U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 0-22908
HOLLYWOOD.COM, INC.
(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)
Big Entertainment, Inc.
-----------------------
(Former Name)
Indicated by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- -----------
As of November 9, 2000, the number of shares outstanding of the
issuer's common stock, $.01 par value, was 24,814,994.
<PAGE>
HOLLYWOOD.COM, INC.
Table of Contents
<TABLE>
<CAPTION>
Page(s)
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PART I FINANCIAL INFORMATION
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<S> <C> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999...................................... 3
Consolidated Statements of Operations for the Nine and Three
Months ended September 30, 2000 and 1999 (unaudited) .................. 4
Consolidated Statement of Shareholders' Equity for the
Nine Months ended September 30, 2000 (unaudited)....................... 5
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2000 and 1999 (unaudited)................... 6
Notes to Consolidated Financial Statements (unaudited)................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 18
PART II OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS............................................................ 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................... 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K... .......................................... 31
Signature .............................................................................. 33
</TABLE>
2
<PAGE>
HOLLYWOOD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,887,581 $ 2,475,345
Receivables, net 2,458,283 1,155,999
Inventories 1,318,988 1,246,733
Prepaid expenses 1,327,363 1,687,347
Note receivable 360,516 --
Other receivables 24,292 18,037
Other current assets 126,758 67,541
Deferred advertising - CBS 21,579,445 --
------------- -------------
Total current assets 32,083,226 6,651,002
PROPERTY AND EQUIPMENT, net 2,812,215 1,877,959
INVESTMENTS 1,649,402 549,975
NONCURRENT DEFERRED ADVERTISING - CBS 98,604,998 --
INTANGIBLE ASSETS, net 4,161,555 3,770,590
GOODWILL, net 46,848,136 46,483,647
OTHER ASSETS 2,463,554 3,149,652
------------- -------------
TOTAL ASSETS $ 188,623,086 $ 62,482,825
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,151,543 $ 2,181,089
Accrued professional fees 54,094 199,514
Other accrued expenses 1,819,461 1,579,682
Loan from shareholder/officer 1,600,000 --
Customer deposits 882,281 --
Deferred advertising - CBS -- 2,344,950
Accrued reserve for closed stores 732,737 2,366,432
Deferred revenue 1,661,108 308,061
Note payable 750,000 1,928,138
Current portion of capital lease obligations 580,777 561,015
------------- -------------
Total current liabilities 12,232,001 11,468,881
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CAPITAL LEASE OBLIGATIONS, less current portion 853,532 995,213
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DEFERRED REVENUE 365,132 249,117
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MINORITY INTEREST 152,045 270,828
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COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized; 24,075,920
(unaudited) and 15,143,216 shares issued at September 30, 2000
and December 31,1999, respectively 240,759 151,432
Warrants outstanding 6,656,612 5,096,704
Deferred compensation (153,100) (306,200)
Additional paid-in capital 261,309,024 105,500,656
Accumulated deficit (93,032,919) (60,943,806)
------------- -------------
Total shareholders' equity 175,020,376 49,498,786
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 188,623,086 $ 62,482,825
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
3
<PAGE>
HOLLYWOOD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES $ 18,012,265 $ 5,829,924 $ 8,029,020 $ 2,774,734
COST OF REVENUE 6,374,119 1,941,347 3,494,409 630,390
------------ ------------ ------------ ------------
Gross profit 11,638,146 3,888,577 4,534,611 2,144,344
------------ ------------ ------------ ------------
OPERATING EXPENSES:
General and administrative 7,979,538 4,482,558 2,768,025 1,967,124
Selling and marketing 8,057,898 2,338,092 2,760,214 1,270,224
Salaries and benefits 8,364,459 3,640,877 3,203,955 1,826,172
Amortization of CBS advertising - non-cash 14,855,465 -- 5,479,561 --
Depreciation and amortization 1,050,316 1,036,381 391,841 422,342
Amortization of goodwill and intangibles 5,065,645 2,102,688 1,735,076 1,455,856
Reserve for closed stores and leased termination costs 9,519 341,188 (236) 293,391
------------ ------------ ------------ ------------
Total operating expenses 45,382,840 13,941,784 16,338,436 7,235,109
------------ ------------ ------------ ------------
Operating loss (33,744,694) (10,053,207) (11,803,825) (5,090,765)
EQUITY IN NET EARNINGS - INVESTMENTS 2,099,865 1,210,063 845,906 87,472
OTHER:
Interest, net (201,887) (462,340) (86,084) (93,378)
Other, net 34,599 8,091 6,192 (971)
------------ ------------ ------------ ------------
Loss before minority interest (31,812,117) (9,297,393) (11,037,811) (5,097,642)
MINORITY INTEREST (276,996) (343,191) (124,141) (104,239)
------------ ------------ ------------ ------------
Net loss $(32,089,113) $ (9,640,584) $(11,161,952) $ (5,201,881)
============ ============ ============ ============
Basic and diluted loss per common share $ (1.40) $ (0.86) $ (0.47) $ (0.36)
============ ============ ============ ============
Weighted average common and common equivalent
shares outstanding - basic and diluted 22,911,866 11,372,691 23,639,409 14,343,100
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid-in Warrants
Stock Capital Outstanding
------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance - December 31,1999 $ 151,432 $ 105,500,656 $ 5,096,704
Issuance of common stock and common stock
warrants pursuant to CBS agreement 66,720 130,037,885 7,114,781
Stock options and warrants exercised 14,604 19,586,041 (7,114,781)
Issuance of common stock - acquisitions 3,454 1,667,262 --
Issuance of common stock - private placement 3,656 2,544,351 358,016
Common stock warrants issued in connection
with investment in Movietickets.com -- -- 1,000,000
Issuance of common stock, stock options and warrants
for services rendered 95 189,215 201,892
Issuance of common stock - payment of note payable 1,525 1,926,613 --
Non-cash issuance of common stock - franchise
agreement 1,000 1,649,000 --
Amortization of employee stock bonuses -- -- --
Shares repurchased (1,727) (1,791,999) --
Net loss -- -- --
------------- ------------- -------------
Balance - September 30,2000 $ 240,759 $ 261,309,024 $ 6,656,612
============= ============= =============
</TABLE>
[RESTUBBED]
<TABLE>
<CAPTION>
Deferred Accumulated
Compensation Deficit Total
------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance - December 31,1999 $ (306,200) $ (60,943,806) $ 49,498,786
Issuance of common stock and common stock
warrants pursuant to CBS agreement -- -- 137,219,386
Stock options and warrants exercised -- -- 12,485,864
Issuance of common stock - acquisitions -- -- 1,670,716
Issuance of common stock - private placement 2,906,023 -- 2,906,023
Common stock warrants issued in connection
with investment in Movietickets.com -- -- 1,000,000
Issuance of common stock, stock options and warrants
for services rendered -- -- 391,202
Issuance of common stock - payment of note payable -- -- 1,928,138
Non-cash issuance of common stock - franchise
agreement -- -- 1,650,000
Amortization of employee stock bonuses 153,100 -- 153,100
Shares repurchased -- -- (1,793,726)
Net loss -- (32,089,113) (32,089,113)
------------- ------------- -------------
Balance - September 30,2000 $ (153,100) $ (93,032,919) $ 175,020,376
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
<PAGE>
HOLLYWOOD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(32,089,113) $ (9,640,584)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of CBS advertising - non-cash 14,855,465 --
Depreciation and amortization 6,115,961 3,139,069
Equity in earnings, net of return of invested capital (1,099,427) 121,630
Issuance of stock options and warrants for services rendered 189,310 169,888
Amortization of employee stock bonuses 153,100 153,100
Recognition of deferred gain -- (9,062)
Provision for bad debts 145,816 --
Provision for inventory obsolescence 95,010 --
Amortization of deferred financing costs 6,435 295,644
Reserve for closed store and lease termination costs 9,519 341,188
Minority interest 276,996 343,191
Changes in assets and liabilities:
Receivables (691,061) 547,986
Prepaid expenses 385,057 (511,001)
Merchandise inventories (3,784) 45,934
Other current assets (65,031) (83,107)
Other assets (89,181) 44,116
Accounts payable 403,312 (1,445,474)
Accrued professional fees (145,420) 105,525
Customer deposits 882,281 --
Deferred revenue 1,670,954 (15,064)
Other accrued expenses 246,564 (221,789)
------------ ------------
Net cash used in operating activities (8,747,237) (6,618,810)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash received (247,862) (7,307,908)
Investment in trademarks (1,070,000) --
Capital expenditures, net (1,410,319) (175,348)
Return of capital from Tekno Books to minority partner (395,779) (301,844)
------------ ------------
Net cash used in investing activities (3,123,960) (7,785,100)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments from revolving line of credit -- (758,917)
Proceeds from shareholder/officer loan 2,050,000 711,000
Repayments of shareholder/officer loan (450,000) (811,000)
Loan to employee, net (360,516) --
Net proceeds from issuance of common stock 8,209,053 17,077,334
Proceeds from exercise of stock options and warrants 7,017,363 4,846,669
Dividends on preferred stock -- (28,097)
Payments to repurchase common stock (1,793,726) (668,729)
Repayments under capital lease obligations (388,741) (463,688)
------------ ------------
Net cash provided by financing activities 14,283,433 19,904,572
------------ ------------
Net increase in cash and cash equivalents 2,412,236 5,500,662
CASH AND CASH EQUIVALENTS, beginning of period 2,475,345 729,334
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 4,887,581 $ 6,229,996
============ ============
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 320,335 $ 253,231
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD.COM, INC. 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.com, Inc. (the "Company") 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 generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations. However, the
Company 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 the Company's financial position and results of operations.
