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 March 31, 2002
[ ] 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)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- -------
As of May 9, 2002, the number of shares outstanding of the issuer's
common stock, $.01 par value, was 28,646,111.
HOLLYWOOD MEDIA CORP.
TABLE OF CONTENTS
PAGE(S)
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PART I FINANCIAL INFORMATION
------ ---------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2002
(unaudited) and December 31, 2001.................................................... 2
Consolidated Statements of Operations for the Three
Months ended March 31, 2002 and 2001 (unaudited) .................................... 3
Consolidated Statement of Shareholders' Equity for the
Three Months ended March 31, 2002 (unaudited)........................................ 4
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2002 and 2001 (unaudited)..................................... 5
Notes to Consolidated Financial Statements (unaudited)............................... 6-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................... 19-31
PART II OTHER INFORMATION
------- -----------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................... 33
Signature ......................................................................................... 35
1
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,337,451 $ 1,980,966
Receivables, net 1,853,895 1,507,199
Inventories, net 8,929,159 7,086,444
Prepaid expenses 831,114 746,482
Other receivables 782,032 600,537
Other current assets 7,053 --
Deferred advertising - CBS 13,054,321 13,054,321
------------- -------------
Total current assets 26,795,025 24,975,949
PROPERTY AND EQUIPMENT, net 4,327,614 2,792,512
INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES 1,011,467 1,522,519
NONCURRENT DEFERRED ADVERTISING - CBS 65,542,431 70,120,029
INTANGIBLE ASSETS, net 3,478,072 2,344,089
GOODWILL, net 40,655,452 40,655,452
OTHER ASSETS 995,547 959,669
------------- -------------
TOTAL ASSETS $ 142,805,608 $ 143,370,219
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,037,851 $ 1,668,494
Other accrued expenses 1,730,421 2,187,425
Notes payable 250,000 350,000
Loan from shareholder/officer 1,000,000 450,000
Advances from factor 296,788 341,856
Accrued exit and retail closure costs 303,543 42,144
Deferred revenue 11,288,438 8,968,641
Current portion of capital lease obligations 603,635 659,620
------------- -------------
Total current liabilities 17,510,676 14,668,180
------------- -------------
CAPITAL LEASE OBLIGATIONS, less current portion 356,540 458,390
------------- -------------
DEFERRED REVENUE 886,466 1,072,153
------------- -------------
MINORITY INTEREST -- --
------------- -------------
OTHER DEFERRED LIABILITIY 3,145,211 --
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized; 28,646,111
and 27,971,409 shares issued and outstanding at March 31, 2002 and
December 31, 2001, respectively 286,461 279,714
Deferred compensation (1,604,221) (2,174,368)
Additional paid-in capital 284,381,464 283,687,361
Accumulated deficit (162,156,989) (154,621,211)
------------- -------------
Total shareholders' equity 120,906,715 127,171,496
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 142,805,608 $ 143,370,219
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
2
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
NET REVENUES $ 12,910,753 $ 10,877,772
COST OF REVENUES 8,441,472 6,767,165
------------ ------------
Gross margin 4,469,281 4,110,607
------------ ------------
OPERATING EXPENSES:
General and administrative 1,628,521 1,696,733
Selling and marketing 925,932 925,593
Salaries and benefits 3,563,120 3,119,836
Amortization of CBS advertising 4,577,598 5,048,292
Depreciation and amortization 905,055 2,150,078
Exit and retail closure costs 261,399 (272,576)
------------ ------------
Total operating expenses 11,861,625 12,667,956
------------ ------------
Operating loss (7,392,344) (8,557,349)
EQUITY IN EARNINGS OF INVESTMENTS 216,383 447,875
OTHER INCOME (EXPENSE):
Interest expense (179,685) (55,636)
Interest income 3,022 49,725
Other, net 20,846 4,914
------------ ------------
Loss before minority interest (7,331,778) (8,110,471)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (204,000) (44,873)
------------ ------------
Net loss $ (7,535,778) $ (8,155,344)
============ ============
Basic and diluted net loss per common share $ (0.27) $ (0.33)
============ ============
Weighted average common and common equivalent shares
outstanding - basic and diluted 28,116,685 24,706,527
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
3
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(Unaudited)
Common Stock Additional
----------------------------- Deferred Paid-in
Shares Amount Compensation Capital
------------- ------------- ------------- -------------
Balance - December 31, 2001 27,971,409 $ 279,714 $ (2,174,368) $ 283,687,361
Issuance of options and warrants for services rendered -- -- -- 77,228
Issuance of stock - 401(k) employer match 20,777 208 -- 136,712
Amortization of deferred compensation 520,682 5,207 570,147 (5,207)
Issuance of stock - note extension 43,044 430 -- 186,787
Issuance of common stock to pay obligations of Hollywood Media 1,163 12 -- 6,378
Employee stock compensation 54,392 544 -- 292,551
Stock option and warrant exercise - net issuance 34,644 346 -- (346)
Net loss -- -- -- --
------------- ------------- ------------- -------------
Balance - March 31, 2002 28,646,111 $ 286,461 $ (1,604,221) $ 284,381,464
============= ============= ============= =============
[restubbed table]
Accumulated
Deficit Total
------------- ----------------
Balance - December 31, 2001 $(154,621,211) $ 127,171,496
Issuance of options and warrants for services rendered -- 77,228
Issuance of stock - 401(k) employer match -- 136,920
Amortization of deferred compensation -- 570,147
Issuance of stock - note extension -- 187,217
Issuance of common stock to pay obligations of Hollywood Media -- 6,390
Employee stock compensation -- 293,095
Stock option and warrant exercise - net issuance -- --
Net loss (7,535,778) (7,535,778)
------------- -------------
Balance - March 31, 2002 $(162,156,989) $ 120,906,715
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
4
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,535,778) $(8,155,344)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 905,055 2,150,078
Interest 143,609 --
Equity in earnings of investments, net of return of invested capital 486,052 (110,476)
Issuance of compensatory stock, stock options and warrants for services rendered 370,323 73,082
Amortization of deferred compensation costs 570,147 51,034
Provision for bad debts 92,742 34,628
Reversal for retail closure costs -- (272,576)
Amortization of CBS advertising 4,577,598 5,048,292
Minority interest 204,000 44,873
Return of capital from Tekno Books to minority partner (268,949) (46,652)
Changes in assets and liabilities:
Receivables (527,325) 412,638
Prepaid expenses (84,632) 217,544
Inventories (1,842,715) (2,907,003)
Other current assets (7,053) (1,293)
Other assets (35,878) (28,734)
Accounts payable 369,357 367,119
Deferred revenue 2,134,110 2,058,200
Other accrued expenses (37,345) 109,638
----------- -----------
Net cash used in operating activities (486,682) (954,952)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net advances from equity method investees -- 464,000
Capital expenditures (390,323) (194,006)
----------- -----------
Net cash (used in) provided by investing activities (390,323) 269,994
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder/officer loan 1,000,000 500,000
Payments of shareholder/officer loan (450,000) --
Payments under note payable (100,000) --
Net advances from factor (45,068) --
Payments to repurchase common stock -- (61,594)
Payments under capital lease obligations (171,442) (65,438)
----------- -----------
Net cash provided by financing activities 233,490 372,968
----------- -----------
Net decrease in cash and cash equivalents (643,515) (311,990)
CASH AND CASH EQUIVALENTS, beginning of period 1,980,966 1,911,224
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,337,451 $ 1,599,234
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 32,409 $ 15,851
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
5
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
In the opinion of management, the accompanying consolidated financial
statements have been prepared by Hollywood Media Corp. ("Hollywood Media")
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, management believes that the disclosures
contained herein are adequate to make the information presented not misleading.
The financial statements reflect, in the opinion of management, all material
adjustments (which include only normal recurring adjustments) necessary to
present fairly Hollywood Media's financial position and results of operations.
The results of operations and cash flows for the three months ended March 31,
2002 are not necessarily indicative of the results of operations or cash flows
which may be recorded for the remainder of 2002. The accompanying unaudited
consolidated financial statements should be read in conjunction with audited
consolidated financial statements and notes thereto included in Hollywood
Media's Annual Report on Form 10-K for the year ended December 31, 2001.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 4,412,495 and 4,820,851 options and warrants to purchase common shares
outstanding at March 31, 2002 and 2001, 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.
In addition, the investors in the May 2001 private placement (discussed
in Note 7) 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 of Hollywood Media's common stock falls below a specified
average price per share (currently set at $3.03) during the stated adjustment
periods. The number of shares issuable during any adjustment period increases as
the average stock price decreases, but in no event shall the average price per
share be less than $2.15. The maximum number of shares issuable in the future
under the warrants is 765,973. These warrants were not included in the number of
outstanding warrants and options to purchase common shares disclosed in the
preceding paragraph because the number of shares, if any, will be determined at
the conclusion of each adjustment period.
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
6
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 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.
