7% Series D Convertible Preferred
Stock (2)
3.3 Articles of Amendment to Articles of Incorporation of
the Company for Designation of Preferences, Rights
and Limitations of 7% Series D-2 Convertible
Preferred Stock (3)
3.4 Articles of Amendment to Articles of Incorporation of
the Company amending Designation of Preferences,
Rights and Limitations of Series A Variable Rate
Convertible Preferred Stock (4)
3.5 Articles of Amendment to Articles of Incorporation of
the Company amending Designation of Preferences,
Rights and Limitations of Series B Variable Rate
Convertible Preferred Stock (4)
3.6 Bylaws (5)
4.1 Form of Common Stock Certificate (5)
4.2 Rights Agreement dated as of August 23, 1996 between
the Company and American Stock Transfer & Trust
Company, as Rights Agent (6)
10.1 Investment and Subscription Agreement made and
entered into as of September 17, 2001, between
Hollywood Media Corp. and Zeke, L.P., a Delaware
limited partnership. *
10.2 Purchase Agreement made as of October 12, 2001,
between Broadway.com, Inc., Robert DeVivio and Peter
Falconello. *
* Filed as an exhibit to this Form 10-Q.
(1) Incorporated by reference from the exhibit filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
(2) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998.
(3) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form S-3 (No. 333-68209).
(4) Incorporated by reference from exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999.
(5) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 33-69294).
32
(6) Incorporated by reference from exhibit 1 to the Company's Current
Report on Form 8-K filed on October 20, 1999.
(a) Reports on Form 8-K
Hollywood Media did not file any Current Report on Form 8-K during the
quarter ended September 30, 2001.
33
SIGNATURE
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 13, 2001 By: /s/ Mitchell Rubenstein
------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
(Principal executive, financial and
accounting officer)