The results of operations and cash flows for the nine and three months ended
September 30, 2000 are not necessarily indicative of the results of operations
or cash flows which may be recorded for the remainder of 2000.
The accompanying consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
(2) ACQUISITIONS:
(a) CinemaSource, Inc.:
On May 18, 1999, the Company acquired substantially all of the assets of
CinemaSource, Inc. ("CinemaSource"), a privately held company, pursuant to the
terms of the Asset Purchase Agreement dated March 29, 1999 for $6.5 million in
cash and 436,191 shares of the Company's common stock valued at $12.50 per
share. At the closing of the acquisition, the Company directed CinemaSource to
transfer the assets sold, on the Company's behalf, to its wholly owned
subsidiary, Showtimes.com, Inc. ("Showtimes.com"). The shares of the Company's
common stock issued at the time of acquisition were restricted from resale for
the first 12 months following the closing of the transaction and are subject to
volume limitations regarding resale thereafter. CinemaSource gathers movie data,
including showtimes, synopses, photos and trailers, and then licenses this data,
in a compiled manner, to various Internet companies, newspapers and wireless
providers.
7
<PAGE>
(b) hollywood.com, Inc.:
On May 20, 1999, the Company acquired all of the capital stock of Hollywood
Online Inc., ("hollywood.com"), from The Times Mirror Company ("Times Mirror").
The aggregate consideration paid to Times Mirror by the Company consisted of a
one-year unsecured promissory note for $1,928,138 and 2,300,075 shares of common
stock, which was valued as of the date of the transaction at $12.64 per share.
As part of the transaction costs the Company issued 53,452 shares of common
stock for services rendered in connection with the acquisition. The
Hollywood.com website offers viewers movie information, movie trailers, box
office charts, movie soundtracks, photos and exclusive interactive games,
celebrity interviews, local movie showtimes, and coverage of movie premieres,
film festivals and movie-related events. Hollywood.com has an exclusive contract
with the National Association of Theatre Owners ("NATO"). Through this contract,
Hollywood.com promotes its website to movie audiences by airing trailers
featuring Hollywood.com before the feature films that play in most NATO-member
theatres. In exchange, hollywood.com provides websites for the exhibiting NATO
members. The value of this contract was recorded as an intangible asset of $4.6
million and is being amortized over the remaining life of the contract,
approximately three years.
(c) Baseline II, Inc.:
On August 31, 1999, the Company purchased substantially all of the motion
picture-related data assets of Baseline II, Inc. and Paul Kagan Associates,
Inc., which includes the PKBaseline.com website (now called HollywoodPro.com),
several publications, including the Motion Picture Investor newsletter, and a
consumer oriented movie website (the "Baseline assets"). HollywoodPro.com is a
subscription pay-per-use website for research analysts, movie professionals,
investment bankers and news organizations. The aggregate purchase price paid for
the Baseline assets consisted of 492,611 shares of common stock valued at $17.81
per share and warrants to purchase an aggregate of 54,735 shares of common stock
at an exercise price of $18.27 per share valued at $543,588. The shares of
common stock issued in the transaction cannot be transferred by the holders for
a period of 24 months following the closing of the transaction.
The acquisitions of CinemaSource, hollywood.com and Baseline II were accounted
for under the purchase method of accounting and accordingly, the operating
results of CinemaSource, hollywood.com and Baseline have been included in the
Company's consolidated financial statements since the date of acquisition. The
excess of the aggregate purchase prices over the fair value of net assets
acquired in 1999 of $48.9 million is being amortized over 10 years.
(d) BroadwayTheater.com, Inc.:
On May 1, 2000, the Company acquired substantially all of the assets of
BroadwayTheater.com, Inc. ("BroadwayTheater.com"), a privately held company, for
$135,000 in cash and 83,214 shares of the Company's common stock valued at
$14.00 per share. The seller of BroadwayTheater.com, Inc. has the right to earn
up to a maximum of 85,714 additional shares of the Company's common stock if the
business meets specified gross profit targets during the three years following
the closing of the acquisition. BroadwayTheater.com sells theater tickets online
predominately for Broadway, off-Broadway and London's West End theater
performances, through the Broadway.com website which is owned by the Company.
(e) Theatre Direct NY, Inc. (D/B/A Theater
Direct International):
On September 15, 2000, the Company acquired Theatre Direct NY, Inc. ("TDI") from
Cameron Mackintosh for 262,165 shares of common stock valued at $2 million and
assumed a $500,000 inter-company promissory note. Of the shares issued at
closing, 195,874 shares are held in escrow for a period of twelve months and
will be delivered to the seller if certain conditions are satisfied at the end
of the twelve month period. TDI is a ticketing wholesaler primarily to the
travel industry (including travel agencies and tour operators) and educational
institutions for live theater productions running on Broadway, off-Broadway and
London. TDI sells tickets through an 800 number, through SABRE (a travel agent
reservation system), via the Web and by fax. As a marketing partner, TDI
represents 11 producers and 16 Broadway shows to the travel industry around the
world.
8
<PAGE>
The acquisitions of BroadwayTheater.com and TDI were accounted for as a purchase
and, accordingly, the operating results of BroadwayTheater.com and TDI have been
included in the Company's consolidated financial statements since the date of
acquisition. The excess of the aggregate purchase price over the fair market
value of net assets acquired of $4.5 million is being amortized over 10 years.
The purchase price of CinemaSource (a), hollywood.com (b), Baseline II, Inc.
(c), BroadwayTheater.com (d) and TDI (e) was allocated to assets and liabilities
acquired as follows:
2000(d)(e) 1999(a)(b)(c)
------------ ------------
Tangible assets $ 1,085,019 $ 2,873,237
Intangible assets -- 4,564,513
Goodwill 3,150,702 48,511,847
Liabilities assumed (2,317,143) (586,877)
------------ ------------
Total purchase price 1,918,578 55,362,720
Less value of common stock
and warrants issued (1,670,716) (46,126,674)
Less value of note issue -- (1,928,138)
------------ ------------
Subtotal $ 247,862 $ 7,307,908
============ ============
Paid in cash - purchase price, net of cash
Acquired $ (192,938) $ 6,500,000
Paid in cash - acquisition costs
440,800 807,908
------------ ------------
Total cash paid, net of cash acquired $ 247,862 $ 7,307,908
============ ============
The Company incurred $185,008 in purchase price adjustments during the six
months ended June 30, 2000 relating to acquisitions in 1999 which have been
included in Goodwill.
9
<PAGE>
The following are unaudited pro forma combined results of operations of the
Company, hollywood.com, CinemaSource, Baseline II and TDI for the nine and three
months ended September 30, 2000 and 1999, as if the acquisitions of
hollywood.com, CinemaSource, Baseline II and TDI had occurred on January 1,
1999:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Revenues $ 35,769,113 $ 21,063,260 $ 13,118,653 $ 7,822,624
============= ============ ============= ============
Net Loss $ (32,059,956) $(17,495,455) $ (11,119,384) $ (5,566,891)
============= ============ ============= ============
Pro Forma Diluted Loss
Per Share $ (1.40) $ (1.33) $ (0.47) $ (0.38
============= ============ ============= ============
Weighted Average Shares
Outstanding 22,976,948 13,236,754 23,702,097 14,748,056
============= ============ ============= ============
</TABLE>
These unaudited pro forma combined results have been prepared for
comparative purposes only and include certain adjustments, such as additional
amortization expense as a result of goodwill and certain contractual adjustments
to salaries. They do not purport to be indicative of the results of operations
which actually would have resulted had the acquired companies been under common
control prior to the date of the acquisition or which may result in the future.
The pre-acquisition results of operations of BroadwayTheater.com are not
material to the Company's consolidated results of operations and therefore have
been excluded from the pro forma combined results of operations.
(3) NOTE RECEIVABLE:
On April 14, 2000, the Company advanced $1,737,513 to an employee of the
Company, who is the former shareholder of CinemaSource, to enable the employee
to pay his income taxes relating to the sale of CinemaSource by him to the
Company. As of September 30, 2000, $1,376,997 of the loan had been repaid to the
Company leaving a balance of $360,516. The loan has a one year term, bears
interest at prime rate plus 1% and is secured by shares of Common Stock of the
Company owned by the borrower.
On January 6, 2000 the Company acquired the web address Broadway.com for a
purchase price of $1.6 million, paid with $1 million in cash and 35,294 shares
of common stock valued at $17.00 per share. The common stock was issued in 1999
and delivered in anticipation of the January 2000 closing. The Company launched
the Broadway.com website on May 1, 2000. In addition to selling tickets to live
theater events, the Broadway.com website offers a comprehensive database of
professional theater showtimes listings, with listings for more than 2,400
venues around the country and in London, as well as show synopses, cast and crew
credits and biographies, digitized show previews and showtunes, a community chat
area and interviews.
(4) DEBT:
On May 20, 1999, the Company delivered a $1,928,138 one-year unsecured
promissory note of the Company payable to Times Mirror as partial consideration
for the acquisition of hollywood.com, Inc. This note was paid on June 16, 2000
by issuing 152,548 shares of the Company's common stock valued at approximately
$12.64 per share.
During the second quarter of 2000, the Company's Chairman of the Board and Chief
Executive Officer and the Company's Vice Chairman and President advanced
$2,050,000 to the Company to enable the Company to meet its obligation to lend
to a former shareholder of CinemaSource funds to pay the shareholder's taxes
under the purchase agreement between the Company and the former shareholder of
CinemaSource. As of September 30, 2000, $450,000 of the loan had been repaid
leaving a balance of $1,600,000. This loan was repaid in full subsequent to
September 30, 2000. The loan bears interest at the J.P. Morgan Bank prime rate
of interest.