Receivables
Receivables consist of amounts due from customers who have advertised
on Hollywood Media's web sites, have purchased content from Hollywood Media's
syndication businesses, have purchased 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 an allowance for
doubtful accounts of $397,520 and $375,681 at March 31, 2002 and December 31,
2001, respectively.
In 2001, Hollywood Media entered into an agreement with a third party
whereby we monetized a certain portion of our accounts receivable. Hollywood
Media receives an initial advance of 80% of the invoice amount, with the
remaining 20%, less fees, transferred to Hollywood Media upon payment by the
customer to the third party. At March 31, 2002 and December 31, 2001, a
liability of $296,788 and $341,856, respectively, was recorded for advances that
had been paid to Hollywood Media but remain payable by Hollywood Media's
customers to the third party.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 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
ceased on January 1, 2002. In addition, SFAS 142 will change the way Hollywood
Media evaluates goodwill and intangibles for impairment. On January 1, 2002,
goodwill and certain intangibles are no longer amortized; however, they will be
subject to evaluation for impairment at least annually using a fair value based
test. The fair value based test is a two-step test. The first step involves
comparing the fair value of each of Hollywood Media's reporting units to the
carrying value of those reporting units. If the carrying value of a reporting
unit exceeds the fair value of the reporting unit, Hollywood Media will be
required to proceed to the second step. In the second step, the fair value of
the reporting unit will be allocated to the assets (including unrecognized
intangibles) and liabilities of the reporting unit, with any residual
representing the implied fair value of goodwill. An impairment loss will be
recognized if and to the extent that the carrying value of goodwill exceeds the
implied value.
Hollywood Media has not yet completed its evaluation in order to
determine if an impairment exists and therefore is unable to quantify the
impact, if any, on the results of operations and financial position. The
transition provisions of SFAS 142 allow until June 30, 2002 to complete step one
of the test and, if required,
7
until December 31, 2002 to complete step 2. Effective January 1, 2002,
amortization of approximately $40.7 million of goodwill ceased. Annual goodwill
amortization was approximately $5.3 million.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. SFAS 143 addresses the
accounting and reporting for obligations associated with the retirement of
tangible long lived assets. Costs of retiring tangible long-lived assets will be
charged to expense and a liability established when incurred at the present
value of the future obligation. This statement requires a cumulative effect
approach to recognizing transition amounts for existing retirement obligations.
Hollywood Media does not believe that the adoption of SFAS 143 will have a
material impact on its 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. Hollywood Media does not believe that the
adoption of SFAS 144 will have a material impact on its results of operations.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 rescinds FASB No.4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB No. 64,
"Extinguishments of Debt to Satisfy Sinking-Fund Requirements." This Statement
also rescinds FASB No. 44, "Accounting for Intangible Assets of Motor Carriers."
This Statement amends FASB No. 13, "Accounting for Leases," to eliminate
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS 145 is effective for fiscal years beginning after May 15, 2002
with regard to rescission of Statement 4; the provisions in paragraph 8 and 9(c)
of this Statement related to Statement 13 are effective for transactions
occurring after May 15, 2002; and all other provisions are effective for
financial statements issued on or after May 15, 2002. Hollywood Media is
currently evaluating the provisions of SFAS 145.
(3) ACQUISITION:
On July 27, 2001, Hollywood Media 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 fee to view the
films.
8
The acquisition of AlwaysI was accounted for under the purchase method
of accounting and, accordingly, its operating results have been included in the
consolidated financial statements since the date of acquisition.
The pre-acquisition results of operations of AlwaysI are not material
to the consolidated results of operations and therefore pro forma combined
results of operations have not been presented.
(4) DEBT:
In connection with the acquisition on September 15, 2000 of Theatre
Direct NY, Inc. ("TDI"), 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 with principal payable monthly. The note bears interest at
Citibank, N.A. prime plus 1% per annum (5.75% at March 31, 2002). The second
promissory note is a one year non-interest bearing note with a face value of
$250,000. During the first quarter of 2002, Hollywood Media paid $100,000 in
cash towards the outstanding balance due under the notes payable. An agreement
was reached on March 31, 2002 between Hollywood Media and the former owner of
TDI that the remaining notes payable balance would be paid with $320,000 in
restricted common stock of Hollywood Media.
In the event that Hollywood Media requires additional funding,
Hollywood Media's Chairman of the Board and Chief Executive Officer and
Hollywood Media's Vice Chairman and President, have indicated their intention to
provide Hollywood Media, if required, with an amount not to exceed $5 million in
order to enable Hollywood Media to meet its working capital requirements during
2002; provided, however, that the commitment will be reduced dollar for dollar
to the extent Hollywood Media raises no less than $5 million from other sources
and such additional funding is not expended on acquisitions. This commitment
terminates January 1, 2003. During the three months ended March 31, 2002, net
advances of $550,000 were provided to Hollywood Media. These advances bear
interest at the J.P. Morgan prime rate (4.75% at March 31, 2002). Interest
expense on these advances was $4,450 for the three months ended March 31, 2002.
9
(5) OTHER ACCRUED EXPENSES:
Other Accrued Expenses consist of the following:
MARCH 31, DECEMBER 31,
2002 2001
---------- ----------
Compensation and benefits $ 620,995 $ 802,308
Accrued liability - theater tickets purchased 336,711 430,323
Insurance 93,731 130,811
Professional fees 191,517 249,207
Licensing fees 54,082 47,517
Interest 77,737 24,069
Royalties 41,414 44,517
Other 314,234 458,673
---------- ----------
$1,730,421 $2,187,425
========== ==========
(6) ACCRUED EXIT AND RETAIL CLOSURE COSTS:
In December 1999, Hollywood Media closed its brick and mortar retail
business in its entirety. Hollywood Media recorded provisions in 1998, 1999,
2000 and 2001, for asset impairments and the estimated cost of early store lease
terminations as a result of exiting the brick and mortar retail business. The
balance at March 31, 2002 and December 31, 2001 of $42,144 consists of an
estimate of Hollywood Media's obligation under a lease for a kiosk location that
was abandoned. This matter is the subject of outstanding litigation. Management
expects this lease matter to be resolved within 2002.
In March 2002, Hollywood Media decided to close its Baseline office in
New York City, as a result of the combination of Baseline and FilmTracker (as
discussed in Note 8) and moved its operations to its new Baseline office located
in Santa Monica, CA office. Severance payments for terminated employees and
lease costs associated with the NY office lease of $261,399 have been accrued
for at March 31, 2002.
(7) COMMON STOCK:
On January 2, 2002, Hollywood Media issued 520,682 shares of common
stock to Hollywood Media's Chairman of the Board and Chief Executive Officer and
Hollywood Media's Vice Chairman and President in accordance with the exchange
and cancellation on December 14, 2001, of 1,045,000 stock options. The
approximate fair value of the stock options, $2,280,587 at December 14, 2001,
was equal to the fair value of the restricted stock for which it was exchanged.
The shares issued vest 50% on June 30, 2002 and 50% on January 1, 2003.
Compensation expense of $570,147 was recorded for the three months ended March
31, 2002.
Hollywood Media issued a total of 40,344 shares of common stock valued
at $187,217 during 2002 to extend the term of a promissory note that Hollywood
Media guaranteed. In 1999, Hollywood Media loaned approximately $1.7 million to
the former owner of CinemaSource (currently an employee of CinemaSource) so that
he could pay a portion of the taxes due resulting from the sale of CinemaSource
to Hollywood Media. Hollywood Media was obligated to make this loan as part of
10
the original purchase agreement to acquire CinemaSource. Hollywood Media sold
the note to a third party in 2000. The outstanding balance of the loan at March
31, 2002 was $723,511. The borrower on the note 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. Hollywood Media recorded $93,609 as interest expense
and $93,608 as other receivables for the three months ended March 31, 2002. The
total amount due to Hollywood Media and included in other receivables at March
31, 2002 was $153,094.
In February 2002, Hollywood Media issued 1,163 shares of common stock
valued at $6,390 in connection with an amendment to a settlement agreement. The
shares were valued at the market price of the common stock on the date the
amendment was entered into.
On March 27, 2002, Hollywood Media issued 20,777 shares of common stock
valued at $136,920 for payment of Hollywood Media's 401(k) employer match for
calendar year 2001.
During 2002, Hollywood Media issued 54,392 shares of unrestricted
common stock valued at $293,095, calculated using the closing market price on
the various dates of issuance in accordance with the Hollywood Media 2000 Stock
Incentive Plan.
In May 2001, Hollywood Media sold 1,252,789 shares of common stock to
investors in a private placement. These investors 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 June 16, 2002 or September 16, 2002 is less than
$3.03 per share. The series B warrants are exercisable on the last day of each
twenty trading day period beginning on each of these two dates. The market price
of the common stock under the series B warrants is defined as the average of the
ten lowest closing sales prices of the common stock during the twenty trading
days following each of these two dates, but can be no less than $2.15. The
number of shares issuable upon exercise of a series B warrant on each of the two
exercise dates is equal to (1) the lower of $3.03 or market price 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
remaining that are issuable in the future under the warrants is 765,973.
