SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 8-K/A AMENDMENT NO. 1 TO CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------- Date of Report (Date of earliest event reported) May 18, 1999 BIG ENTERTAINMENT, INC. (Exact Name of Registrant as Specified in Charter) Florida 0-22908 65-0385686 (State or Other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification No.) 2255 Glades Road, Suite 237 West, Boca Raton, Florida 33431 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (561) 998-8000 INFORMATION TO BE INCLUDED IN THE REPORT Item 2. Acquisition or Disposition of Assets. 1. Acquisition of Substantially All of the Assets of CinemaSource, Inc. On May 18, 1999, Big Entertainment, Inc., a Florida corporation (the "Company"), acquired substantially all of the assets (the "CinemaSource Assets") of CinemaSource, Inc., a Connecticut corporation ("CinemaSource"), pursuant to the terms of the Asset Purchase Agreement dated as of March 29, 1999 (the "Asset Purchase Agreement") by and among the Company, CinemaSource, Brett West (the sole shareholder of CinemaSource) and Pamela West. At the closing of the acquisition, the Company directed CinemaSource to transfer the CinemaSource Assets, on the Company's behalf, to its indirect wholly owned subsidiary, Showtimes.com, Inc. CinemaSource was engaged in the business of compiling, reproducing and distributing movie showtimes and related movie information through electronic means and over the Internet to customers including Yahoo!, Excite, Microsoft, and other Internet and traditional media companies. The CinemaSource Assets constitute substantially all of the assets used by CinemaSource in conducting such business and include tangible and intangible property such as contracts, certain fixed assets, customer lists and certain intellectual property. The Company presently intends to integrate the CinemaSource Assets and the business of hollywood.com, Inc. acquired by merger on May 20, 1999 (which is described hereinbelow) into its existing operations, thereby creating a comprehensive movie Internet web site which (i) contains movie information, movie reviews, trailers and celebrity interviews, (ii) sells movie-related merchandise and (iii) delivers movie showtimes listings. The purchase price for the CinemaSource Assets consisted of (i) $6,500,000 in cash, plus (ii) 436,191 shares of common stock, $0.01 par value, of the Company (the "Common Stock"). Funding for the cash portion of the purchase price came from the proceeds of a private placement of approximately 570,000 shares of the Common Stock at a price per share of $21.25 and warrants exercisable for approximately 190,000 shares of the Common Stock at an exercise price per share of $21.25. The total proceeds of the private placement were approximately $12,000,000, before closing costs. The securities sold in the private placement were sold without registration under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on an exemption from registration under Section 4(2) of the 1933 Act and Rule 506 of Regulation D thereunder. The purchase price for the CinemaSource Assets was determined by arms-length negotiations between CinemaSource and the Company. Prior to entering into the Asset Purchase Agreement, there were no material relationships between the Company or any of its affiliates, directors or officers, or any associates of such directors and officers on one hand, and CinemaSource, on the other hand. 2 2. Acquisition of the Capital Stock of hollywood.com, Inc. On May 20, 1999, the Company acquired all of the capital stock of hollywood.com, Inc., a California corporation ("Hollywood.com"), from The Times Mirror Company ("Times Mirror") pursuant to the merger (the "Merger") of Hollywood.com into Big Acquisition Corp., a wholly owned subsidiary of the Company prior to the Merger ("Merger Sub"). The Merger occurred in accordance with the Agreement and Plan of Merger dated as of January 10, 1999 (the "Merger Agreement") by and among the Company, Times Mirror, Hollywood.com (formerly Hollywood Online, Inc.) and Merger Sub. Hollywood.com owns and operates the HOLLYWOOD.COM web site, offering viewers movie information, movie trailers, movie soundtracks, photos and exclusive interactive games, current movie, laserdisc and movie soundtrack information, local movie theaters' showtimes, daily Hollywood news, celebrity interviews, listings of movies on TV, a searchable database with over 130,000 movies and 850,000 cast and crew credits, movie reviews, box office charts, interactive forums, a weekly e-mail dispatch and coverage of premieres, film festivals and movie-related events. The Company presently intends to integrate this business and the CinemaSource Assets with its existing Internet business, thereby creating a comprehensive movie Internet website which (i) contains movie information, movie reviews, trailers and celebrity interviews, (ii) sells movie-related merchandise and (iii) displays online and delivers movie showtimes listings. The aggregate consideration paid to Times Mirror by the Company in the Merger consisted of (i) 2,300,075 shares of the Common Stock, plus (ii) $1,928,137.64 by delivery of a promissory note of the Company payable to Times Mirror. The promissory note has a maturity date of May 20, 2000 (at which time the aggregate principal balance thereof must be repaid in full) and bears interest at the prime rate in effect from time to time of Citibank, N.A. plus 1%. Accrued but unpaid interest on the then unpaid principal balance of the note is payable on June 30, 1999, September 30, 1999, December 31, 1999, March 