10
<PAGE>
(5) OTHER ACCRUED EXPENSES:
Included in other accrued expenses of $1,819,461 at September 30, 2000 is
accrued payroll, accrued vacation, taxes payable and packaging fees payable.
(6) CUSTOMER DEPOSITS:
At September 30, 2000 the Company recorded $882,281 in proceeds received from a
tour company to be used by the Company to purchase theater tickets to
performances in London and Toronto for the 2001 tour season on behalf of the
tour company. Any unused portion of the deposit will be returned to the tour
company at the end of the agreement.
(7) ACCRUED RESERVE FOR CLOSED STORES:
The Company recorded a liability for estimated cost of early lease terminations
and other costs related to the closure of the Company's brick and mortar retail
operations of $2,366,432 at December 31, 1999. During the first quarter of 2000,
$1,650,000 of the liability was satisfied, (see Note 8). The balance in accrued
reserve for closed stores at September 30, 2000 was $732,737.
(8) COMMON STOCK:
On January 3, 2000, the Company issued 6,672,031 shares of common stock valued
at $19.50 per share and a warrant to purchase 1,178,892 shares of common stock
valued at $7,114,781, with an exercise price of $10,937,002 as consideration for
$100,000,000 of CBS advertising, promotion and content over a seven year period
and $5,303,030 in cash. In March 2000, CBS exercised a warrant to acquire an
additional approximate 5% equity interest in the Company. The exercise price of
these warrants was $10,937,002 consisting of $5,468,501 in cash and $5,468,501
in additional promotional advertising from CBS. The value of the common stock
and warrants issued to CBS has been recorded in the balance sheet as deferred
advertising and is being amortized over each related contract year.
On February 8, 2000, the Company issued 100,000 shares of common stock valued at
$1,650,000 in order to reacquire territorial rights as per a franchise
agreement. The Company closed its retail operations in December 1999 and
$1,650,000 was accrued for in the accompanying December 31, 1999 consolidated
balance sheet as accrued reserve for closed stores.
On May 1, 2000, the Company acquired substantially all the assets of
BroadwayTheater.com for $135,000 in cash and 83,214 shares of common stock
valued at $14.00 per share.
On June 16, 2000, the Company issued 152,548 shares of common stock valued at
approximately $12.64 per share in order to pay-off an unsecured promissory note
payable to the Times Mirror Company.
On August 22, 2000 the Company issued 358,423 shares of common stock in a
private placement at a purchase price of $8.37 per share. In addition, the
Company issued to the same investors warrants to purchase an aggregate of 60,000
shares of common stock at a price of $10 per share. These warrants have been
valued at $358,016. The Company incurred $93,977 in transaction costs and issued
7,168 shares of common stock as a fee to the placement agent.
On September 15, 2000 the Company acquired TDI for 262,165 shares of common
stock valued at $2,000,000. Of the shares issued at closing, 195,874 shares of
common stock are to be held in escrow for a period of twelve months and will be
delivered if certain conditions are satisfied at the end of the twelve month
period.
11
<PAGE>
During the three months ended September 30, 2000 the Company issued 9,511 shares
of common stock valued at $76,767 for services rendered.
In 1998, the Company's Board of Directors approved a plan for the repurchase of
the Company's common stock. Pursuant to the plan, during the nine months ended
September 30, 2000 the Company repurchased 171,700 shares of its common stock
for an aggregate consideration of $1,793,726, and an average purchase price of
$10.45 per share.
During the nine months ended September 30, 2000, the Company issued 1,460,344
shares of common stock upon the exercise of outstanding stock options and
warrants, for which the Company received $7,017,363 in cash exercise proceeds
and $5,468,501 in additional promotional advertising from CBS.
(9) INVESTMENTS:
(a) NETCO PARTNERS:
The Company owns a 50% interest in a joint venture called NetCo Partners. The
Company records its investment under the equity method of accounting,
recognizing 50% of NetCo Partners' income or loss as Equity in Net Earnings -
Investments. NetCo Partners is engaged in the licensing of intellectual
properties. NetCo Partners has entered into numerous licensing agreements,
including book publishing agreements with The Berkley Publishing Group, Books on
Tape, Inc. and various foreign publishers, and an ABC television mini-series
agreement. NetCo Partners recognizes revenues pursuant to these contracts when
the earnings process has been completed based on the terms of the various
contracts and at the point where ultimate collection of such revenue is no
longer subject to significant contingencies such that collection is
substantially assured.
The revenues, gross profit and net income of NetCo Partners for the nine and
three months ended September 30, 2000 and 1999 are presented below:
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues $5,556,639 $3,075,677 $2,483,866 $319,807
Gross Profit 4,560,878 2,508,575 1,984,960 270,417
Net Income 4,546,059 2,420,126 1,952,583 174,945
The revenues, gross profit and net income of NetCo Partners for the three months
ended September 30, 2000 are principally attributable to the delivery to the
publisher of the manuscript for adult book number five in the Tom Clancy's
NetForce series of books.
As of September 30, 2000, NetCo Partners has $2,938,370 in accounts receivable.
Management of NetCo Partners believes that these receivables will be collected
in full and no reserves have been established.
NetCo Partners' deferred revenues, consisting of cash advances received but not
yet recognized as income, amounted to $749,804 as of September 30, 2000.
As of September 30, 2000, the Company has received cumulative profit
distributions from NetCo Partners since its formation totaling $4,997,368, in
addition to reimbursement of substantially all amounts advanced by the Company
to fund the operations of NetCo Partners.
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<PAGE>
(b) MOVIETICKETS.COM, INC.:
The Company entered into a joint venture agreement on February 29, 2000 with the
movie theater chains AMC Entertainment Inc. and National Amusements, Inc. to
form MovieTickets.com, Inc., ("MovieTickets.com"). The joint venture has entered
into an agreement in principle for Viacom Inc. to acquire a five percent
interest for $25 milliam of advertising over 5 years. The Company owned 31.67%
of the MovieTickets.com, Inc. joint venture at September 30, 2000. The Company
records its investment under the equity method of accounting, recognizing its
percentage ownership of MovieTickets.com income or loss as equity in net
earnings - investments. For the nine months ended September 30, 2000, the
Company recorded a loss of $173,165 in its investment in MovieTickets.com. The
MovieTickets.com website, which launched in late May 2000, allows users to
purchase movie tickets online. At September 30, 2000, the Company contributed
$400,000 in cash to MovieTickets.com and issued warrants to acquire 90,573
shares of common stock at an exercise price of $17.875 per share and valued at
$1,000,000. This warrant was recorded as goodwill and is being amortized over a
life of ten years.
(10) LOSS PER COMMON SHARE:
Basic loss per common share is computed by dividing net loss, after deducting
dividends applicable to preferred stock, by the weighted average number of
common shares outstanding.
The following table sets forth the computation of basic and diluted loss per
share for the nine and three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Loss $(32,089,113) $ (9,640,584) $(11,161,952) $ (5,201,881)
Preferred Stock Dividends -- (119,557) -- (28,097)
------------ ------------ ------------ ------------
Net Loss Available to Common
Shareholders $(32,089,113) $ (9,760,141) $(11,161,952) $ (5,229,978)
Weighted Average Shares
Outstanding 22,911,866 11,372,691 23,639,409 14,343,100
------------ ------------ ------------ ------------
Basic and Diluted Loss per
Share $ (1.40) $ (0.86) $ (0.47) $ (0.36)
============ ============ ============ ============
</TABLE>
Inclusion of convertible preferred shares as dilutive securities would have an
antidilutive effect on the loss per share calculation. Accordingly, these shares
have been excluded from the calculation for the nine and three months ended
September 30, 2000 and 1999. Options and warrants to purchase 3,968,898 shares
of common stock at exercise prices ranging from $0.01 to $23.00 per share were
also not included in the computation of loss per share for the nine months ended
September 30, 2000 because the result would be antidilutive.
13
<PAGE>
(11) SEGMENT REPORTING:
The Company has six reportable segments: Internet ad sales, business to business
(b2b), ticketing, e-commerce, retail, and intellectual properties. The Internet
ad sales segment sells advertising on the Hollywood.com, Broadway.com and
Hollywood.com International websites. The business to business segment (b2b)
licenses entertainment content and data and includes the divisions CinemaSource
(which licenses movie showtimes and other movie content), EventSource (which
licenses local event data), TheaterSource (which licenses live theater showtimes
and content) and ConcertSource (which licenses local listings of concerts and
music related events) to Internet, media and wireless companies. The ticketing
segment sells tickets to live theater events for Broadway, off-Broadway and
London's West End on the Internet and to domestic and international travel
professionals including travel agencies and tour operators, educational
institutions and traveling consumers. E-commerce sells entertainment related
merchandise over the Internet. The retail segment operated retail studio stores
that sold entertainment-related merchandise and was closed in December 1999. 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, including books.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company 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.