During the three months ended March 31, 2002, Hollywood Media issued
stock options and warrants valued at $77,228 for consulting services rendered
and recorded such amount as consulting expense in the accompanying consolidated
statement of operations.
During the three months ended March 31, 2002, Hollywood Media completed
net issuances of 34,644 shares of common stock upon the exercise of outstanding
stock options and warrants for which no proceeds were received.
(8) FILMTRACKER TRANSACTION:
On January 14, 2002, FilmTracker's parent company, Fountainhead Media
Services ("FMS"), acquired a 20% equity interest in Baseline, Inc. for $4
million, with consideration consisting of a $2 million promissory note payable
to Hollywood Media in installments over a five-year period with a final payment
of approximately $1.2 million, and the contribution of the FilmTracker database,
intellectual property rights, and all existing contracts with a stated value of
$2 million. The promissory note is secured by the 20% equity interest in
Baseline held by FMS. FMS will have the right to convert its 20% equity interest
in Baseline into common stock of Hollywood Media at any time during the two-year
11
period following the payment in full of the promissory note based upon a
multiple of Baseline's EBITDA (earnings before interest, taxes, depreciation and
amortization) for the year preceding the conversion. For purposes of any such
conversion, Hollywood Media's stock will be valued at the greater of (i) $7.50
per share, and (ii) the average closing price of the stock on the Nasdaq Stock
Market for the 15 trading days preceding the notice of conversion. Hollywood
Media will also have the right to cause the conversion of the equity interest in
Baseline to Hollywood Media common stock at any time after the earlier of the
payment in full of the promissory note and January 14, 2006. For accounting
purposes this transaction is treated as an acquisition of the FilmTracker assets
in exchange for:
o an issuance of a five year option on Baseline stock with a $2
million exercise and
o the issuance of a put and call option on Hollywood Media
common stock.
Management of Hollywood Media has preliminarily estimated the net value of the
option in Baseline stock and the put and call options in Hollywood Media common
stock as $3,145,211 and has assigned that value to the FilmTracker assets. The
purchase price of $3,145,211 was allocated as follows: 1) $1.5 million to fixed
assets (equipment, software, etc.) and 2) $1,645,211 to intangible assets. The
purchase price allocation is preliminary, pending an appraisal by a third party.
(9) INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES:
Investments in and advances to equity method investees consist of the
following:
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
NetCo Partners (a) $ 1,112,133 $ 1,527,494
MovieTickets.com (b) (100,666) (4,975)
----------- -----------
$ 1,011,467 $ 1,522,519
=========== ===========
(A) NETCO PARTNERS
Hollywood Media owns a 50% interest in a joint venture called NetCo
Partners. NetCo Partners is engaged in the development and licensing of Tom
Clancy's Net Force. This investment is recorded under the equity method of
accounting, recognizing 50% of NetCo Partners' income or loss as Equity in
Earnings of Investments. The revenues, gross profit and net income of NetCo
Partners for the three months ended March 31, 2002 and 2001 are presented below:
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
---- ----
Revenues $ 764,405 $1,171,264
Gross profit 578,321 998,786
Net income 574,148 996,517
Hollywood Media's
share of net income 287,074 498,258
12
Hollywood Media and C.P. Group are each 50% partners in NetCo Partners.
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.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement,
Hollywood Media is responsible for developing, producing, manufacturing,
advertising, promoting, marketing and distributing NetCo Partners' illustrated
novels and related products and for advancing all costs incurred in connection
therewith. All amounts advanced by Hollywood Media to fund NetCo Partners'
operations are treated as capital contributions of Hollywood Media and Hollywood
Media is entitled to a return of such capital contributions before distributions
of cash flow are split equally between Hollywood Media and C.P. Group.
NetCo Partners has signed several significant licensing agreements for
Tom Clancy's NetForce. These agreements include book licensing agreements for
North American rights to a series of adult and young adult books, an audio book
agreement and licensing agreements with various foreign publishers for rights to
publish Tom Clancy's NetForce books in different languages. These contracts
typically provide for payment of non-refundable advances to NetCo Partners upon
achievement of specific milestones, and for additional royalties based on sales
of the various products at levels in excess of the levels implicit in the
non-refundable advances. NetCo Partners recognizes revenue pursuant to these
contracts when the earnings process has been completed based on performance of
all services and delivery of completed manuscripts.
As of March 31, 2002, NetCo Partners has $2,108,602 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 Hollywood Media's consolidated balance sheets.
NetCo Partners' deferred revenues, consisting of cash advances received
but not yet recognized as revenue, amounted to $122,301 as of March 31, 2002.
These deferred revenues are not included Hollywood Media's consolidated balance
sheets.
As of March 31, 2002, we received cumulative profit distributions from
NetCo Partners since its formation totaling $7,745,446, in addition to
reimbursement of substantially all amounts advanced by Hollywood Media to fund
the operations of NetCo Partners.
(B) MOVIETICKETS.COM
Hollywood Media entered into a joint venture agreement on February 29,
2000 with the movie theater chains AMC Entertainment Inc. ("AMC") and National
Amusements, Inc. to form MovieTickets.com, Inc. ("MovieTickets.com"). In August
2000, the joint venture entered into an agreement with Viacom Inc. to acquire a
five percent interest in the joint venture for $25 million of advertising over 5
years. In addition to the Viacom advertising and promotion, MovieTickets.com is
promoted through on-screen advertising on each participating exhibitor's movie
screens. In March 2001, America Online Inc. ("AOL") purchased a non-interest
bearing convertible preferred equity interest in MovieTickets.com for $8.5
million in cash, which can be converted into approximately 3% of the common
stock of MovieTickets.com, Inc. In connection with this transaction,
MovieTickets.com's ticket inventory is promoted through AOL's interactive
properties and ticket inventory of AOL's Moviefone is available on
MovieTickets.com.
13
Hollywood Media owns 26.4% of the equity in MovieTickets.com, Inc. at
March 31, 2002. Excluding AOL's convertible preferred equity interest, Hollywood
Media shares in 27.1% of the income or losses generated by the joint venture.
This investment is recorded under the equity method of accounting, recognizing
27.1% of MovieTickets.com income or loss as Equity in Earnings of Investments.
Hollywood Media recorded losses of $70,691 and $50,383 in its investment in
MovieTickets.com for the three months ended March 31, 2002 and 2001,
respectively. During 2000 Hollywood Media issued a warrant to AMC to acquire
90,573 shares of common stock at an exercise price of $17.875 per share valued
at $1,000,000. The fair market value of the warrant was recorded as additional
investment and is being amortized over a period of ten years.
MovieTickets.com is a leading destination for the purchase of movie
tickets through the Internet. Hollywood Media launched the MovieTickets.com web
site in May 2000 with several major theater exhibitors. The MovieTickets.com web
site allows users to purchase movie tickets and retrieve them at "will call"
windows or kiosks at theaters. The web site also features bar coded tickets that
can be printed at home and presented directly to the ticket taker at
participating theaters. The web site contains movie content from Hollywood.com
for all current and future release movies, movie reviews and synopses, digitized
movie trailers and photos, and box office results. The web site generates
revenues from service fees charged to users for the purchase of tickets and the
sale of advertising which includes ads on the "print-at-home" ticket. Service
fees on ticket sales were introduced in November 2000. MovieTickets.com's
current participating exhibitors include AMC Entertainment, Inc., National
Amusements, Inc., Famous Players, Inc., Hoyts Cinemas, Marcus Theaters,
Consolidated Theaters, and other regional exhibitors.
(10) 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 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.
Hollywood Media also records barter revenue and expense under an
agreement with the National Association of Theater Owners ("NATO"), which was
acquired through the acquisition of hollywood.com, Inc. in 1999. In connection
with the NATO contract, Hollywood Media also acquired rights and obligations
under ancillary agreements with individual theaters that participate in the NATO
organization. Pursuant to these agreements, Hollywood Media provides them with
movie showtime information and content as well as hosting web sites for the
theaters. In addition, Hollywood Media provides ongoing web site maintenance
services for each of the theaters including providing promotional materials,
movie and theater information, advertising 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.
14
Barter transactions by type for the three months ended March 31, 2002 and 2001
are as follows:
Three Months Ended March 31,
----------------------------
2002 2001
-------- --------
Barter Advertising $ 12,431 $ 53,130
Barter - NATO 745,438 745,438
-------- --------
$757,869 $798,568
======== ========
Barter transactions accounted for approximately 51% and 55% of net
Internet ad sales revenues for the three months ended March 31, 2002 and 2001,
respectively.
Barter transactions accounted for approximately 6% and 7% of net
revenues for the three months ended March 31, 2002 and 2001, respectively.