31, 2000 and on the maturity date. The promissory note may be prepaid in whole or in part at any time without payment of any premiums or penalty. The consideration paid to Times Mirror in the Merger was determined by arms-length negotiations between Times Mirror and the Company. Other than an agreement between the Company and Hollywood.com pursuant to which the Hollywood.com website was linked to the bige.com website, prior to entering into the Merger Agreement, there were no material relationships between the Company or its affiliates, directors or officers, or any associates of such directors or officers, on one hand, and Hollywood.com and/or Times Mirror, on the other hand. 3 3. Press Release Regarding the Acquisitions On May 20, 1999, the Company issued a press release regarding the foregoing acquisitions, a copy of which is attached as Exhibit 99 hereto and is incorporated herein by reference. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Businesses Acquired. (i) Financial statements of CinemaSource, Inc. (ii) Financial statements of hollywood.com, Inc. (formerly Hollywood Online, Inc.) (b) Pro Forma Financial Information. (i) Big Entertainment, Inc. and Subsidiaries Unaudited Pro Forma Combined Condensed Financial Statements (c) Exhibits. *1. Asset Purchase Agreement dated as of March 29, 1999 by and among Big Entertainment, Inc., CinemaSource, Inc., Brett West and Pamela West. *2. Agreement and Plan of Merger dated as of January 10, 1999 by and among The Times Mirror Company, Hollywood.com, Inc. (formerly Hollywood Online, Inc.), Big Entertainment, Inc. and Big Acquisition Corp., as amended by the Waiver and Consent; and Other Modifications dated as of May 14, 1999. *3. Press Release dated as of May 20, 1999. - -------- * Previously filed. 4 CINEMASOURCE, INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,1998 AND 1997 TABLE OF CONTENTS Page ---- Independent Auditor's Report i Balance Sheets as of December 31, 1998 and 1997 ii Statements of Income and Retained Earnings for the years ended December 31, 1998 and 1997 iii Statements of Cash Flows for the years ended December 31, 1998 and 1997 iv Notes to Financial Statements v-vii INDEPENDENT AUDITOR'S REPORT To the Board of Directors CinemaSource, Inc. Ridgefield, Connecticut We have audited the accompanying balance sheets of CinemaSource, Inc. (an "S" Corporation) as of December 31, 1998 and 1997, and the related statements of income and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CinemaSource, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Reynolds & Rowella, LLP Ridgefield, Connecticut April 23, 1999 -i- CINEMASOURCE, INC. BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ASSETS 1998 1997 --------- --------- CURRENT ASSETS Cash and cash equivalents $ 96,692 $ 36,813 Accounts receivable 40,282 15,100 Other receivable 115,000 -- --------- --------- TOTAL CURRENT ASSETS 251,974 51,913 --------- --------- PROPERTY AND EQUIPMENT Office and computer equipment 96,998 79,081 Less: Accumulated depreciation 50,091 33,691 --------- --------- PROPERTY AND EQUIPMENT - NET 46,907 45,390 --------- --------- OTHER ASSETS Deposits 3,000 3,000 --------- --------- TOTAL ASSETS $ 301,881 $ 100,303 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Notes payable $ -- $ 30,000 Accounts payable 19,133 46,453 Note payable - stockholder loan 329 15,609 Deferred revenues 56,224 11,543 --------- --------- TOTAL CURRENT LIABILITIES 75,686 103,605 --------- --------- STOCKHOLDER'S EQUITY Capital stock, no par value, 5000 shares authorized, 100 shares issued and outstanding 1,000 1,000 Retained earnings 225,195 (4,302) --------- --------- TOTAL STOCKHOLDER'S EQUITY 226,195 (3,302) --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 301,881 $ 100,303 ========= ========= See accompanying notes -ii- CINEMASOURCE, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 1998 1997 ----------- ----------- REVENUES $ 1,282,629 $ 747,402 COST OF SERVICES 100,480 52,743 ----------- ----------- GROSS PROFIT 1,182,149 694,659 ----------- ----------- OPERATING EXPENSES Salaries and benefits 795,741 496,781 Auto and travel 12,959 2,762 Advertising 2,228 386 Depreciation 16,400 12,817 Insurance 2,244 2,065 Fees and subscriptions 6,091 3,502 Professional fees 7,995 9,061 Office expenses 50,638 29,935 Rent 45,185 43,351 Utilities 37,635 37,725 Taxes 505 593 ----------- ----------- TOTAL OPERATING EXPENSES 977,621 638,978 ----------- ----------- INCOME FROM OPERATIONS 204,528 55,681 ----------- ----------- OTHER INCOME (EXPENSE) Interest income 738 441 Interest expense (7,598) (2,075) Other income(expense) 31,829 (64,725) ----------- ----------- TOTAL OTHER INCOME (EXPENSE) 24,969 (66,359) ----------- ----------- NET INCOME (LOSS) 229,497 (10,678) RETAINED EARNINGS/(DEFICIT) - BEGINNING (4,302) 6,376 ----------- ----------- RETAINED EARNINGS/(DEFICIT) - ENDING $ 225,195 $ (4,302) =========== =========== PRO FORMA Net income (loss) $ 229,497 $ (10,678) Pro forma income tax provision (Note 9) 86,000 -- ----------- ----------- Pro forma Net income (loss) $ 143,497 $ (10,678) =========== =========== See accompanying notes -iii- CINEMASOURCE, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,1998 AND 1997 1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income(loss) $ 229,497 $ (10,678) --------- --------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 16,400 12,817 Increase in accounts receivable (25,182) (15,100) Increase in other receivable (115,000) -- Increase in deferred revenues 44,681 11,543 Increase(decrease) in accounts payable (27,320) 38,842 --------- --------- Total