14
<PAGE>
The following table illustrates the financial information regarding the
Company's reportable segments.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Revenues:
Internet Ad Sales $ 7,548,400 $ 2,020,732 $ 2,679,901 $ 1,308,537
Business to Business 3,872,023 836,808 1,515,674 639,282
Ticketing 4,382,367 -- 3,021,517 --
E-Commerce 796,510 436,257 350,467 254,228
Retail 23,370 1,276,485 -- 340,822
Intellectual Properties 1,389,595 1,259,642 461,461 231,865
Other -- -- -- --
------------ ------------ ------------ ------------
$ 18,012,265 $ 5,829,924 $ 8,029,020 $ 2,774,734
============ ============ ============ ============
Gross Profit:
Internet Ad Sales $ 6,832,485 $ 1,843,458 $ 2,443,624 $ 1,196,778
Business to Business 3,682,912 788,575 1,465,483 604,891
Ticketing 535,070 -- 322,594 --
E-Commerce 88,751 96,364 77,492 67,626
Retail 45,000) 415,534 (45,000) 145,770
Intellectual Properties 543,928 744,646 270,418 129,279
Other -- -- -- --
------------ ------------ ------------ ------------
$ 11,638,146 $ 3,888,577 $ 4,534,611 $ 2,144,344
============ ============ ============ ============
Operating Income (Loss)(a):
Internet Ad Sales (a) $(24,003,727) $ (2,170,520) $ (8,472,163) $ (2,442,293)
Business to Business 281,967 237,040 159,661 162,084
Ticketing 204,489 -- 79,088 --
E-Commerce (2,021,911) (1,032,230) (637,756) (459,128)
Retail (91,129) (2,056,416) (49,071) (161,952)
Intellectual Properties 558,036 697,469 309,133 32,453
Other (8,672,419) (5,728,550) (3,192,717) (2,221,929)
------------ ------------ ------------ ------------
$(33,744,694) $(10,053,207) $(11,803,825) $ (5,090,765)
============ ============ ============ ============
Depreciation and
Amortization:
Internet Ad Sales $ 2,020,084 $ 720,749 $ 708,267 $ 495,448
Business to Business 86,768 11,483 32,714 9,527
Ticketing 3,975 -- 3,975 --
E-Commerce 12,831 8,887 4,653 8,887
Retail -- 259,814 -- 91,818
Intellectual Properties 5,355 3,810 1,575 1,270
Other 3,986,948 2,134,326 1,375,733 1,271,248
------------ ------------ ------------ ------------
$ 6,115,961 $ 3,139,069 $ 2,126,917 $ 1,878,198
============ ============ ============ ============
Interest, net:
Internet Ad Sales $ 17,471 $ -- 8,487 --
Business to Business 216 313 (563) 313
Ticketing -- -- -- --
E-Commerce -- -- -- --
Retail 110,333 374,926 24,933 74,438
Intellectual Properties (7,219) (3,280) (3,407) (1,291)
Other 81,086 90,381 56,634 19,918
------------ ------------ ------------ ------------
$ 201,887 462,340 86,084 93,378
============ ============ ============ ============
Capital Expenditure:
Internet Ad Sales $ 1,074,532 $ 91,673 $ 180,682 $ 69,183
Business to Business 180,593 -- 49,858 --
Ticketing -- -- -- --
E-Commerce 13,347 65,058 969 --
Retail -- -- -- --
Intellectual Properties 5,188 -- -- --
Other 136,659 18,617 -- --
------------ ------------ ------------ ------------
$ 1,410,319 $ 175,348 $ 754,198 $ 69,183
============ ============ ============ ============
</TABLE>
(a) Includes $14,855,465 and $5,479,561 in amortization of non-cash CBS
advertising for the nine and three months ended September 30, 2000,
respectively.
15
<PAGE>
(12) USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
Significant estimates include management's estimate that accounts receivable of
NetCo Partners as of September 30, 2000 will be collected in full, and that no
reserve for uncollectible accounts is necessary (see Note 9).
(13) COMMITMENTS AND CONTINGENCIES:
Litigation - The Company is a party to various legal proceedings arising in the
ordinary course of business, none of which are expected to have a material
adverse impact on the Company's financial condition or results of operations.
The following lawsuits were initiated in third quarter 2000.
Steven B. Katinsky v. The Times Mirror Company, Hollywood.com, Inc.
and Hollywood Online Inc. filed on September 8, 2000 in Superior Court of the
State of California for the County of Los Angeles. Claim against Tribune Company
(formerly The Times Mirror Company) and the Company seeking a performance cycle
bonus allegedly owing to the plaintiff by Tribune Company in connection with the
sale of Hollywood Online Inc. from Tribune Company to the Company. The plaintiff
is seeking monetary damages in excess of $19.8 million for alleged fraud by the
defendants in connection with the sale of Hollywood Online Inc. to the Company.
The Company is indemnified by Tribune Company for the amount of any such
performance cycle bonus payable to the plaintiff. The Company believes that all
claims by the plaintiff against the Company are without merit and intends to
defend them vigorously.
Interviews.com v. Hollywood Online, Inc. filed on August 17, 2000 in Superior
Court of the State of California for the County of Los Angeles. Claim by
Interviews.com that the Company's wholly owned subsidiary, hollywood.com, Inc.
(formerly known as Hollywood Online, Inc.), did not timely perform its
obligations with respect to the transfer of several domain names under an
Assignment Agreement dated December 17, 1997. Interviews.com is owned and
controlled by Steven Katinsky, the plaintiff in the lawsuit described above. All
matters related to this claim occurred prior to the Company's acquisition of
Hollywood Online, Inc. in May 1999 and all domain names subject to the dispute
have been transferred to the plaintiff. The domain names transferred were not
being utilized by the Company and were not related to the Company's business.The
plaintiff is seeking monetary damages in excess of $5 million. The Company
believes that this claim is without merit and intends to defend it vigorously.
(14) RECLASSIFICATION:
Certain amounts in the 1999 financial statements have been reclassified to
conform with the 2000 classification.
(15) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
For the Nine Months ended September 30, 2000:
o The Company issued 100,000 shares of common stock, valued at $1,650,000.
This amount was accrued for at December 31, 1999 in accrued reserve for
closed stores.
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<PAGE>
o Warrants to acquire 90,573 shares of common stock at an exercise price of
$17.875 valued at $1.0 million were issued in connection with the Company's
investment in MovieTickets.com, Inc.
o The Company recorded $5,468,501 in deferred advertising in connection with
the exercise of warrants by CBS.
o Capital lease transactions totaled $266,822.
o A note payable for $1,928,138 was paid by issuing 152,548 shares of
common stock valued at approximately $12.64 per share.
For the Nine Months ended September 30, 1999:
o The Company recorded the conversion of $6,152,261 of Series A,B,C,D, and
D-2 Preferred Stock into 1,580,490 shares of common stock.
o Non-cash dividends on its Series A,B,C,D and D-2 Convertible Preferred
Stock in the amount of $83,657 were recorded, of which $79,808 was paid
through the issuance of 6,675 shares of common stock.
o Capital lease transactions totaled $56,068.
o The Company issued 2,500 shares of restricted stock valued at $46,250 as an
incentive stock bonus to an officer.
17
<PAGE>
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.com, Inc. (the "Company")
which represent the Company's expectations or beliefs, including, but not
limited to, statements concerning industry performance, the Company's
operations, performance, financial condition, growth, acquisition, and
divestiture strategies, margins, and growth in sales of the Company's 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
the Company's control, and actual results may differ materially depending on a
variety of important factors. Factors that may affect the Company's results
include, but are not limited to, our continuing operating losses and accumulated
deficit, our limited operating history, the need for additional capital to
finance our operations, the need to manage our growth and integrate new
businesses into the Company, our ability to develop strategic relationships with
media and entertainment organizations, our ability to compete successfully 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. (formerly CBS
Corporation), and accounting considerations related to our strategic alliance
with Viacom. The Company is also subject to other risks detailed herein or
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
Introduction
We are an entertainment-focused media and Internet company that offers
widely recognized brands and a broad and deep collection of entertainment
content data and related information in the industry. Our businesses include an
extensive ticketing network through which we sell movie tickets online for
theaters throughout the United States and Canada, live theater tickets online,
and to the tourism and travel industry for shows in New York and London. We also
operate the intellectual property business from which our Company has expanded
and evolved. Our Internet business generates revenues through the sale of
advertising on Hollywood.com and Broadway.com and the business-to-business (b2b)
syndication of our content to major newspapers, web portals, and wireless
companies, such as AOL's Digital City, Yahoo!, Go Network, Excite,
Ticketmaster/CitySearch, Zip2, The New York Times website, usatoday.com,
latimes.com, Sprint PCS and AT&T Wireless. Our businesses, Hollywood.com,
Broadway.com, CinemaSource, EventSource, TheaterSource, ConcertSource, and
HollywoodPro.com, provide in-depth entertainment information, including movie
and theater descriptions and reviews, showtimes and live theater listings,
entertainment news and an extensive multimedia library. Our ticketing
businesses, Broadway.com, MovieTickets.com 31.67 ownership percentage) and
Theatre Direct International, generate revenues through the sale of tickets and
service fees and commissions earned in connection with the sale of tickets, the
sale of advertising online and through cooperative marketing programs and by
providing various ancillary services related to the sale of tickets. In January
2000 we entered into an agreement with CBS Corporation providing for $100
million of advertising and promotion of the Hollywood.com website over seven
years and $5.3 million in cash in exchange for an approximate 30% equity
interest in the Company. In March 2000 CBS Corporation exercised a warrant to
acquire an additional approximate 5% equity interest in the Company for $5.5
million in cash and $5.5 million in additional promotional advertising. CBS
Corporation merged with and into Viacom, Inc. in May 2000.
18
<PAGE>
Internet Businesses
Hollywood.com. Hollywood.com is a premier entertainment related website
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 showtime 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 banner advertising and sponsorships on Hollywood.com through a
relationship with DoubleClick, Inc. and through an internal advertising staff.
Some of our recent advertisers include Microsoft, Toyota, Universal Studios,
eBay, Proctor &Gamble, iVillage, Visa, M&Ms, New Line Cinema, JC Penny, US Army,
Nissan, AT&T, Discovery/TLC, Nextel and Women.com.