(11) SEGMENT REPORTING:
Hollywood Media's main reportable segments are ticketing, business to
business, Internet ad sales and other and intellectual properties. 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
CinemaSource (which licenses movie showtimes and other movie content),
EventSource (which licenses local listings of events around the country) to
media, wireless and Internet companies, AdSource (which creates exhibitor paid
directory ads for insertion in newspapers around the country) and
Baseline/FilmTracker (a provider of information services to studios and
professionals in the feature film and television industries and a pay-per-use
subscription website geared towards professionals in the entertainment industry,
news and financial organizations). The Internet ad sales and other segment sells
advertising on Hollywood.com and Broadway.com web sites and offers independent
films to subscribers over the internet. The intellectual properties segment owns
or controls the exclusive rights to certain intellectual properties created by
best-selling authors and media celebrities, which it licenses across all media.
This segment also includes a 51% interest in Tekno Books, a book development
business. Hollywood Media's e-commerce segment and retail segment were closed in
January 2001 and December 1999, respectively.
Management evaluates performance based on a comparison of actual profit
or loss from operations before income taxes, depreciation, interest, and
nonrecurring gains and losses to budgeted amounts. There are no intersegment
sales or transfers.
The following table illustrates the financial information regarding
Hollywood Media's reportable segments.
15
THREE MONTHS ENDED MARCH 31,
2002 2001
------------ ------------
NET REVENUES:
Ticketing $ 9,040,155 $ 7,254,222
Business to Business 1,424,601 1,666,756
Internet Ad Sales and Other 1,497,346 1,464,902
Intellectual Properties 948,651 475,991
E-Commerce (A) -- 15,901
------------ ------------
$ 12,910,753 $ 10,877,772
============ ============
GROSS MARGIN:
Ticketing $ 1,145,777 $ 881,304
Business to Business 1,377,486 1,589,457
Internet Ad Sales and Other 1,396,513 1,457,873
Intellectual Properties 549,505 191,652
E-Commerce (A) -- (9,679)
------------ ------------
$ 4,469,281 $ 4,110,607
============ ============
OPERATING INCOME (LOSS):
Ticketing $ 81,833 $ (113,864)
Business to Business (B) (194,360) 274,820
Internet Ad Sales and Other (C) (5,328,367) (6,153,128)
Intellectual Properties 459,501 107,966
E-Commerce (A) -- 19,549
Retail (D) -- 269,063
Corporate and other (2,410,951) (2,961,755)
------------ ------------
$ (7,392,344) $ (8,557,349)
============ ============
CAPITAL EXPENDITURES:
Ticketing $ 26,051 $ 2,006
Business to Business 111,553 10,614
Internet Ad Sales and Other 8,079 154,190
Corporate and other 244,640 27,196
------------ ------------
$ 390,323 $ 194,006
============ ============
DEPRECIATION AND AMORTIZATION EXPENSE:
Ticketing $ 33,266 $ 14,160
Business to Business 50,918 44,360
Internet Ad Sales and Other 735,678 734,752
Intellectual Properties -- 1,575
E-Commerce (A) -- 1,551
Corporate and other 85,193 1,353,680
------------ ------------
$ 905,055 $ 2,150,078
============ ============
16
(A) The e-commerce segment was closed in January 2001.
(B) Includes $261,399 in additional expenses relating to the closure
of the New York Baseline office. The Baseline operations were moved to
the new Baseline office in CA.
(C) Includes $4,577,598 and $5,048,292 in amortization of CBS advertising
for the three months ended March 31, 2002 and 2001, respectively used
to promote Hollywood.com and Broadway.com.
(D) The retail segment was closed in December 1999. The operating income in
2001 results from the reversal of reserves established for closed
stores. - See Note 6.
(12) COMMITMENTS AND CONTINGENCIES:
Hollywood Media is a party to various legal proceedings arising in the
ordinary course of business, including the proceeding described below. Hollywood
Media does not expect any of these legal proceedings to have a material adverse
impact on the financial condition or results of operations.
Water Garden Company, LLC, as Plaintiff, v. Hollywood Media Corp., a
Florida corporation; hollywood.com, Inc. a California corporation; and The
Tribune Company, (as successor in interest to the Times Mirror Company), as
Defendants; filed July 16, 2001 in the Superior Court of the State of California
for the County of Los Angeles. Water Garden Company, LLC has filed suit against
Hollywood Media and its subsidiary, hollywood.com, Inc., among others, claiming
damages as a result of alleged defaults by us under a lease for office space
entered into by hollywood.com, Inc. Hollywood Media believes that it has valid
defenses to such claims and therefore denies any liability. In the event
Hollywood Media is unsuccessful in its defense, management believes that there
will not be a material impact on Hollywood Media's financial condition.
(13) RECLASSIFICATION:
Certain amounts in the 2001 financial statements have been reclassified
to conform with the 2002 classification.
(14) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
For The Three Months Ended March 31, 2002:
o Capital lease transactions totaled $13,607.
o 54,392 shares of Hollywood Media common stock, valued at
$293,095, were issued under the Hollywood Media 2000 Stock
Incentive Plan.
o Hollywood Media issued 1,163 shares of common stock, valued at
$6,390, to satisfy an outstanding obligation.
17
o 20,777 shares of Hollywood Media common stock, valued at
$136,920 were issued as payment of Hollywood Media's 401(k)
employer match for calendar year 2001.
o Hollywood Media issued 43,044 shares of common stock, valued
at $187,217, for the extension of a promissory note guaranteed
by Hollywood Media.
o 34,644 shares of Hollywood Media were issued for the net
exercise of stock options and warrants during the first
quarter of 2002.
o Options and warrants, valued at $77,228, under Black Scholes,
were granted for services rendered.
For The Three Months Ended March 31, 2001:
o Capital lease transactions totaled $117,564.
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
under Black Scholes, were granted to placement agents for
services rendered in connection with the August 2000 private
placement.
o Hollywood Media issued 160,000 shares of common stock valued
at $799,564 in exchange for payment of $799,564 in certain
media, goods and services of Hollywood Media by a third party.
o Stock options valued at $58,082, under Black Scholes, were
granted for services rendered.
o Hollywood Media issued 4,138 shares of common stock valued at
$15,000 as an incentive stock bonus to an officer.
18
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.
("Hollywood Media") which represents Hollywood Media's expectations or beliefs,
including, but not limited to, statements concerning industry performance,
operations, performance, financial condition, 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 and the market price of our
common stock include, but are not limited to, our continuing operating losses,
negative cash flows from operations 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 into Hollywood Media,
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 our Annual Report on Form 10-K for
the year ended December 31, 2001 and in other filings made by Hollywood Media
with the Securities and Exchange Commission.
OVERVIEW
Hollywood Media is a provider of entertainment-related information,
content and ticketing services to consumers and businesses. We manage a number
of integrated business units focused on Hollywood, Broadway, and the
entertainment industry. Hollywood Media derives a diverse stream of revenues
from this array of business units, including revenue from individual and group
Broadway ticket sales, business to business content syndication, subscription
fees, content licensing fees, advertising and book development. Due to a common
focus on the entertainment vertical, each of these business units supports the
others, with content shared between multiple business units and customers
cross-generated for one unit by another. For instance, our Hollywood.com
consumer content site funnels customers into our MovieTickets.com affiliate
while making use of movie listings supplied by our wholly owned CinemaSource
unit, which is the largest business to business supplier of movie showtimes, and
movie data supplied by our Baseline/FilmTracker business to business unit.
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 34,000 movie
screens. Since its start in 1995, CinemaSource has substantially increased its
operations and currently provides movie showtime listings to more than 200
newspapers, wireless companies, Internet sites, and other media outlets,
including newspapers, such as The New York Times and The Washington Post,
wireless companies such as Sprint PCS, AT&T Wireless, Verizon and Vindigo,
Internet companies including AOL's Digital City, Yahoo! and Lycos and other
media outlets.
19
CinemaSource also syndicates entertainment news, movie reviews, and
celebrity biographies. In addition to charging fixed 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 shows on
Broadway, of-Broadway, touring companies, community playhouses and dinner
theaters throughout North America and in London's West End. 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 Vindigo and the web site of The New York Times.
ADSOURCE. We launched AdSource in January 2002, as yet another
expansion of the CinemaSource operations, requiring very little overhead.
AdSource leverages the movie theater showtimes from the CinemaSource data
collection systems and our relationship with various movie exhibitors to create
exhibitor paid directory ads for insertion in newspapers around the country. Our
first customer, a major theater chain, signed a contract in March 2002 for
certain markets including New York City. We are now providing this service
nationally for this customer.