adjustments (106,421) 48,102 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 123,076 37,424 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (17,917) (16,562) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (17,917) (16,562) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Notes payable (30,000) 30,000 Repayment of capital lease -- (3,572) Repayments of stockholder loans (15,280) (20,582) --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (45,280) 5,846 --------- --------- NET INCREASE IN CASH 59,879 26,708 CASH AND CASH EQUIVALENTS - BEGINNING 36,813 10,105 --------- --------- CASH AND CASH EQUIVALENTS- ENDING $ 96,692 $ 36,813 ========= ========= See accompanying notes -iv- CINEMASOURCE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION CinemaSource, Inc. (the "Company") is a data service organization that collects local movie theater information and distributes such data in customized formats to newspapers and other media. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenues and Costs Recognition The Company records revenues on an accrual basis, where revenues are recognized in the accounting period in which revenues are earned regardless of when cash is received. Cost of services and expenses are reported as expenses when incurred. Equipment Equipment is recorded at cost and depreciated over its estimated useful lives of seven to ten years, using the straight-line method. Repairs and maintenance expenditures which do not increase the useful lives of the assets are charged to operations as incurred. Depreciation expense for the years ended December 31, 1998 and 1997 was $16,400 and $12,817 respectively. Statement of Cash Flows The Company uses cash and cash equivalents as its basis for measuring changes in this statement. Interest paid for the years ended December 31, 1998 and 1997 was $7,598 and $2,075 respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Income Taxes The Company has elected to be taxed under the provisions of subchapter "S" of the Internal Revenue Code. Under these provisions the Company does not pay federal corporate income tax on the taxable income. Instead, the shareholder reports the taxable income on his personal tax return. However, the Company is liable for State of Connecticut corporate income taxes. No provision has been made for state corporate income taxes due to operating losses carried forward from prior years. Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. -v- CINEMASOURCE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Concentration of Risk Financial instruments that potentially subject the Company to credit risk include cash balances at banks which exceed the Federal deposit insurance of $100,000. NOTE 3 - OTHER RECEIVABLE During 1998 and 1997 CinemaSource, Inc. was engaged in litigation. As of December 31, 1998, all actions were dismissed. CinemaSource, Inc. collected $115,000 subsequent to December 31, 1998, in settlement, which is reflected in other income in the accompanying statement of income and retained earnings for 1998. NOTE 4 - NOTE PAYABLE The Company has a $50,000 unsecured operating line of credit with Ridgefield Bank, which provides for working capital financing. Borrowings bear interest at 11%. The balance outstanding at December 31, 1998 and 1997 was $0 and $30,000 respectively. NOTE 5 - RELATED PARTY The Company has an unsecured note payable to its officer/stockholder. The borrowings have no formal repayment schedule. The balance outstanding as of December 31, 1998 and 1997 was $329 and $15,609 respectively. NOTE 6 - DEFERRED REVENUES Some customers from time to time prepay the next month's billings. These prepayments are recorded as deferred revenues. The Deferred Revenues as of December 31, 1998 and 1997 were $56,224 and $11,543 respectively. NOTE 7 - OPERATING LEASE The Company leases its office space in Ridgefield, Connecticut under a non-renewable operating lease. The current lease, for 1998 and 1997 has a monthly payment of $3,500 and $3,250,respectively, expires in October 1999. The Company currently leases a vehicle under an operating lease agreement. Under this agreement the Company is required to pay $500 a month for 24 months ending June 1999. -vi- CINEMASOURCE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 8 - CONTINGENCIES There are existing disputes, which have arisen between CinemaSource, Inc,. and certain other companies in relation to CinemaSource, Inc.'s use, and of its acquisition of show time information, and in relation to an alleged breach by CinemaSource, Inc., of certain agreements which were entered into in the ordinary course of business. As of the date of these financial statements, litigation has not been commenced with respect to any of these matters. However, there can be no assurance that litigation will not be commenced against the Company. Management has indicated its plan to vigorously contest any suit which may arise and believes the loss, if any, resulting from any such suit should not have a material impact on the Company's financial position, results of operations, or cash flows. NOTE 9 - SUBSEQUENT EVENT On March 29, 1999, the stockholder of the Company (the "Stockholder") entered into an asset purchase agreement, to sell substantially all assets, which transaction does not include a transfer or assumption of liabilities, of the business to an unrelated third party (the "Purchaser"). In consideration for the sale, the Stockholder will receive a combination of cash and stock of the Purchaser. Since the Purchaser is a C Corporation for federal and state income tax purposes, the operations of the