We promote the Hollywood.com website through our strategic
relationships with CBS and the National Association of Theatre Owners ("NATO").
Through exclusive contracts with NATO and over 85 of its member theater
exhibitors, we promote the Hollywood.com website to movie audiences by airing
trailers about Hollywood.com before feature films that play in participating
theaters and by displaying posters and other promotional materials in those
theaters. In exchange, we develop and maintain websites for many of the theater
exhibitors that feature their movie showtimes.
In January 2000 we entered into a strategic, seven-year relationship
with CBS that provides for extensive promotion of the Hollywood.com website. CBS
has agreed to provide Hollywood.com with $100 million of promotion across its
full range of media properties, including the CBS television network, CBS owned
and operated television stations, CBS cable networks, Infinity Broadcasting
Corporation's radio stations and outdoor billboards, CBS Internet sites and CBS
syndicated television and radio programs. To supplement our internal sales
efforts, we also have the right to reallocate a portion of each year's
promotional budget and require CBS to sell up to $1.5 million of advertising on
the Hollywood.com and Broadway.com websites. CBS has agreed to include the
Hollywood.com website in all advertising sale programs and presentations that
are appropriate for the sale of advertising on the website. We will pay an 8%
commission on any additional advertising revenues generated by CBS for us in
excess of the $1.5 million guaranteed amount selected by us each year.
Broadway.com. We launched the Broadway.com website on May 1, 2000.
Broadway.com features theater showtimes for virtually all professional live
theater venues in the U.S. as well as London's West End and hundreds of college
and local live theater venues; the ability to purchase Broadway, off-Broadway
and West End theater tickets online; the latest theater news; interviews with
stage actors and playwrights; opening-night coverage; original theater reviews;
and video excerpts from selected shows. The Broadway.com website 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 advertising sales, ticket
sales and syndication of content to other Internet companies.
Hollywood.com International. We have entered into and are pursuing
several strategic relationships geared toward leveraging the Hollywood.com brand
internationally. We entered into an agreement with America Online Latin America,
Inc. in late 1999 pursuant to which we agreed to launch Portuguese and Spanish
versions of the Hollywood.com website to be promoted on AOL in countries
throughout Latin America. We launched the br.hollywood.com Portuguese-language
website in Brazil in November 1999 and the mx.hollywood.com and ar.hollywood.com
Spanish-language websites in Mexico and Argentina in May 2000. These websites
are tailored to the local movie-going audience and feature much of the same
content that is on Hollywood.com, including daily entertainment news, movie
descriptions and reviews, movie previews, movie soundtracks, celebrity profiles
and biographies and interactive games. Each of these websites are featured and
promoted on the entertainment channels of both AOL Latin America and El
Sitio.com, a Latin American-based Internet portal.
19
<PAGE>
The Company has entered into an agreement in principle to form a strategic
partnership to distribute Hollywood.com content, in the Chinese language,
throughout China on all new Legend personal computers along with Legend's new
Chinese-language portal, FM365.com.
We have also entered into an agreement in principle to form a strategic
partnership to distribute Hollywood.com content across British Telecom's
multiple Internet platforms, including narrowband ISP, broadband DSL access and
wireless WAP technologies, throughout the United Kingdom.
CinemaSource. CinemaSource is the largest supplier of movie showtimes
to the Internet and compiles movie showtimes for every movie theater in the
United States and Canada, representing approximately 36,000 movie screens. Since
its start in 1995, CinemaSource has substantially increased its operations and
currently provides movie showtime listings to more than 200 different Internet
sites and media outlets, including Yahoo!, Excite, Go Network,
Ticketmaster/CitySearch, Zip2, NBCi and iWon.com, major newspapers xsuch as The
New York Times website, usatoday.com, latimes.com, The Washington Post website,
the Boston Globe website, and the Newsday website and wireless providers such as
Spring PCS and AT&T Wireless.
In addition, CinemaSource recently expanded its syndication business to include
entertainment news, movie reviews, and celebrity biographies. In addition to
charging guaranteed amounts for the data that it provides to its customers,
CinemaSource often shares in the advertising revenue generated by its customers
in connection with the data.
EventSource. We launched the EventSource business in mid-1999 as an
expansion of the operations of CinemaSource. EventSource compiles and syndicates
detailed information on community events in cities around the country, including
concerts and live music, sporting events, festivals, fairs and live theater.
EventSource entered into an agreement with AOL's Digital City in April 2000 to
provide event listings for up to 200 cities nationwide. In addition to Digital
City, other EventSource customers include the websites of The New York Times and
Knight Ridder.
TheaterSource. We launched the TheaterSource business in mid-2000 as a
further expansion of the operations of EventSource. TheaterSource compiles and
syndicates a comprehensive database of theater productions and showtimes,
covering shows on Broadway, off-Broadway, touring companies, community
playhouses, dinner theaters throughout North America and in London's West End
theater district.
ConcertSource. We launched this business in October 2000. ConcertSource
offers extensive local listings of concerts and music-related events from major
arenas to small local jazz clubs, including a complete listing of every
performance from major touring groups to hometown bands. ConcertSouce currently
covers concert and event listings for the top 60 markets in the United States
and plans to expand its coverage to more than 200 markets throughout North
America.
HollywoodPro. We own and operate the HollywoodPro.com website (formerly
called Baseline), a pay-per-use subscription website geared to movie
professionals such as Bloomberg, Daily Variety, People Magazine, and which we
acquired from media analyst Paul Kagan. The HollywoodPro business maintains one
of the most comprehensive movie and television-related databases and has been in
operation for over 15 years. The HollywoodPro.com website is a comprehensive
database of information on over 67,000 films and television programs, as well as
biographies on over one million entertainment industry professionals. This rich,
interactive database is accessible online to our subscribers and includes
credits, synopses, reviews and box office statistics. HollywoodPro continuously
tracks production, distribution, and exhibition of feature films worldwide,
including box office projections, budgets, and trends. HollywoodPro customers
include major movie studios, investment banks, news agencies, consulting firms
and other professionals in the entertainment industry.
20
<PAGE>
Hollywood.com Studio Store. Our online studio store located at
shopping.hollywood.com features a product line of branded licensed merchandise
including toys, apparel, video games, art, collectibles, movie posters, games,
high tech merchandise and media items. We cross-promote the Hollywood.com studio
store to movie and entertainment enthusiasts through banners and links on our
other websites. The website is promoted on numerous affiliate websites,
including latimes.com, usatoday.com, Yahoo!, Excite, nj.com and others. We also
sell a comprehensive collection of merchandise related to current and classic
Broadway shows through the Broadway.com website.
Ticketing Businesses
MovieTickets.com. MovieTickets.com, a joint venture among
Hollywood.com, AMC Entertainment Inc. and National Amusements, Inc. was launched
in late May 2000. Each of Hollywood.com, AMC Entertainment, National Amusements,
Inc. owns approximately 31.67% of the equity of MovieTickets.com, Inc. and the
joint venture has entered into an agreement in principle for Viacom Inc. to
acquire a five percent interest for $25 million of advertising over 5 years.
MovieTickets.com will be promoted through on-screen advertising in each
participating exhibitor's movie screens and through $25 million of CBS
advertising and promotion over the next five years. MovieTickets.com's current
participating exhibitors include AMC Entertainment Inc., National Amusements,
Inc., Famous Players Inc., Marcus Theaters, Muvico Entertainment and several
regional exhibitors. These exhibitors operate theaters located in all of the top
twenty markets and approximately 70% of the top 50 markets in the United States
and Canada and represent approximately 50% of the top 100 grossing theaters in
North America. AMC Entertainment Inc. is the largest movie theater operator in
the United States based on box office sales and Famous Players generates
approximately half of all box office sales in Canada. The MovieTickets.com
website allows users to purchase movie tickets and retrieve them at "will call"
windows or kiosks at theaters. The website also features 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. We expect
the website to generate revenues from the sale of advertising and from service
fees charged to users for the purchase of tickets. DoubleClick, Inc. is the
exclusive online advertiser for Movietickets.com.
Theatre Direct International. We acquired Theatre Direct International
(TDI) effective as of September 15, 2000. Founded in 1990, TDI is a live theater
marketing and sales agency serving over 40,000 domestic and international travel
professionals, traveling consumers and New York-area theater patrons. TDI is a
ticketing wholesaler to the travel industry that provides groups and individuals
with access to low-cost tickets and knowledgeable service, covering shows on
Broadway, long running shows off-Broadway and shows in London. TDI sells tickets
through an 800 number, through SABRE (a travel agent reservation system), via
the Web and by fax. As a marketing agency, TDI represents 11 producers and 16
Broadway shows to the travel industry around the world. The 16 Broadway shows
are Aida, Annie Get Your Gun, Beauty and the Beast, Cabaret, Chicago, Contact,
Fosse, Jekyll and Hyde, Kiss Me Kate, Les Miserables, Rent, Riverdance, Swing,
The Lion King, The Music Man and The Phantom of the Opera. In addition, TDI's
Education division, Broadway Classroom, markets group tickets to schools across
the country. TDI's offline ticketing service complements the online ticketing
services available on Broadway.com, since its launch on May 1. The combined
companies will provide live theater ticketing and related content for all
Broadway shows and most shows running off-Broadway and in London's West End at
over 200 venues in multiple markets to a customer base consisting over 40,000
travel agencies, tour operators, corporations and educational institutions, in
addition to numerous newspapers and web sites.