BASELINE/FILMTRACKER. During January 2002 we merged Baseline, our
pay-per-use subscription service, with FilmTracker, a leading provider of
information services to professionals in the feature film and television
industries. The new combined service, which is targeted at studios, production
companies, distributors, agents, managers, producers, news organizations, and
financial analysts, incorporates all of Baseline's data into FilmTracker's
user-friendly interface. The result is a film and television database that
contains over 1.5 million records, including over one million listings of people
in the media industry, 7,000 entertainment personality biographies, credits for
over 45,000 released feature films dating back 50 years, nearly 35,000
television series, miniseries, movies of the week and specials, over 11,000 film
and television projects in every stage of development and production, 1,800
movie reviews, box office grosses going back nearly 20 years including over
5,800 feature films, 16,000 company rosters and representation for about 19,000
entertainment professionals.
In connection with the launch of the combined service, we signed
multi-year licensing agreements with two major film studios during the first
quarter of 2002. Baseline customers also include Bloomberg, Daily Variety,
People Magazine, Lexis-Nexis, NBC, HBO, ABC, Paramount Pictures, 20th Century
Fox, DreamWorks, Sony Pictures, MGM, E! Entertainment Television, and the
Directors Guild of America. In connection with the merger that occurred on
January 14, 2002, FilmTracker's parent company, Fountainhead Media Services
("FMS"), acquired a 20% equity interest in Baseline, Inc. for $4 million, with
consideration consisting of a $2 million promissory note payable to Hollywood
Media in installments over a five-year period with a final payment of
approximately $1.2 million, and the contribution of the FilmTracker database,
intellectual property rights, and all existing contracts with a stated value of
$2 million. The promissory note is secured by the 20% equity interest in
Baseline held by FMS. FMS will have the right to convert its 20% equity interest
in Baseline into common stock of Hollywood Media at any time during the two-year
20
period following the payment in full of the promissory note based upon a
multiple of Baseline's EBITDA (earnings before interest, taxes, depreciation and
amortization) for the year preceding the conversion. For purposes of any such
conversion, Hollywood Media's stock will be valued at the greater of (i) $7.50
per share, and (ii) the average closing price of the stock on the Nasdaq Stock
Market for the 15 trading days preceding the notice of conversion. Hollywood
Media will also have the right to cause the conversion of the equity interest in
Baseline to Hollywood Media common stock at any time after the earlier of the
payment in full of the promissory note and January 14, 2006. For accounting
purposes this transaction is treated as an acquisition of the FilmTracker assets
in exchange for 1) an issuance of a five year option on Baseline stock with a $2
million exercise price and 2) the issuance of a put and call option on Hollywood
Media common stock.
TICKETING DIVISIONS
THEATRE DIRECT INTERNATIONAL, BROADWAY.COM AND 1-800-BROADWAY. We
acquired Theatre Direct International ("TDI") as of September 15, 2000. Founded
in 1990, TDI is a live theater ticketing wholesaler that provides groups and
individuals with access to theater tickets and knowledgeable service, covering
shows on Broadway, long running shows off-Broadway, shows in London's West End
theatre district and shows in Toronto. TDI sells tickets directly to travel
agents and tour groups. As a marketing agency, TDI represents numerous producers
and Broadway shows to the travel industry around the world. The Broadway shows
are Aida, Beauty and the Beast, Cabaret, Chicago, Contact, 42nd Street, Harlem
Song, Into the Woods, Les Miserables, Mamma Mia!, Oklahoma, Rent, The Full
Monty, The Graduate, The Lion King, The Phantom of the Opera, Urinetown and
Metamorphoses. In addition, TDI's education division, Broadway Classroom,
markets group tickets to schools across the country. 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. Our 1-800-BROADWAY
number, which we acquired in October 2001, is marketed in tandem by us with
Broadway.com. TDI's offline ticketing service complements the online ticketing
services available on our Broadway.com and our ticket sales through our
1-800-BROADWAY number. The combined businesses provide live theater ticketing
and related content for 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 sites.
MOVIETICKETS.COM, INC. MovieTickets.com is a leading destination for
the purchase of movie tickets through the Internet. Hollywood Media launched the
MovieTickets.com web site in May 2000 with several major theatre exhibitors.
Hollywood Media currently owns 26.4% of the equity of MovieTickets.com, Inc.
MovieTickets.com, Inc. entered into an agreement with Viacom Inc. effective
August 2000 whereby Viacom Inc. acquired a five percent interest in
MovieTickets.com, Inc. for $25 million of advertising and promotion over five
years. In addition to the Viacom advertising and promotion, MovieTickets.com is
promoted through on-screen advertising in each participating exhibitor's movie
screens. In March 2001, AOL purchased a non-interest bearing convertible
preferred equity interest in MovieTickets.com for $8.5 million in cash, which
can be converted into approximately 3% of the common stock of MovieTickets.com,
Inc. In connection with that transaction, MovieTickets.com's ticket inventory is
promoted throughout America Online's interactive properties and ticket inventory
of AOL's Moviefone is available on MovieTickets.com.
21
MovieTickets.com. Inc.'s current participating exhibitors include AMC
Entertainment Inc., National Amusements, Inc., Famous Players Inc., Hoyts
Cinemas, Marcus Theaters, Consolidated Theaters, and other regional exhibitors.
A recent addition includes theaters formerly owned by General Cinemas, which
were acquired by AMC Entertainment, Inc. 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. The MovieTickets.com web site allows users
to purchase movie tickets and retrieve them at "will call" windows or kiosks at
theaters. The web site also features bar coded tickets that can be printed at
home and presented directly to the ticket taker at participating theaters. The
web site contains movie content from Hollywood Media's various divisions for all
current and future release movies, movie reviews and synopses, digitized movie
trailers and photos, and box office results. The web site generates revenues
from service fees charged to users for the purchase of tickets and the sale of
advertising which includes ads on the "print-at-home" ticket.
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.
We sell sponsorships and banner advertising on Hollywood.com through
relationships with advertising representative firms and through an internal
sales staff. Some of our recent advertisers include Disney, Fox Home
Entertainment, Verizon Wireless, The History Channel, The Sci-Fi Channel, HBO,
Purina, People Magazine, Verisign, VISA, Showtime and movie studios including
New Line, Universal, Warner Brothers and Sony.
Effective January 2000, we entered into a strategic, seven-year
relationship with CBS that provides for extensive promotion of the Hollywood.com
and Broadway.com web sites. Viacom has agreed to provide Hollywood.com and
Broadway.com with $105.5 million of promotion across certain of its media
properties, including the CBS television network, CBS owned and operated
television stations, the TNN and CMT cable networks, Infinity Broadcasting
Corporation's radio stations and Viacom Outdoor billboards and CBS syndicated
television and radio programs. The advertising provided by Viacom is valued
based upon the average price charged by Viacom for similar advertisements. To
supplement our internal sales efforts, we also have the right to reallocate a
portion of each year's advertising and promotion budget provided by Viacom and
require Viacom to sell up to $1.5 million of advertising on the Hollywood.com
and Broadway.com web sites. We have already exercised this right through 2003.
We will pay an 8% commission on any additional advertising revenues generated by
Viacom for us in excess of the $1.5 million guaranteed amount selected by us
each year.
BROADWAY.COM. We launched Broadway.com on May 1, 2000. Broadway.com
features the ability to purchase Broadway, off-Broadway and London's West End
theater tickets online; theater showtimes for professional live theater venues
throughout 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
22
and playwrights; opening-night coverage; original theater reviews; and video
excerpts from selected shows. Broadway.com also offers current box office
results, show synopses, cast and crew credits and biographies, digitized show
previews, digitized showtunes, and an in-depth Tony Awards(R) area. Broadway.com
generates revenue from the sale of tickets and advertising.
INTELLECTUAL PROPERTIES BUSINESS
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, multi-media 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).
NETCO PARTNERS. In June 1995, Hollywood Media and C.P. Group Inc.
("C.P. Group"), entered into an agreement to form NetCo Partners. NetCo Partners
owns Tom Clancy's NetForce. Hollywood Media and C.P. Group are each 50% partners
in NetCo Partners. Tom Clancy is a shareholder of C.P. Group. At the inception
of the partnership, C.P. Group contributed to NetCo Partners all rights to Tom
Clancy's NetForce, and Hollywood Media contributed to NetCo Partners all rights
to Tad Williams' MirrorWorld, Arthur C. Clarke's Worlds of Alexander, Neil
Gaiman's Lifers, and Anne McCaffrey's Saraband. NetCo Partners licensed Tom
Clancy's NetForce 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 business through
our 51% owned subsidiary, Tekno Books, that develops and executes book projects,
typically with best-selling authors. Tekno Books has worked with approximately
50 New York Times best-selling authors, including Tom Clancy, 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 a library of more than
1,300 books. Another 2,620 foreign editions and other editions (audio,
paperback, etc.) of these books have been sold to 330 publishers around the
world, and published in 33 languages. Tekno Books has approximately 300
forth-coming books under contract. We believe the library of books is valuable
as many of the books can be resold and reissued in future years, and also moved
into various electronic formats. We are expanding into one of the largest areas
of publishing, which is romance fiction, and the fastest growing area of
publishing, which is the Christian book market. 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. Hollywood Media also owns a direct 25%
interest in the magazine.