Company will also become taxable as a C Corporation effective at the date of purchase. Accordingly, the accompanying statement of income for the year ended December 31, 1998 presents an unaudited proforma income tax provision and proforma net income as they would have been reported had the Company been subject to federal and state income taxes. The proforma effective income tax rate of 37.5% exceeds the federal statutory rate due to the impact of state income taxes. -vii- CINEMASOURCE, INC. FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31,1999 AND 1998 TABLE OF CONTENTS Page ---- Accountant's Compilation Report i Balance Sheets as of March 31, 1999 ii Statements of Income and Retained Earnings for the Three Months ended March 31, 1999 and 1998 iii Statements of Cash Flows for the Three Months ended March 31, 1999 and 1998 iv Notes to Financial Statements v-vii To the Board of Directors CinemaSource,Inc. Ridgefield, Connecticut We have compiled the accompanying balance sheet of CinemaSource,Inc. (an "S" Corporation), as of March 31, 1999 and the related statements of income and retained earnings and cash flows for the three months ended March 31, 1999 and 1998, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statement information that is the representation of management. We have not audited or reviewed the accompanying financial statements, supplementary information and, accordingly, do not express an opinion or any other form of assurance on them. Reynolds & Rowella, LLP Ridgefield, Connecticut May 7, 1999 -i- CINEMASOURCE, INC. BALANCE SHEET MARCH 31, 1999 ASSETS 1999 -------- CURRENT ASSETS Cash and cash equivalents $141,948 Accounts receivable 78,134 -------- TOTAL CURRENT ASSETS 220,082 -------- PROPERTY AND EQUIPMENT Office and computer equipment 99,116 Less: Accumulated depreciation 54,218 -------- PROPERTY AND EQUIPMENT - NET 44,898 -------- OTHER ASSETS Deposits 3,000 -------- TOTAL ASSETS $267,980 ======== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable $ 22,011 Deferred revenues 16,179 -------- TOTAL CURRENT LIABILITIES 38,190 -------- STOCKHOLDER'S EQUITY Capital stock, no par value, 5000 shares authorized, 100 shares issued and outstanding 1,000 Retained earnings 228,790 -------- TOTAL STOCKHOLDER'S EQUITY 229,790 -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $267,980 ======== See accountant's compilation report and accompanying notes -ii- CINEMASOURCE, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 1999 1998 --------- --------- REVENUES $ 434,386 $ 277,353 COST OF SERVICES 30,215 19,907 --------- --------- GROSS PROFIT 404,171 257,446 --------- --------- OPERATING EXPENSES Salaries and benefits 319,031 178,637 Auto and travel 3,160 4,761 Advertising 730 76 Depreciation 4,127 3,257 Insurance 12,087 5,209 Fees and subscriptions 715 711 Professional fees 19,131 3,390 Office expenses 6,694 6,754 Rent 10,500 9,750 Utilities 9,462 8,747 Taxes 2,608 250 --------- --------- TOTAL OPERATING EXPENSES 388,245 221,542 --------- --------- INCOME FROM OPERATIONS 15,926 35,904 --------- --------- OTHER INCOME (EXPENSE) Interest income 473 141 Interest expense -- (780) Other expenses (8,911) (94,665) --------- --------- TOTAL OTHER INCOME (EXPENSE) (8,438) (95,304) --------- --------- NET INCOME (LOSS) 7,488 (59,400) RETAINED EARNINGS (DEFICIT) - BEGINNING 225,195 (4,302) Stockholder distributions, net (3,893) -- --------- --------- RETAINED EARNINGS (DEFICIT) - ENDING $ 228,790 $ (63,702) ========= ========= PRO FORMA Net income $ 7,488 $ (59,400) Pro forma income taxes (Note 8) 1,816 -- --------- --------- Pro forma net income $ 5,672 $ (59,400) ========= ========= See accountant's compilation report and accompanying notes -iii- CINEMASOURCE, INC. STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31,1999 AND 1998 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 7,488 $ (59,400) --------- --------- Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Depreciation 4,127 3,257 Increase in accounts receivable (37,852) (24,141) Decrease in other receivables 115,000 -- Decrease in deferred revenues (40,045) (11,027) Increase in accounts payable 2,878 82,772 --------- --------- Total adjustments 44,108 50,861 --------- --------- NET CASH PROVIDED BY/ (USED IN) OPERATING ACTIVITIES 51,596 (8,539) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (2,118) -- Stockholder distributions, net (3,893) -- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (6,011) -- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments of note payable -- (7,000) Repayments of stockholder loans (329) (2,330) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (329) (9,330) --------- --------- NET INCREASE/(DECREASE) IN CASH 45,256 (17,869) CASH AND CASH EQUIVALENTS - BEGINNING 96,692 36,813 --------- --------- CASH AND CASH EQUIVALENTS - ENDING $ 141,948 $ 18,944 ========= ========= See accountant's compilation report and accompanying notes -iv- CINEMASOURCE, INC NOTES TO FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION CinemaSource, Inc. (the "Company") is a data service organization that collects local movie theater information and distributes such data in customized formats to newspapers and other media. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation In the opinion of management, the accompanying interim financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. 