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<PAGE>
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 Leonard Nimoy's Primortals, Mickey
Spillane's Mike Danger and Anne McCaffrey's Acorna the Unicorn Girl. 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, the Company and C.P. Group Inc. ("C.P.
Group"), entered into an agreement to form NetCo Partners. NetCo Partners is
engaged in the publishing and licensing of entertainment properties, including
Tom Clancy's NetForce.
The Company and C.P. Group are each 50% partners in NetCo Partners. Tom
Clancy owns 50% 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 the
Company 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 continues to own Tom Clancy's NetForce and,
in accordance with the terms of the partnership agreement, the other properties
have reverted back to the Company.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement,
the Company 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 the Company to fund NetCo Partners'
operations are treated as capital contributions of the Company and the Company
is entitled to a return of such capital contributions before distributions of
cash flow are split equally between the Company and C.P. Group.
Book Development and Book Licensing. Our intellectual properties
division also includes a book development and book licensing operation through
our 51% owned subsidiary, Tekno Books, that develops and executes book projects,
typically with best-selling authors. 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
1,100 books. The Chief Executive Officer of Tekno Books, Dr. Martin H.
Greenberg, is also a director of the Company and owner of the remaining 49%
interest in Tekno Books.
Tekno Books also owns a 50% interest in Mystery Scene Magazine, a trade
journal of the mystery genre of which Dr. Greenberg is co-publisher. During
1995, the Company directly acquired an additional 25% interest in the magazine.
The Company is currently working to develop an area on the Hollywood.com website
initially dedicated to mysteries. Management believes that this is an example of
one of the many synergistic opportunities between the Company's Internet and
intellectural properties businesses.
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Results of Operations
The following table summarizes the Company's net revenues, cost of revenues and
gross profit by business segment for the nine months ended September 30, 2000
("Y3-00") and 1999 ("Y3-99") and the three months ended September 30, 2000
("Q3-00") and 1999 ("Q3-99"), respectively:
<TABLE>
<CAPTION>
Business
Internet to Business E- Intellectual
Ad Sales (b2b) Ticketing Commerce Properties Retail Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Y3-00
Net Revenues $ 7,548,400 $ 3,872,023 $ 4,382,367 $ 796,510 $ 1,389,595 $ 23,370 $18,012,265
Cost of Revenues 715,915 189,111 3,847,297 707,759 845,667 68,370 6,374,119
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit $ 6,832,485 $ 3,682,912 $ 535,070 $ 88,751 $ 543,928 $ (45,000) $11,638,146
=========== =========== =========== =========== =========== =========== ===========
Y3-99
Net Revenues $ 2,020,732 $ 836,808 $ -- $ 436,257 $ 1,259,642 $ 1,276,485 $ 5,829,924
Cost of Revenues 177,274 48,233 -- 339,893 514,996 860,951 1,941,347
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit $ 1,843,458 $ 788,575 $ -- $ 96,364 $ 744,646 $ 415,534 $ 3,888,577
=========== =========== =========== =========== =========== =========== ===========
Q3-00
Net Revenues $ 2,679,901 $ 1,515,674 $ 3,021,517 $ 350,467 $ 461,461 $ -- $ 8,029,020
Cost of Revenues 236,277 50,191 2,698,923 272,975 191,043 45,000 3,494,409
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit $ 2,443,624 $ 1,465,483 $ 322,594 $ 77,492 $ 270,418 $ (45,000) $ 4,534,611
=========== =========== =========== =========== =========== =========== ===========
Q3-99
Net Revenues $ 1,308,537 $ 639,282 $ -- $ 254,228 $ 231,865 $ 340,822 $ 2,774,734
Cost of Revenues 111,758 34,391 -- 186,602 102,587 195,052 630,390
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit $ 1,196,779 $ 604,891 $ -- $ 67,626 $ 129,278 $ 145,770 $ 2,144,344
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
NET REVENUES
Total net revenues for the nine months ended September 30, 2000 and 1999 were
$18,012,265 and $5,829,924, respectively. Net revenues increased $12,182,341 or
209% from Y3-99 to Y3-00. Net revenue for the three months ended September 30,
2000 increased to $8,029,020 from $2,774,734 for the three months ended
September 30, 1999, an increase of $5,254,286 or 189%. Net revenues increased in
both periods predominately due to increases in revenues from the Company's
Internet ad sales, business to business (b2b), ticketing segments and
acquisitions. The Company acquired the businesses that generate Internet ad
sales revenues and business to business revenues in May and August of 1999. On
May 1, 2000 the Company acquired BroadwayTheater.com, Inc. which sells live
theater tickets over the Internet. On September 15, 2000, the Company acquired
TDI which is a live theater marketing and sales agency that sells tickets to
groups and individuals for shows running on Broadway, off -Broadway and in
London. From the date of acquisition the Company recorded net revenues of
approximately $1.3 million for TDI.
Internet ad sales revenue increased to $7,548,400 for Y3-00 from $2,020,732 for
Y3-99, an increase of $5,527,668 or 274%; and increased $1,371,364 or 105% from
$1,308,537 for Q3-99 to $2,679,901 for Q3-00. Internet ad sales revenue is
derived from the sale of banner advertisements and sponsorships on the
Hollywood.com, Broadway.com and Hollywood.com international websites.
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Barter transactions that generate non-cash advertising revenue (included in
Internet ad sales revenues), in which the Company received advertising or other
services in exchange for content or advertising on its websites, was $1,464,229
for Y3-00 and $595,143 for Q3-00 and accounted for 8.1% and 7.4% of the
Company's total net revenue for Y3-00 and Q3-00, respectively. Barter revenue
was $76,707 for Y3-99 and Q3-99, representing approximately 1.3% and 2.8% of the
Company's total net revenues for Y3-99 and Q3-99 respectively. In future
periods, management intends to maximize cash advertising revenue, although the
Company will continue to enter into barter relationships when deemed appropriate
as a cashless method for the Company to market its business.
The Company also records barter income earned under a contract with the National
Association of Theatre Owners ("NATO"), which the Company acquired through its
acquisition of hollywood.com on May 20, 1999. This income is included in
Internet ad sales revenue. Through the NATO contract, the Company promotes its
website to movie audiences by airing movie trailers about Hollywood.com, 40 out
of 52 weeks per year, before the feature films that play in most NATO-member
theaters. In exchange, the Company provides websites and movie showtimes for the
exhibiting NATO members, promotional materials and movie information,
advertising and editorial content. The Company recorded $2,236,313 and
$1,167,854 in promotional non-cash revenue and non-cash expense under the NATO
contract for Y3-00 and Y3-99, respectively. Barter income from NATO recorded
accounted for 12% and 20% of the Company's total net revenue for Y3-00 and
Y3-99, respectively. In Q3-00 and Q3-99 the Company recorded $745,437 in barter
revenue or 9.3% and 26.9% of the Company's total net revenue, respectively.
Business to business revenue (b2b) increased to $3,872,023 for Y3-00 from
$836,808 for Y3-99, an increase of $3,035,215 or 363%, and increased $876,392 or
137% to $1,515,674 for Q3-00 from $639,282 for Q3-99. Business to business
revenue is generated by the licensing of movie, event and theater showtimes and
other content information to other Internet and media companies including AOL
Digital City, Yahoo!, Excite, Zip2, NBCi, Go Network, and usatoday.com as well
as other newspapers and wireless providers. The Company acquired the business to
business operations of CinemaSource and HollywoodPro (formerly known as
Baseline) on May 18, 1999 and August 31, 1999, respectively. Revenues have
increased predominately from revenues generated from the EventSource division.
EventSource entered into a contract with AOL's Digital City in April 2000 to
provide event listing for up to 200 cities nationwide.
Ticketing revenue for Y3-00 and Q3-00 was $4,382,367 and $3,021,517
respectively. Ticketing revenue is generated from the sales of live theater
tickets for Broadway, off-Broadway and London's West End on the Internet and to
domestic and international travel professionals, traveling consumers and New
York area theater patrons. The Company acquired BroadwayTheater.com on May 1,
2000 and TDI on September 15, 2000.
E-commerce revenue increased $360,253 or 83% from $436,257 for Y3-99 to $796,510
for Y3-00 and increased $96,239 or 38% from $254,228 for Q3-99 to $350,467 for
Q3-00. Revenue increased due to improved product promotion through the Company's
relationship with CBS, other affiliate relationships, and conversion to sales of
the increased traffic on the website.
Revenues from the Company's intellectual properties segment increased $129,953
or 10.3% to $1,389,595 for Y3-00 from $1,259,642 for Y3-99 and increased
$229,596 or 99% from $231,865 for Q3-99 to $461,461 for Q3-00. The increase in
revenues is attributable to a greater number of manuscripts being delivered for
Y3-00 and Q3-00 as compared to Y3-99 and Q3-99. The intellectual properties
division generates revenues from several different activities including book
development and licensing, intellectual property licensing, and publishing
Mystery Scene Magazine. Revenues vary quarter to quarter dependent on the
various stages of the book projects. Revenues are recognized when ultimate
collection of such revenues is no longer subject to contingencies.
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<PAGE>
Retail revenues decreased from $1,276,485 for Y3-99 to $23,370 for Y3-00 and
from $340,822 for Q3-99 to $0 for Q3-00. The revenue recognized in Y3-00
represents proceeds received for the liquidation of inventory remaining after
the closure of all the brick and mortar locations in December 1999.