23
RESULTS OF OPERATIONS
The following table summarizes Hollywood Media's revenues, cost of
revenues and gross margin by reportable segment for the three months ended March
31, 2002 ("Q1-02") and 2001 ("Q1-01"), respectively:
INTERNET
BUSINESS TO AD SALES INTELLECTUAL
TICKETING BUSINESS AND OTHER PROPERTIES (A) E-COMMERCE TOTAL
----------- ----------- ----------- ----------- ----------- -----------
MARCH 31, 2002
--------------
Net Revenues $ 9,040,155 $ 1,424,601 $ 1,497,346 $ 948,651 $ -- $12,910,753
Cost of Revenues 7,894,378 47,115 100,833 399,146 -- 8,441,472
----------- ----------- ----------- ----------- ----------- -----------
Gross Margin $ 1,145,777 $ 1,377,486 $ 1,396,513 $ 549,505 $ -- $ 4,469,281
=========== =========== =========== =========== =========== ===========
MARCH 31, 2001
--------------
Net Revenues $ 7,254,222 $ 1,666,756 $ 1,464,902 $ 475,991 $ 15,901 $10,877,772
Cost of Revenues 6,372,918 77,299 7,029 284,339 25,580 6,767,165
----------- ----------- ----------- ----------- ----------- -----------
Gross Margin $ 881,304 $ 1,589,457 $ 1,457,873 $ 191,652 $ (9,679) $ 4,110,607
=========== =========== =========== =========== =========== ===========
(A) This does not include our 50% interest in NetCo Partners which is accounted
for under the equity method of accounting and is reported as equity in earnings
of investments.
COMPOSITION OF OUR SEGMENTS IS AS FOLLOWS:
o TICKETING - Includes our TDI ticketing business as well as our Broadway.com
online ticketing operations and our 1-800-BROADWAY operations.
o BUSINESS TO BUSINESS - Includes our CinemaSource, EventSource, AdSource,
and Baseline/FilmTracker syndication operations.
o INTERNET AD SALES AND OTHER - Includes advertising sold on the web sites
Hollywood.com and Broadway.com, the AlwaysI subscription service which
offers films to subscribers over the Internet and barter revenues derived
from the collection and compilation of movie showtimes data and the hosting
of web sites for movie theaters in exchange for advertising services from
the theaters.
o INTELLECTUAL PROPERTIES - Includes our book development and book licensing
operation through our 51% owned subsidiary Tekno Books and our 50.5%
interest in Fedora, publisher of Mystery Scene Magazine. This segment does
not include our 50% interest in NetCo Partners.
o E-COMMERCE - Hollywood Media exited the e-commerce business in
January 2001.
24
NET REVENUES
Total net revenues were $12,910,753 for Q1-02 as compared to
$10,877,772 for Q1-01, an increase of $2,032,981 or 19%. The increase in revenue
was primarily due to an increase in net ticketing revenues. We recorded $757,869
and $798,568 in non-cash barter revenue during Q1-02 and Q1-01, respectively.
Barter revenue as a percentage of total net revenue was 6% and 7% for Q1-02 and
Q1-01, respectively. In Q1-02 net revenues were derived 70% from ticketing, 11%
from business to business, 12% from Internet ad sales and other and 7% from
intellectual properties.
Ticketing revenues were $9,040,155 for Q1-02 as compared to $7,254,222
for Q1-01, an increase of $1,785,933 or 25%. Ticketing revenues increased in
part due to our participation in the NYC & Co. "Red, White and Blue Freedom
Package" promotion aimed at bringing tourists to New York City, following the
events of September 11, 2001. TDI is the exclusive supplier of Broadway theater
tickets for these packages. Ticketing revenue is generated from the sale of live
theater tickets for Broadway, off-Broadway and London both online (Broadway.com)
and offline (1-800-BROADWAY), to domestic and international travel
professionals, traveling consumers and New York area theater patrons. Ticketing
revenue is recognized on the date of performance of the show.
Business to business revenues (which includes CinemaSource,
EventSource, AdSource and Baseline/FilmTracker) were $1,424,601 for Q1-02 as
compared to $1,666,756 for Q1-01, a decrease of $242,155 or 15%. Revenues
decreased predominately from the loss of technology-based customers of
CinemaSource that ceased operations during fiscal year 2001. Our CinemaSource
business began to rebound, beginning in the fourth quarter of 2001. Our growth
trend has been positive for two consecutive quarters. During Q1-02 we had a net
increase to our customer base of 10, with a net gain in annualized revenue of
$200,000. Revenue for CinemaSource and EventSource is generated by the licensing
of movie, event and theater showtimes and other information to other media
outlets and Internet companies including newspapers such as the New York Times
and The Washington Post, Internet companies including AOL's Digital City, Lycos,
and Yahoo! and wireless providers such as AT&T Wireless, Sprint PCS and Verizon.
AdSource generates revenues by creating exhibitor paid director ads for
insertion in newspapers around the country. Baseline/FilmTracker generates
revenues from the syndication of its data, licensing information to
professionals in the feature film and television industries as well as operating
a pay-per-use subscription web site geared towards professionals in the
entertainment industry. Revenues from the Baseline/FilmTracker division
increased moderately from Q1-01 to Q1-02. The increase in revenue is a result of
the combination of Baseline with FilmTracker.com on January 14, 2002, and
reflects revenue generated from studios under the new subscription model which
allows customers unlimited data access for one monthly fee. This model is used
to target the larger customer, mainly film studios. We signed multi-year
licensing agreements with two major film studios during Q1-02.
Internet ad sales and other were $1,497,346 for Q1-02 as compared to
$1,464,902 for Q1-01, an increase of $32,444 or 2%. While the increase in
Internet ad sales appears to be minimal, revenues generated from national
advertising campaigns doubled in Q1-02 as compared to Q1-01 as revenues from
barter and syndication decreased. Our traffic levels continue to increase as the
number of unique visitors to Hollywood.com increased from 5,887,000 in the
fourth quarter of 2001 to 6,791,000 for Q1-02, as reported by Media Metrix. The
number of unique visitors was 2,407,000 for Q1-01. Internet ad sales revenue is
generated from the sale of sponsorships and banner advertisements on
25
Hollywood.com and Broadway.com. Included in Internet ad sales and other are
non-cash barter revenues of $757,869 and $798,568 for Q1-02 and Q1-01,
respectively. As a percentage of Internet ad sales and other, barter revenues
comprised 51% and 55% of Internet ad sales and other for Q1-02 and Q1-01,
respectively. Hollywood Media records two types of barter revenue related to
Internet advertising as more fully described below.
Barter transactions that generate non-cash advertising revenue
(included in Internet ad sales and other revenues), in which Hollywood Media
received advertising in exchange for content advertising on its web site was
$12,431 for Q1-02 and $53,130 for Q1-01, a reduction of $40,699 or 77% and
accounted for less than 1% of total net revenue for Q1-02 and Q1-01. Hollywood
Media records barter revenue only in instances where the fair value of the
advertising surrendered can be determined based on our historical practice of
receiving cash for similar advertising. Although management is focused on
maximizing cash advertising revenue, we will continue to enter into barter
relationships when deemed appropriate as a cashless method to market our
business.
Hollywood Media also records barter revenue and an equal amount of
expense earned under a contract with The National Association of Theater Owners
("NATO"), which Hollywood Media acquired through its acquisition of
hollywood.com, Inc. on May 20, 1999. This income is included in Internet ad
sales and other revenue. 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 feature films that play in most NATO-member
theaters. In exchange, Hollywood Media hosts web sites for member theaters and
collects and compiles movie showtimes for exhibiting NATO members as well as
providing promotional materials and movie information and editorial content.
Hollywood Media recorded $745,438 in promotional non-cash revenue and non-cash
expense included in selling and marketing expense under the NATO contract in
both Q1-02 and Q1-01. Barter revenue from NATO recorded accounted for 6% and 7%
of total net revenue for Q1-02 and Q1-01 respectively.
Revenues from our intellectual properties division were $948,651 for
Q1-02 as compared to $475,991 for Q1-01, an increase of $472,660 or 99%. The
increase in revenues is attributable to a greater number of manuscripts being
delivered in Q1-02 as compared to Q1-01 and an increase in royalties earned. The
intellectual properties division generates revenues from several different
activities including book development and licensing, intellectual property
licensing. Revenues vary quarter to quarter dependent on the timing of the
delivery of the manuscripts to the publishers. Revenues are recognized when the
earnings process is complete and ultimate collection of such revenues is no
longer subject to contingencies.
E-commerce revenue was $15,901 for Q1-01. This division was closed in
January 2001.