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 three months ended March 31, 1999 and 1998 are not necessarily indicative of the results of operations or cash flows which may be recorded for the remainder of 1999 or 1998. The accompanying financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 1998. Revenues and Costs Recognition The Company records revenues on an accrual basis, where revenues are recognized in the accounting period in which revenues are earned regardless of when cash is received. Cost of services and expenses are reported as expenses when incurred. Equipment Equipment is recorded at cost and depreciated over its estimated useful lives of seven to ten years, using the straight-line method. Repairs and maintenance, charges which do not increase the useful lives of the assets, are charged to operations as incurred. Statement of Cash Flows The Company uses cash and cash equivalents as its basis for measuring changes in this statement. Interest paid for the periods ended March 31, 1999 and 1998 was $0 and $780, respectively. -v- CINEMASOURCE, INC NOTE TO FINANCIAL STATEMENTS NOTE 2- SUMMARY OF ACCOUNTING POLICIES (Continued) Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. Income Taxes The Company has elected to be taxed under the provisions of subchapter "S" of the Internal Revenue Code. Under these provisions the Company does not pay federal corporate income tax on the taxable income. Instead, the shareholder reports the taxable income on his personal tax return. However, the Company is liable for State of Connecticut corporate income taxes. No provision has been made for state corporate income taxes due to operating losses carried forward from prior years. Concentration of Risk Financial instruments that potentially subject the Company to credit risk include cash balances at banks, which exceed the federal deposit insurance of $100,000. NOTE 3 - NOTE PAYABLE The Company has a $50,000 unsecured operating line of credit with Ridgefield Bank, which provides for working capital financing. Borrowings bear interest at 11%. The balance outstanding at March 31, 1999 and 1998 was $0 and $23,000, respectively. NOTE 4 - OPERATING LEASE The Company leases its office space in Ridgefield, Connecticut under a non-renewable operating lease. The current lease for 1999 and 1998 has a monthly payment of $3,250 and $3,500, respectively, expires in October 1999. NOTE 5- RELATED PARTY Stockholder loan represents an unsecured demand loan with no formal repayment schedule. The balance as of March 31, 1999 and 1998 was $0 and $13,279, respectively. -vi- CINEMASOURCE, INC NOTES TO FINANCIAL STATEMENTS NOTE 6- DEFERRED REVENUES Some customers from time to time prepay the next month's billings. These prepayments are recorded as deferred revenues. NOTE 7- CONTINGENCIES There are existing disputes, which have arisen between CinemaSource, Inc,. and certain other companies in relation to CinemaSource, Inc.'s use, and of its acquisition of show time information, and in relation to an alleged breach by CinemaSource, Inc., of certain agreements which were entered into in the ordinary course of business. As of the date of these financial statements, litigation has not been commenced with respect to any of these matters. However, there can be no assurance that litigation will not be commenced against the Company. Management has indicated its plan to vigorously contest any suit which may arise and believes the loss, if any, resulting from any such suit should not have a material impact on the Company's financial position, results of operations, or cash flows. NOTE 8- SUBSEQUENT EVENT On March 29, 1999 the stockholder of the Company (the "Stockholder") entered into an asset purchase agreement, to sell substantially all assets, which transaction does not include a transfer or assumption of liabilities of the business, .to an unrelated third party (the "Purchaser"). In consideration for the sale, the Stockholder will receive a combination of cash and stock of the Purchaser. Since the purchaser is a C Corporation for federal and state income tax purposes, the operations of the Company will also become taxable as a C Corporation effective at the date of purchase. Accordingly, the accompanying statements of income for the periods ended March 31, 1999 and 1998 presents a pro forma income tax provision and pro forma net income as they would have been reported had the Company been subject to federal and state income taxes. The pro forma effective income tax rate of 24.25% exceeds the federal statutory tiered rate due to the impact of state income taxes. -vii- Audited Financial Statements Hollywood Online Inc. Years ended December 31, 1996, 1997 and 1998 with Report of Independent Auditors Hollywood Online Inc. Audited Financial Statements Years ended December 31, 1996, 1997 and 1998 Contents Report of Independent Auditors.................................................1 Audited Financial Statements Statements of Operations.......................................................2 Balance Sheets.................................................................3 Statements of Shareholder's Equity (Deficit)...................................4 Statements of Cash Flows.......................................................5 Notes to Financial Statements..................................................6 Report of Independent Auditors Board of Directors Hollywood Online Inc. We have audited the accompanying balance sheets of Hollywood Online Inc., a wholly owned subsidiary of The Times Mirror Company, as of December 31, 1996, 1997 and 1998, and the related statements of operations, shareholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hollywood Online Inc. at December 31, 1996, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP Los Angeles, California March 9, 1999 1 Hollywood