COST OF REVENUE
Cost of revenue increased to $6,374,119 for Y3-00 from $1,941,347 for Y3-99. As
a percentage of net revenues, cost of revenues was 35% for Y3-00 and 33% for
Y3-99. The cost of revenues were comparable for Y3-00 and Y3-99. As a percentage
of net revenue, cost of revenue was 44% and 23% for Q3-00 and Q3-99,
respectively. Cost of revenues as a percentage of net revenues will increase in
the future as our ticketing businesses are expanded. Gross margins expected to
be generated from ticketing are approximately 13%. Cost of revenues consists of
the cost of products sold, including shipping and handling costs, for the
Company's e-commerce segment; commissions due to ad agencies, ad rep firms and
other third parties for revenue generated for the Internet ad sales and business
to business (b2b) segments, and fees and royalties paid to authors and
co-editors for the Company's intellectual properties segment.
EQUITY IN NET EARNINGS - INVESTMENTS
Equity in net earnings of investments consists of the Company's 50% interest in
NetCo Partners and 31.67% interest in MovieTickets.com, Inc. The Company's
equity in net earnings of investments increased by 74% or $889,802 to $2,099,865
for Y3-00 from $1,210,063 for Y3-99. Equity in net earnings of investments
increased $758,434 from $87,472 for Q3-99 to $845,906 for Q3-00. On book
projects, as it relates to NetCo Partners, revenues are typically recognized
upon delivery of the manuscripts to the publishers. Equity in earnings increased
due to the delivery of a novel in the Tom Clancy's NetForce series of books
delivered to the publisher during Q3-00. These increases were offset by the
recognition of $173,165 and $130,386 in losses generated by MovieTickets.com,
Inc. for Y3-00 and Q3-00 respectively. MovieTickets.com, Inc. began its
operations in late May 2000.
OPERATING EXPENSES
General and administrative expenses. General and administrative expenses
increased $3,496,980 or 78% to $7,979,538 for Y3-00 from $4,482,558 for Y3-99
and increased $800,901 or 41% to $2,768,025 for Q3-00 from $1,967,124 for Q3-99.
These increases are primarily attributable to the acquisitions made in May and
August of 1999, a Broadway ticketing business acquired in May 2000, a Broadway
ticketing business acquired in September 2000 and expenses relating to the
launch and operations of Broadway.com as well as the Hollywood.com International
websites during Q2-00.
Selling and marketing expenses. Selling and marketing expenses increased
$5,719,806 or 245% to $8,057,898 for Y3-00 from $2,338,092 for Y3-99 and
increased $1,489,990 or 117% to $2,760,214 for Q3-00 from $1,270,224 for Q3-99.
Included in selling and marketing are non-cash barter transactions of $3,700,542
and $1,464,500 for Y3-00 and Y3-99, respectively and $1,400,891 and $822,145 for
Q3-00 and Q3-99, respectively. Barter transactions accounted for approximately
46% and 63% of selling and marketing expense for Y3-00 and Y3-99, respectively
and 51% and 65% for Q3-00 and Q3-99, respectively. Excluding non-cash barter
transactions, the increase in selling and marketing expense of $3,483,284 from
Y3-99 to Y3-00 and $911,244 from Q3-99 to Q3-00 is primarily the result of
increased advertising on radio, television, online and outdoor for the Company's
Internet ad sales and e-commerce segments and additional advertising related to
the launch of Broadway.com on May 1, 2000. In addition, the Company incurred
production costs associated with advertising on CBS's media properties. The
Company and Viacom entered into a seven year agreement in January 2000;
therefore there were no comparable costs in Y3-99 and Q3-99.
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<PAGE>
Salaries and benefits. Salaries and benefits increased $4,723,582 or 130% to
$8,364,459 for Y3-00 from $3,640,877 for Y3-99 and increased $1,377,783 or 75%
to $3,203,955 for Q3-00 from $1,826,172 for Q3-99. This increase is attributable
to the acquisitions made in May and August of 1999; and in May and September
2000, the launch of various websites during the second quarter of 2000 and an
increase in the infrastructure to support the growth of the Company incurred in
the first and second quarter 2000.
Amortization. Amortization of goodwill and intangibles was $5,065,645 and
$2,102,688 for Y3-00 and Y3-99, respectively and $1,735,076 and $1,455,856 for
Q3-00 and Q3-99, respectively. The increase in amortization is attributable to
goodwill and intangibles recorded with the three Internet businesses acquired in
May and August of 1999 and the ticketing companies acquired on May 1, 2000 and
September 15, 2000.
Amortization of CBS non-cash advertising relating to the Company's agreement
with Viacom (the parent of CBS) was $14,855,465 for Y3-00 and $5,479,561 for
Q3-00. Under the Company's agreement with Viacom, the Company issued shares of
Common Stock and warrants in consideration for CBS's advertising and promotional
efforts over seven years across its full range of media properties. The value of
the common stock and warrants issued to Viacom has been recorded in the balance
sheet as deferred advertising and is being amortized over each related contract
year. The agreement with Viacom closed in January 2000; therefore there is no
comparable expense for the period Y2-99 and Q2-99.
Depreciation and amortization. Depreciation and amortization was $1,050,316 for
Y3-00 and $1,036,381 for Y3-99 and $391,841 for Q3-00 and $422,342 for Q3-99.
The minimal increase in depreciation and amortization expense from Y3-99 to
Y3-00 is attributable to the increase in capital expenditures to support the
websites launched during Q2-00, additional capital expenditures required to
support the growth in traffic on the Company's websites and additional equipment
required for the expansion of the business to business (b2b) segment.
Depreciation and amortization decreased from Q3-99 to Q3-00 due to the closure
of our retail business in December 1999.
Interest Expense, net. Interest expense, net for Y3-00 was $201,887 compared to
$462,340 for Y3-99 and $86,084 for Q3-00 as compared to $93,378 for Q3-99. The
decrease is primarily attributable to an increase in interest income earned on a
higher average balance of cash, decrease in interest due on capital lease
obligations and a decrease in interest paid on the Company's capital lease
obligations and inventory line of credit as it relates to the Company's retail
operations that were closed in December 1999.
NET LOSS
The Company generated a net loss of $32,089,113 for Y3-00 as compared to a net
loss of $9,640,584 for Y3-99, an increase of $22,448,529 or 233%. For Q3-00 the
net loss increased by $5,960,071 or 115% from $5,201,881 for Q3-99 to
$11,161,952 for Q3-00. A significant portion of the increased loss for Y3-00 and
Q3-00 is amortization of non-cash CBS advertising and amortization of goodwill
and intangibles attributable to the acquisitions made in 1999 and in 2000. These
non-cash expenses were $20,971,426 for Y3-00 and $7,606,478 for Q3-00 as
compared to $3,139,069 for Y3-99 and $1,878,198 for Q3-99.
Net loss for Y3-00 compared to Y3-99 excluding amortization of CBS advertising
and goodwill and intangibles was $11,117,687 for Y3-00 as compared to $6,501,515
for Y3-99 and $3,555,474 for Q3-00 as compared to $3,323,683 for Q3-99.
On a per share basis, the loss per common share increased by ($.54) from ($.86)
for Y3-99 to ($1.40) for Y3-00, while the loss per common share increased by
($.11) from ($.36) for Q3-99 to ($.47) for Q3-00.
If non-cash amortization of CBS advertising and goodwill and intangibles are
excluded from the loss per share calculation then loss per share for Q3-00
decreased by $.08 to ($.15) for Q3-00 from ($.23) for Q3-99.
26
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The Company has made several modifications to its initial business plan in order
to reverse its losses. During 1999, the Company closed its brick and mortar
retail operations and focused on its Internet business. The Company acquired
three new businesses in 1999 and two ticketing businesses in 2000. The Company
is evaluating the operations of all its new businesses and is working toward
achieving economies of scale among all its operations to result in reduced
general and administrative expenses and salaries and benefits. As a result,
certain activities at the Santa Monica and New York locations were consolidated
during the third quarter of 2000 at the Boca Raton offices, expecting to produce
economies of scale and reduce operational expenses by over $2.5 million.
The Company is presently focusing its resources on the expansion of its b2b and
Broadway ticketing businesses. The Company plans to expand its Internet and
ticketing operations, both through acquisitions and strategic alliances and
through internal development. While the Company believes that these measures
will ultimately reverse its operating losses, there can be no assurances that
for the foreseeable future the revenues generated will be sufficient to offset
the associated expenses incurred.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company had cash and cash equivalents of $4,887,581
and working capital of $19,851,225 compared to cash and cash equivalents of
$2,475,345 and a working capital deficit of $4,817,879 at December 31, 1999. Net
cash used in operating activities during Y3-00 was $8,747,237 primarily
representing cash used to fund the Company's net loss and the launch and
promotion of various businesses. Net cash used in investing activities was
$3,123,960, while $14,283,433 in cash was provided by financing activities. As a
result of the above, cash and cash equivalents increased by $2,412,236 for the
nine months ended September 30, 2000. During the nine months ended September 30,
1999, net cash used in operating activities was $6,618,810, net cash used in
investing activities was $7,785,100, and $19,904,572 in cash was provided by
financing activities.
On January 3, 2000, the Company issued 6,672,031 shares of common stock valued
at $19.50 per share and a warrant with an exercise price of $10,937,002 and
valued at $7,114,781 as consideration for $100,000,000 of CBS advertising,
promotion and content over a seven year period and $5,303,030 in cash.
On February 8, 2000, the Company issued 100,000 shares of common stock valued at
$1,650,000 in order to reacquire territorial rights under a franchise agreement.
The company closed its retail operations in December 1999 and $1,650,000 was
accrued for the accompanying December 31, 1999 consolidated balance sheet as
accrued reserve for closed stores.
On May 1, 2000, the Company acquired substantially all the assets of
BroadwayTheater.com for $135,000 in cash and 83,214 shares of common stock
valued at $14.00 per share.