COST OF REVENUES
Cost of revenues was $8,441,472 for Q1-02 as compared to $6,767,165 for
Q1-01, an increase of $1,674,307 or 25%. The increase in the cost of revenues is
primarily the result of an increase in ticketing revenues. The ticketing segment
accounts for 94% of the cost of revenues for both Q1-02 and Q1-01. Cost of
revenue consists primarily of the cost of tickets and credit card fees for the
ticketing segment; commissions due to advertising agencies, advertising rep
firms and other third parties for revenue generated from the business to
business and Internet ad sales and other segments; and fees and royalties paid
to authors and co-editors for the intellectual properties segment.
26
GROSS MARGIN
Gross margin was $4,469,281 for Q1-02 as compared to $4,110,607 for
Q1-01, an increase of $358,674 or 9%. Gross margin increased predominately
because of the increase in revenue in Q1-02 from Q1-01 from the ticketing and
intellectual properties segments. As a percentage of net revenues the gross
margin percentage in Q1-02 was 35% as compared to 38% in Q1-01. The decrease in
gross margin percentage is attributable to an increased percentage of our
revenues being generated from ticketing, which generate lower gross margins than
our other business segments. In addition, the gross margins generated from our
participation in the "Red, White and Blue Freedom Package" promotion were lower
than normal due to the nature of the campaign.
EQUITY IN EARNINGS OF INVESTMENTS
Equity in earnings of investments consists of the following:
Three Months Ended March 31,
----------------------------
2002 2001
--------- ---------
NetCo Partners (a) $ 287,074 $ 498,258
MovieTickets.com (b) (70,691) (50,383)
--------- ---------
$ 216,383 $ 447,875
========= =========
(a) NetCo Partners
NetCo Partners owns Tom Clancy's NetForce and is primarily engaged in
the development and licensing of Tom Clancy's Net Force. NetCo Partners
recognizes revenues when the earnings process has been completed based on the
terms of the various agreements, generally upon the delivery of the manuscript
to the publisher and at the point where ultimate collection is substantially
assured. When advances are received prior to completion of the earnings process,
NetCo Partners defers recognition of revenue until the earnings process has been
completed. Hollywood Media owns 50% of NetCo Partners and accounts for its
investment under the equity method of accounting. Hollywood Media's 50% share of
earnings was $287,074 for Q1-02 as compared to $498,258 for Q1-01, a decrease of
$211,184.
(b) MovieTickets.com
Hollywood Media owns 26.4% of the total equity in MovieTickets.com,
Inc. joint venture at March 31, 2002. Hollywood Media records its investment in
MovieTickets.com, Inc. under the equity method of accounting, recognizing its
percentage of ownership of MovieTickets.com income or loss as equity in earnings
of investments. Excluding AOL's three percent convertible preferred equity
interest, Hollywood Media shares in 27.1% of the losses or income generated by
the joint venture. We recorded losses of $70,691 and $50,383 in Q1-02 and Q1-01,
respectively on our investment in MovieTickets.com. The web site generates
revenues from service fees charged to users for the purchase of tickets and the
sale of advertising which includes ads on the "print-at-home" ticket.
27
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $68,212 or 4% to $1,628,521 for Q1-02 from $1,696,733 for
Q1-01. General and administrative expenses consist of occupancy costs,
production costs, human resources and administrative expenses, professional and
consulting fees, telecommunication costs, provision for doubtful accounts
receivable and general insurance costs. As a percentage of revenue, general and
administrative expenses decreased to 13% for Q1-02 from 16% for Q1-01.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses remained
flat year over year, increasing $339 to $925,932 for Q1-02 from $925,593 for
Q1-01. Selling and marketing expenses includes advertising, marketing,
promotional, business development and public relations expenses. Also included
in selling and marketing expenses are non-cash barter transactions of $757,869
and $798,568 for the three months ended March 31, 2002 and 2001, respectively.
Barter transactions accounted for approximately 82% and 86% of selling and
marketing expense for the three months ended March 31, 2002 and 2001,
respectively. As a percentage of revenue, selling and marketing expenses
decreased to 7% for Q1-02 from 9% for Q1-01.
SALARIES AND BENEFITS. Salaries and benefits increased $443,284 or 14%
to $3,563,120 for Q1-02 from $3,119,836 for Q1-01. This increase is
predominately attributable to the increase in non-cash amortization of deferred
compensation of $519,113. Excluding the non-cash amortization of deferred
compensation, salaries and benefits decreased $75,829 or 3% in Q1-02 as compared
to Q1-01. As a percentage of revenue, salaries and benefits decreased to 28% for
Q1-02 from 29% for Q1-01.
AMORTIZATION OF CBS ADVERTISING. Amortization of CBS advertising
relating to the agreement with Viacom was $4,577,598 and $5,048,292 for Q1-02
and Q1-01, respectively. Under the agreement with Viacom, Hollywood Media issued
shares of common stock and warrants in exchange for cash and CBS's advertising
and promotional efforts over seven years across its full range of media
properties. The fair value of the common stock and warrants issued to Viacom has
been recorded in the balance sheet as deferred advertising and is being
amortized as the advertising is used each related contract year. The advertising
contract year begins on October 1 and ends September 30.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was
$905,055 and $2,150,078 for Q1-02 and Q1-01, respectively, representing a
decrease of $1,245,023. The decrease is primarily attributable to the cessation
of amortization of goodwill on January 1, 2002 in accordance with SFAS No. 142.
INTEREST EXPENSE. Interest expense for Q1-02 was $179,685 compared to
$55,636 for Q1-01, representing an increase of $124,049. The increase is
primarily attributable to non-cash charges of $93,609 related to the extension
of a promissory note guaranteed by Hollywood Media and a $50,000 fee to extend
the term of notes payable.
INTEREST INCOME. Interest income was $3,022 for Q1-02 as compared to
$49,725 for Q1-01.
28
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had cash and cash equivalents of $1,337,451
compared to cash and cash equivalents of $1,980,966 at December 31, 2001.
Working capital at March 31, 2002, which included $13,054,321 in deferred CBS
advertising was $9,284,349 as compared to working capital of $10,307,769 at
December 31, 2001 which included $13,054,321 in deferred CBS advertising. Net
cash used in operating activities during the first quarter of 2002 was $486,682,
primarily representing an increase in ticketing inventory, deferred revenue, and
accounts receivable for our ticketing division. Net cash used in investing
activities was $390,323, while $233,490 in cash was provided by financing
activities. As a result of the above, cash and cash equivalents decreased by
$643,515 for the three months ended March 31, 2002. In comparison, during the
three months ended March 31, 2001, net cash used in operating activities was
$954,952, net cash provided by investing activities was $269,994, and $372,968
in cash was provided by financing activities. Net cash used in operating
activities improved by $468,270 or 49% from $954,952 for Q1-01 to $486,682 for
Q1-02. Included in cash is $650,625 in proceeds held by Hollywood Media's agent
on our behalf in connection with our intellectual property division, which has
been transferred to Hollywood Media.
In the event that we require additional funding, Hollywood Media's
Chairman of the Board and Chief Executive Officer and Hollywood Media's Vice
Chairman and President, have indicated their intention to provide to Hollywood
Media, if required, with an amount not to exceed $5 million in order to enable
us to meet our working capital requirements during 2002; provided, however, that
the commitment will be reduced dollar for dollar to the extent Hollywood Media
raises no less than $5 million from other sources and such additional funding is
not expended on acquisitions. This commitment terminates January 1, 2003.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Hollywood
Media and all majority-owned subsidiaries. The consolidated financial statements
are prepared in conformity with accounting principles generally accepted in the
United States of America. As such, we are required to make certain estimates,
judgments and assumptions that we believe are reasonable based upon the
information available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:
Ticketing Revenue Recognition
Ticket revenue is derived from the sale of live theater tickets for
Broadway, off-Broadway and London shows to individuals, groups, travel agencies,
tour groups and educational facilities. Revenue recognition is deferred on
ticket sales until performance has taken place. Ticket revenue and cost of
revenue are recorded on a gross basis.
29
Advertising Costs
Hollywood Media expenses the cost of advertising as incurred or when
such advertising initially takes place. In the first quarter of 2000, Hollywood
Media issued common stock and warrants to CBS with a fair value of approximately
$137 million in exchange for approximately $105 million of advertising on CBS
properties to be received over a period of seven years. Hollywood Media is
entitled to utilize a specified portion of this advertising each contract year.
The deferred advertising is carried on Hollywood Media's balance sheet as a
deferred asset and is being amortized over the contract period as the
advertising is utilized. Advertising expense recorded related to CBS advertising
for three months ended March 31, 2002 and 2001 was $4,577,598 and $5,048,292,
respectively, and is separately reported in the accompanying consolidated
statements of operations under the caption "Amortization of CBS advertising."
These CBS advertising expenses are non-cash.