Online Inc. Statements of Operations Year ended December 31 Three months ended March 31 1996 1997 1998 1998 1999 ----------------------------------------------------------------------- (Unaudited) (Unaudited) Net revenue $ 1,159,000 $ 963,000 $ 1,622,000 $ 218,000 $ 460,000 Costs and expenses: Cost of revenues 839,000 1,371,000 1,517,000 368,000 388,000 Selling, general and administrative 910,000 1,304,000 2,127,000 290,000 752,000 Salaries and benefits 774,000 1,436,000 3,945,000 409,000 2,267,000 Amortization of goodwill 355,000 355,000 355,000 89,000 89,000 ----------------------------------------------------------------------- 2,878,000 4,466,000 7,944,000 1,156,000 3,496,000 ----------------------------------------------------------------------- Operating loss (1,719,000) (3,503,000) (6,322,000) (938,000) (3,036,000) Interest income 3,000 -- -- -- -- ----------------------------------------------------------------------- Loss before taxes (1,716,000) (3,503,000) (6,322,000) (938,000) (3,036,000) Income tax expense (benefit) 19,000 11,000 (30,000) (8,000) -- ----------------------------------------------------------------------- Net loss $(1,735,000) $(3,514,000) $(6,292,000) $ (930,000) $(3,036,000) ======================================================================= See accompanying notes. 2 Hollywood Online Inc. Balance Sheets December 31 March 31 1996 1997 1998 1999 ------------------------------------------------------------ (Unaudited) Assets Current assets: Cash $ 9,000 $ 13,000 $ 13,000 $ 13,000 Accounts receivable (net of allowance for doubtful accounts of $0, $7,000, $23,000 and $23,000 respectively) 36,000 277,000 593,000 575,000 Prepaid and other 31,000 76,000 27,000 89,000 ------------------------------------------------------------ Total current assets 76,000 366,000 633,000 677,000 Net property and equipment 721,000 860,000 1,286,000 1,318,000 Goodwill, net of accumulated amortization 1,419,000 1,064,000 710,000 621,000 Other 4,000 2,000 31,000 31,000 ------------------------------------------------------------ Total assets $ 2,220,000 $ 2,292,000 $ 2,660,000 $ 2,647,000 ============================================================ Liabilities and shareholder's equity (deficit) Current liabilities: Accounts payable $ 19,000 $ 359,000 $ 939,000 $ 292,000 Accrued payroll and related liabilities 34,000 114,000 134,000 76,000 Accrued liabilities -- -- 125,000 320,000 Deferred compensation - current -- -- -- 1,415,000 Amount payable to Times Mirror, net 1,869,000 4,988,000 8,705,000 10,508,000 ------------------------------------------------------------ Total current liabilities 1,922,000 5,461,000 9,903,000 12,611,000 Deferred tax liabilities 33,000 80,000 -- -- Deferred compensation -- -- 2,298,000 2,613,000 Commitments and contingencies Shareholder's equity (deficit): Common stock, no par value: Authorized shares - 1,000 Issued and outstanding shares - 133 2,000,000 2,000,000 2,000,000 2,000,000 Accumulated (deficit) (1,735,000) (5,249,000) (11,541,000) (14,577,000) ------------------------------------------------------------ Total shareholder's equity (deficit) 265,000 (3,249,000) (9,541,000) (12,577,000) ------------------------------------------------------------ Total liabilities and shareholder's equity (deficit) $ 2,220,000 $ 2,292,000 $ 2,660,000 $ 2,647,000 ============================================================ See accompanying notes. 3 Hollywood Online Inc. Statements of Shareholder's Equity (Deficit) Common Accumulated Stock Deficit Total ------------------------------------------- Balance at January 16, 1996 $ -- $ -- $ -- Initial contribution 2,000,000 -- 2,000,000 Net loss -- (1,735,000) (1,735,000) ------------------------------------------- Balance at December 31, 1996 2,000,000 (1,735,000) 265,000 Net loss -- (3,514,000) (3,514,000) ------------------------------------------- Balance at December 31, 1997 2,000,000 (5,249,000) (3,249,000) Net loss -- (6,292,000) (6,292,000) ------------------------------------------- Balance at December 31, 1998 2,000,000 (11,541,000) (9,541,000) Net loss (unaudited) -- (3,036,000) (3,036,000) ------------------------------------------- Balance at March 31, 1999 (unaudited) $ 2,000,000 $(14,577,000) $(12,577,000) =========================================== See accompanying notes. 4 Hollywood Online Inc. Statements of Cash Flows Three months ended Year ended December 31 March 31 1996 1997 1998 1998 1999 ----------------------------------------------------------------------- (Unaudited) (Unaudited) Operating activities Net loss $(1,735,000) $(3,514,000) $(6,292,000) $ (930,000) $(3,036,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 410,000 533,000 622,000 146,000 184,000 Changes in other operating assets and liabilities: Accounts receivable 29,000 (241,000) (316,000) (11,000) 18,000 Accounts payable and accrued liabilities 5,000 341,000 705,000 61,000 (452,000) Deferred tax liability 33,000 47,000 (80,000) (8,000) -- Accrued payroll and related 24,000 80,000 20,000 -- (58,000) Deferred compensation -- -- 2,298,000 -- 1,730,000 Other (21,000) (43,000) 20,000 8,000 (62,000) ----------------------------------------------------------------------- Net cash used in operating activities (1,255,000) (2,797,000) (3,023,000) (734,000) (1,676,000) Investing activities Capital expenditures (683,000) (318,000) (694,000) (62,000) (127,000) ----------------------------------------------------------------------- Net cash used in investing activities (683,000) (318,000) (694,000) (62,000) (127,000) Financing activities Net change in payable to Times Mirror 1,869,000 3,119,000 3,717,000 796,000 1,803,000 ----------------------------------------------------------------------- Net cash provided by financing activities 1,869,000 3,119,000 3,717,000 796,000 1,803,000 ----------------------------------------------------------------------- Net increase (decrease) in cash (69,000) 4,000 -- -- -- Cash at beginning of period 78,000 9,000 13,000 13,000 13,000 ----------------------------------------------------------------------- Cash at end of period $ 9,000 $ 13,000 $ 13,000 $ 13,000 $ 13,000 ======================================================================= See accompanying notes. 