On June 16, 2000, the Company issued 152,548 shares of common stock valued at
approximately $12.64 per share in order to repay an unsecured promissory note.
On August 22, 2000 the Company issued 358,423 shares of common stock in a
private placement at a purchase price of $8.37 per share. In addition, the
Company issued to the same investors warrants to purchase an aggregate of 60,000
shares of common stock at a price of $10 per share. These warrants have been
valued at $358,016. The Company incurred $93,977 in transaction costs and issued
7,168 shares of common stock as a fee to the placement agent.
27
<PAGE>
On September 15, 2000 the Company acquired TDI for 262,165 shares of common
stock valued at $2,000,000. Of the shares issued at closing, 195,874 shares of
common stock are to be held in escrow for a period of twelve months and will be
deliverable based on attainment of certain conditions pursuant to the agreement
and plan of merger.
During the nine months ended September 30, 2000 the company issued 9,511 shares
of common stock valued at $76,767 for services rendered.
In 1998, the Company's Board of Directors approved a plan for the repurchase of
the Company's common stock. Pursuant to the plan, during the nine months ended
September 30, 2000 the Company repurchased 171,700 shares of its common stock
for an aggregate consideration of $1,793,726, and an average purchase price of
$10.45 per share.
During the second quarter of 2000, the Company's Chief Executive Officer and
President advanced $2,050,000 to the Company to enable the Company to meet its
obligation to lend to a former shareholder of CinemaSource funds to pay the
shareholder's taxes under the purchase agreement between the Company and the
former shareholder of CinemaSource. The Company repaid $450,000 of this loan
during the third quarter of 2000.
During the nine months ended September 30, 2000, the Company issued 1,460,344
shares of common stock upon the exercise of outstanding stock options and
warrants, for which the Company received $7,017,363 in cash exercise proceeds
and $5,468,501 in additional promotional advertising from CBS.
Subsequent to September 30, 2000 the Company issued 733,696 shares of common
stock in a private placement to six accredited investors and received gross
proceeds of $4,250,000.
The growth of our operations has required substantial financing and we expect to
continue to require additional financing to fund our growth plan and for working
capital. Our operating plans and assumptions indicate that anticipated cash
flows when combined with other potential sources of capital, will be enough to
meet our working capital requirements for the year 2000. If plans change or our
assumptions prove to be inaccurate, we may need to seek further financing or
curtail our operations. Our long-term financial success depends on our ability
to generate enough revenue to offset operating expenses. To the extent we do not
generate sufficient revenues to offset expenses we will require further
financing to fund our ongoing operations.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on the Company's
sales or results of operations. The Company does, however, consider 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
development and licensing operation as a result of the general publishing
industry practice of paying royalties semi-annually. In addition, although not
seasonal, the Company's intellectual properties division and NetCo Partners both
experience significant fluctuations in their respective revenue streams,
earnings and cash flow as a result of the significant amount of time that is
expended in the creation and development of the intellectual properties and
their respective licensing agreements. While certain of the development costs
are incurred as normal recurring operating expenses, the recognition of
licensing revenue is typically triggered by specific contractual events which
occur at different points in time rather than on an evenly recurring basis.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Steven B. Katinsky v. The Times Mirror Company, Hollywood.com, Inc.
and Hollywood Online Inc. filed on September 8, 2000 in Superior Court of the
State of California for the County of Los Angeles. Claim against Tribune Company
(formerly The Times Mirror Company) and the Company seeking a performance cycle
bonus allegedly owing to the plaintiff by Tribune Company in connection with the
sale of Hollywood Online Inc. from Tribune Company to the Company. The plaintiff
is seeking monetary damages in excess of $19.8 million for alleged fraud by the
defendants in connection with the sale of Hollywood Online Inc. to the Company.
The Company is indemnified by Tribune Company for the amount of any such
performance cycle bonus payable to the plaintiff. The Company believes that all
claims by the plaintiff against the Company are without merit and intends to
defend them vigorously.
Interviews.com v. Hollywood Online, Inc. filed on August 17, 2000 in
Superior Court of the State of California for the County of Los Angeles. Claim
by Interviews.com that the Company's wholly owned subsidiary, hollywood.com,
Inc. (formerly known as Hollywood Online, Inc.), did not timely perform its
obligations with respect to the transfer of several domain names under an
Assignment Agreement dated December 17, 1997. Interviews.com is owned and
controlled by Steven Katinsky, the plaintiff in the lawsuit described above. All
matters related to this claim occurred prior to the Company's acquisition of
Hollywood Online, Inc. in May 1999 and all domain names subject to the dispute
have been transferred to the plaintiff. The domain names transferred were not
being utilized by the Company and were not related to the Company's business.
The plaintiff is seeking monetary damages in excess of $5 million. The Company
believes that this claim is without merit and intends to defend it vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2000, the Company issued a total of
48,720 shares of its common stock upon the exercise of outstanding warrants and
options with exercise prices ranging from $5.00 to $6.346 per share. The Company
received gross proceeds of $261,080 for issuance of this common stock and paid
no fees or commissions related thereto.
On August 22, 2000, the Company issued 358,423 shares of common stock in a
private placement at a purchase price of $8.37 per share. In addition, the
Company issued to the same investors warrants to purchase an aggregate of 60,000
shares of common stock at a price of $10 per share. If the investors continue to
hold at least seventy-five percent of the shares of common stock issued to them
in the transaction as of May 7, 2000, the exercise price of the warrants will be
decreased to $8.84. We also issued adjustment warrants to these investors. The
right to purchase additional shares under the adjustment warrants will be
determined at the conclusion of ten adjustment periods in accordance with the
terms of those adjustment warrants. If the average of the five lowest volume
weighted average prices of the common stock during the final fifteen days of an
adjustment period is below $9.63, the Company will be obligated to issue
additional shares to those selling shareholders for no additional consideration.
The precise number of shares of common stock, if any, which will be issued will
be determined in accordance with a formula set forth in the adjustment warrants.
The Company incurred $93,977 in transaction costs and issued 7,168 shares of
common stock as a fee to the placement agent.
On September 15, 2000, the Company acquired TDI for 262,165 shares of common
stock valued at $2,000,000. 195,874 of the shares issued at closing are held in
escrow for a period of twelve months and will be delivered to the seller only if
certain conditions are satisfied at the end of the 12-month period.
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<PAGE>
During the quarter ended June 30, 2000, the Company issued stock options and
warrants to purchase an aggregate of 224,500 shares of the Company's common
stock, including 64,500 stock options granted to employees at exercise prices
ranging from $7.688 to $11 per share. Options granted to employees are subject
to vesting periods ranging from six months to four years and generally expire
five years from the date of issuance.
The common stock issued by the Company upon exercise of options granted under
the Company's 1993 Stock Option Plan were registered under the Securities Act of
1933 pursuant to a registration Statement on Form S-8 filed by the Company with
the Securities and Exchange Commission on October 23, 1996. The other securities
described above were issued without registration under the Securities Act of
1933 by reason of the exemption from registration afforded by the provisions of
Section 4(2) thereof, as transactions by an issuer not involving a public
offering, each recipient of securities having delivered appropriate investment
representations to the Company with respect thereto and having consented to the
imposition of restrictive legends upon the certificates evidencing such
securities.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Incorporated by
No. Description Reference From
--- ----------- --------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (2)
4.1 Form of Common Stock Certificate (2)
4.2 Rights Agreement dated as of August 23, 1996 between the Company and (3)
American Stock transfer & Trust Company, as Rights Agent
10.1 Common Stock Investment Agreement dated as of August 22, 2000 among the (4)
Company, Elliott Associates, L.P. and Westgate International, L.P.
10.2 Registration Rights Agreement dated August 22, 2000 among the Company, (4)
Elliott Associates, L.P. and Westgate International, L.P.
10.3 Common Stock Adjustment Warrant dated August 22, 2000 between the Company (4)
and Elliott Associates, L.P.
10.4 Common Stock Adjustment Warrant dated August 22, 2000 between the Company (4)
and Westgate International, L.P.
10.5 Common Stock Purchase Warrant dated August 22, 2000 between the Company and (4)
Elliott Associates, L.P.
10.6 Common Stock Purchase Warrant dated August 22, 2000 between the Company and (4)
Westgate International, L.P.
10.7 Purchase Agreement effective as of September 29, 2000 among Hollywood.com, (5)
Inc. and the Purchasers named therein.
10.8 Agreement and Plan of Merger dated as of September 15, 2000 by and among *
Cameron Mackintosh, Inc., Theatre Direct NY, Inc., Hollywood.com, Inc. and
Theater Acquisition Corp.
27.1 Financial Data Schedule *
</TABLE>
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<PAGE>
------------------
* Filed as an exhibit to this Form 10-Q
(1) Incorporated by reference from the exhibit filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(2) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 33-69294).
(3) Incorporated by reference from Exhibit 1 to the Company's Current
Report on Form 8-K filed on October 20, 1999.
(4) Incorporated by reference from the exhibits to the Company's Current
Report on Form 8-K filed on August 29, 2000.
(5) Incorporated by reference from the exhibit to the Company's Current
Report on Form 8-K filed on October 5, 2000.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 29, 2000 disclosing the
Company's issuance of 358,423 shares of the Company's common stock to two
investors at $8.37 per share for a total purchase price of $3,000,000 in cash.
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<PAGE>
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.COM, INC.
Date: November 14, 2000 By: /s/ Mitchell Rubenstein
----------------------------------
Mitchell Rubenstein, Chairman of
the Board and Chief Executive
Officer (Principal executive,
financial and accounting officer)
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