Barter Transactions
Hollywood Media records barter revenue and expense under the NATO
contract, which Hollywood Media acquired through its acquisition of
hollywood.com, Inc. in 1999. In connection with the NATO contract, Hollywood
Media also acquired rights and obligations under ancillary agreements with
individual theaters that participate in the NATO organization. Pursuant to these
agreements, Hollywood Media collects and compiles movie showtimes data for NATO
member theaters and hosts web sites for each of the theaters so as to display
the movie showtimes and other information about the theater. In addition,
Hollywood Media provides ongoing web site maintenance services for each of the
theaters including providing promotional materials, movie and theater
information, advertising 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 in
accordance with Accounting Principles Board Opinion ("APB") No. 29, "Accounting
for Nonmonetary Transactions." During the three months ended March 31, 2002 and
2001 we recorded $745,438, in revenue and expense under the NATO contract.
Additionally for the three months ended March 31 2002 and 2001 we recorded
$12,431 and $53,130, respectively in other non-cash Internet barter
transactions.
Stock Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," allows either adoption of a fair
value method of accounting for stock-based compensation plans or continuation of
accounting under APB No. 25, "Accounting for Stock Issued to Employees," and
related interpretations with supplemental disclosures. Hollywood Media has
chosen to account for all stock-based arrangements under which employees receive
shares of Hollywood Media's stock under APB 25 and make the related disclosures
required by SFAS No. 123. Stock options and warrants granted to non-employees
are accounted for under the fair value method prescribed by SFAS No. 123 and
related interpretations.
30
Impairment of Long-Lived Assets
Beginning on January 1, 2002, Hollywood Media applies the provisions of
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Under the provisions of this statement, Hollywood Media has evaluated its
long-lived assets for financial impairment, and will continue to evaluate them
as events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable.
Hollywood Media evaluates the recoverability of long-lived assets to be
held and used by comparing the carrying amount of the assets to the estimated
undiscounted cash flows associated with them. At the time such evaluations
indicate that the future undiscounted cash flows of certain long-lived assets
are not sufficient to recover the carrying values of such assets, the assets are
adjusted to their fair values. Hollywood Media determines fair value as the net
present value of future cash flows. Based on these evaluations, there were no
adjustments to the carrying value of long-lived assets in 2002 or 2001.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and
intangible assets acquired after June 30, 2001 were no longer subject to
amortization. Goodwill and intangibles with indefinite lives acquired prior to
June 30, 2001 ceased to be amortized beginning January 1, 2002. In addition,
SFAS 142 will change the way we evaluate goodwill and intangibles for
impairment. On January 1, 2002, goodwill and certain intangibles are no longer
amortized; however, they will be subject to evaluation for impairment at least
annually using a fair value based test. The fair value based test is a two-step
test. The first step involves comparing the fair value of each of our reporting
units to the carrying value of those reporting units. If the carrying value of a
reporting unit exceeds the fair value of the reporting unit, we will be required
to proceed to the second step. In the second step, the fair value of the
reporting unit will be allocated to the assets (including unrecognized
intangibles) and liabilities of the reporting unit, with any residual
representing the implied fair value of goodwill. An impairment loss will be
recognized if and to the extent that the carrying value of goodwill exceeds the
implied value.
Hollywood Media has not yet completed its evaluation in order to
determine if an impairment exists and therefore is unable to quantify the
impact, if any, on the results of operations and financial position. The
transition provisions of SFAS 142 allow until June 30, 2002 to complete step one
of the test and, if required, until December 31, 2002 to complete step 2.
Effective January 1, 2002, we ceased to amortize approximately $40.7 million of
goodwill. Our annual goodwill amortization was approximately $5.3 million.
INFLATION AND SEASONALITY
Although Hollywood Media cannot accurately determine the precise
effects of inflation, it does not believe inflation has a material effect on
sales or results of operations. Hollywood Media considers its business to be
somewhat seasonal and expects net revenues to be generally higher during the
second and fourth quarters of each fiscal year for its Tekno Books book
licensing business as a result of the general publishing industry practice of
paying royalties semi-annually. The ticketing business is also effected by
seasonal variations with net revenues generally higher in the second quarter as
a result of increased sales volumes due to the Tony Awards(R) and in the fourth
quarter due to increased levels during the holidays. In addition, although not
seasonal, Hollywood Media's intellectual properties division and NetCo Partners
both experience fluctuations in their respective revenue streams, earnings and
cash flow as a result of the amount of time that is expended in the creation and
development of the intellectual properties and their respective licensing
agreements. The recognition of licensing revenue is typically triggered by
specific contractual events which occur at different points in time rather than
on a regular periodic basis.
31
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 2, 2002, Hollywood Media issued 520,682 shares of common
stock to Hollywood Media's Chairman of the Board and Chief Executive Officer and
Hollywood Media's Vice Chairman and President in accordance with the
cancellation on December 14, 2001, of 1,045,000 stock options. The shares issued
vest 50% on June 30, 2002 and 50% on January 1, 2003. The approximate fair value
of the stock options, $2,280,587 at December 14, 2001, was equal to the fair
value of the restricted stock for which it was exchanged.
We issued a total of 40,344 shares of common stock valued at $187,217
during the three months ended March 31, 2002 for the extension of the term of a
promissory note that Hollywood Media guaranteed. The borrower on the note, the
former owner of CinemaSource (currently an employee of CinemaSource) is
obligated to pay Hollywood Media an amount equal to 50% of the costs incurred
for payment of the extension by Hollywood Media.
In February 2002, Hollywood Media issued 1,163 shares of common stock
valued at $6,390 in connection with an amendment to a settlement agreement. The
shares were valued at the market price of the common stock on the date the
amendment was entered into.
On March 27, 2002, Hollywood Media issued 20,777 shares of common stock
valued at $136,920 for payment of Hollywood Media's 401(k) employer match for
calendar year 2001.
During 2002, Hollywood Media issued 54,392 shares of unrestricted
common stock valued at $293,095, calculated using the closing market price on
the various dates of issuance in accordance with the Hollywood Media 2000 Stock
Incentive Plan.
During the three months ended March 31, 2002, Hollywood Media issued
stock options and warrants valued at $77,228 for consulting services rendered
and recorded such amount as consulting expense in the accompanying consolidated
statement of operations.
During the three months ended March 31, 2002, Hollywood Media completed
net issuances of 34,644 shares of common stock upon the exercise of outstanding
stock options and warrants for which no proceeds were received.
During the quarter ended March 31, 2002, Hollywood Media issued stock
options and warrants to purchase an aggregate of 105,500 and 10,000 shares of
common stock, respectively, at exercise prices ranging from $5.05 to $6.50 per
share. Options granted to employees are subject to vesting periods ranging from
six months to four years and generally expire 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 Hollywood Media with respect thereto
and having consented to the imposition of restrictive legends upon certificates
evidencing such securities.
32
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 Hollywood Media
Corp. 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 Hollywood Media
Corp. 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 Hollywood Media
Corp. 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 Hollywood Media
Corp. 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 Hollywood Media
Corp. and American Stock Transfer & Trust Company, as Rights Agent (6)
10.1 Transfer and Shareholders Agreement dated January 14, 2002 by and among
Baseline Acquisitions Corp., Baseline, Inc., Hollywood Media Corp. and
Fountainhead Media Services, Inc. (7)
10.2 Employment Agreement as of January 14, 2002 between Baseline, Inc. and
Alex Amin (7)
10.3 Employment Agreement as of January 14, 2002, between Baseline, Inc. and
Rafi Gordon (7)
10.4 Pledge Agreement, as of January 14, 2002 between Fountainhead Media
Services, Inc. and Hollywood Media Corp. (7)
10.5 Management Service Agreement as of January 14, 2002 between Hollywood
Services, Inc. and Baseline, Inc. (7)
10.6 Stock Purchase Agreement, as of January 14, 2002 between Fountainhead
Services, Inc. and Hollywood Media Corp. (7)
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10.7 Secured Promissory Note between Fountainhead Media Services and Hollywood
Media Corp., dated January 14, 2002
Schedule 1 to Promissory Note (7)
(1) Incorporated by reference from the exhibit filed with Hollywood Media's
Annual Report on Form 10-K for the year ended December 31, 2000.
(2) Incorporated by reference from the exhibit filed with Hollywood Media's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998.
(3) Incorporated by reference from the exhibit filed with Hollywood Media's
Registration Statement on Form S-3 (No. 333-68209).
(4) Incorporated by reference from exhibits filed with Hollywood Media's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999.
(5) Incorporated by reference from the exhibit filed with Hollywood Media's
Registration Statement on Form SB-2 (No. 33-69294).
(6) Incorporated by reference from exhibit 1 to Hollywood Media's Current
Report on Form 8-K filed on October 20, 1999.
(7) Incorporated by reference from the exhibit filed with Hollywood Media's
Annual Report on Form 10-K for the year ended December 31, 2001.
(a) REPORTS ON FORM 8-K
We did not file any Current Report on Form 8-K during the quarter ended
March 31, 2002.
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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: May 15, 2002 By: /s/ Mitchell Rubenstein
------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
(Principal executive, financial and
accounting officer)
35