5 Hollywood Online Inc. Notes to Financial Statements December 31, 1998 (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 1. Summary of Significant Accounting Policies Nature of Business Hollywood Online Inc. (the Company) owns and operates a Web site for movies and the motion picture industry. The Company's Web site (hollywood.com) features a large collection of movie and celebrity-related multimedia, including digitized video and audio clips, trailers, soundtrack music, photographs, and interactive games. Hollywood Online's broad range of movie information includes current-release movie and video information, daily motion picture industry news, celebrity interviews, coverage of major movie premieres and film festivals, a movie database, movie reviews, interactive forums and box-office charts. Hollywood Online also provides a proprietary movie theater listing service that covers over 18,000 U.S. movie screens. Hollywood Online commenced its operations in California in May 1993, and was incorporated in California in September 1993. On January 16, 1996, The Times Mirror Company (Times Mirror) purchased 100% of the capital stock of Hollywood Online. The acquisition was accounted for as a purchase with the excess of the purchase price over the fair value of the net assets acquired allocated to goodwill (see Note 2). The accompanying financial statements reflect the acquisition by Times Mirror with the purchase price as an initial contribution to the capital of the Company. The 1996 statement of operations reflect the Company's operations from January 1, 1996 through December 31, 1996. The results of operations from January 1, 1996 through January 15, 1996, were not significant. Hollywood Online is a wholly owned subsidiary of Times Mirror and significant accounts and transactions between Times Mirror and the Company are disclosed as related party transactions in Note 8. Basis of Presentation The historical financial statements do not necessarily reflect the results of operations or financial position that would have existed had the Company been an independent company. Times Mirror provides certain legal services, tax compliance and various other corporate services to the Company. The incremental cost of these services is not believed to be significant and is not included in the financial statements. The Los Angeles Times, a division of Times Mirror, provides certain selling promotion and marketing services to the Company in connection with its normal sales and marketing activities. The incremental cost of these services is not determinable nor is it believed to be significant and therefore is not included in the financial statements. 6 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 1. Summary of Significant Accounting Policies (continued) Interim Financial Statements The accompanying balance sheet as of March 31, 1999, and the statements of operations and cash flows for the three months ended March 31, 1998 and 1999, and the statement of shareholders' (deficit) for the three months ended March 31, 1999, are unaudited. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for the three months ended March 31, 1999, are not necessarily indicative of operating results to be expected for the full fiscal year. Economic Reliance on Parent Company The Company has incurred operating losses since 1995 and has an accumulated deficit of $11,541,000 and $14,577,000 as of December 31, 1998 and March 31, 1999, respectively. The Company is heavily dependent upon its Parent, Times Mirror, to provide adequate funding to support its operations. On May 20, 1999, Times Mirror completed the sale of the Company and the rights to its Web site, hollywood.com (see Note 9). Significant Customers and Concentration of Credit Risk The Company's customers are not concentrated in any geographic region. During the three years ended December 31, 1998, the Company had various significant customers (different customers for each year). The two largest customers accounted for 44% and 17%, 16% and 13%, and 12% and 8% of net revenues in 1996, 1997 and 1998, respectively. At December 31, 1996, 1997 and 1998, one customer accounted for 60%, 54% and 20% of accounts receivable in each year, respectively. The Company routinely assesses the financial strength of significant customers but generally does not require collateral. The Company establishes an allowance for potential credit losses based on the credit risk for specific customers, historical trends and other information; such losses have been within management's expectations. 7 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 1. Summary of Significant Accounting Policies (continued) Revenue Recognition The Company's revenues are derived principally from the sale of advertisements on its Web site under short-term agreements; advertising rates are dependent on whether the "impressions" (the number of times an advertisement appears in pages viewed by users of the Company's online properties) are for general rotation throughout the Company's Web site or premier areas of the Company's Web site. To date, the Company's advertising commitments generally have averaged one or two months in length. The Company also offers a combination of sponsorship and banner advertising campaign contracts to select premier partners. In general, these premier partner contracts have longer terms than standard banner advertising contracts (generally up to one year) and involve some integration with the Company's Web site. Advertising revenues on both banner and premier partner contracts are recognized ratably over the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include the guarantee of a minimum number of impressions. Revenue is deferred if the Company is unable to provide the level of impressions guaranteed. To date, no deferral has been required. Property and Equipment Property and equipment are stated at cost. Depreciation is provided for by the straight-line method over the estimated useful lives ranging from 3-10 years. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the lease term. Impairment of Long-Lived Assets The Company assesses on an ongoing basis the recoverability of long-lived assets, based on estimates of future undiscounted cash flows compared to net book value. If the future undiscounted cash flow estimates were less than net book value, net book value would then be reduced to fair value based on an estimate of discounted cash flow. The Company also evaluates the amortization periods of assets, including goodwill and other intangible assets, to determine whether events or circumstances warrant revised estimates of useful lives. 8 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 1. Summary of Significant Accounting Policies (continued) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. As discussed in Note 4, the Company has recorded deferred compensation to certain executives based on an estimate of the Company's market value. At December 31, 1998 and March 31, 1999, the Company estimated its market value based on the relevant terms of the definitive agreement discussed in Note 9. Barter Transactions A portion of the advertising on the Company's Web site is exchanged for advertisements on the Web sites or publications of other companies. These revenues and marketing expenses are recorded at the fair value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter transactions is recognized as income when advertisements are delivered on the Company's Web site, and expense from barter transactions is recognized when advertisements are delivered on the other companies' Web sites. Barter revenues and expenses in 1996 were not significant. Barter revenues and expenses were approximately $59,000 and $280,000 for the years ended December 31, 1997 and 1998, respectively, and $41,000 and $0 for the quarters ended March 31, 1998 and 1999, respectively. The Company also has an agreement with the National Association of Theatre Owners, Inc. (NATO) which provides access to member theaters nationwide. As part of this agreement, the company provides certain movie information and related showtimes via its online/internet network in exchange for certain advertising and the airing of promotional trailers on the screens of the member theaters. While the Company believes such exclusive advertising rights are of significant value, there is no independent basis to assess such value; accordingly, no amount has been recorded in the financial statement to reflect this arrangement. Web Site Development Costs Web site developments costs are expensed as incurred. 9 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 1. Summary of Significant Accounting Policies (continued) Advertising Costs Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 1996, 1997 and 1998, amounted to $88,000, $113,000 and $563,000, respectively. 2. Goodwill Goodwill represents the excess of the purchase price of the Company over the fair value of the net assets acquired. Goodwill of $1,774,000 is being amortized on a straight-line basis over five years and is reported net of accumulated amortization of $355,000, $710,000 and $1,064,000, at December 31, 1996, 1997 and 1998, respectively. 3. Net Property and Equipment Property and equipment at December 31 consists of the following: 1996 1997 1998 ----------------------------------------- Office furniture and equipment $ 266,000 $ 277,000 $ 303,000 Computer equipment and software 511,000 801,000 1,469,000 Leasehold improvements 24,000 40,000 40,000 ----------------------------------------- 801,000 1,118,000 1,812,000 Less accumulated depreciation and amortization (80,000) (258,000) (526,000) ----------------------------------------- $ 721,000 $ 860,000 $ 1,286,000 ========================================= 4. Executive Employment and Noncompetition Agreements The Company maintains executive employment and noncompetition agreements with certain executives of the Company. The agreements provide for minimum salary levels, incentive compensation, and deferred compensation. The deferred compensation vests over a predetermined schedule and unless accelerated at the option of certain of the executives, will be determined on December 31, 2000, and paid within two to six months thereafter. The amount to be paid under the deferred compensation arrangement will be equivalent to 10% to 16% of the market value of the Company on December 31, 2000. 10 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 4. Executive Employment and Noncompetition Agreements (continued) Additionally, in the event of a transaction involving the Company or a significant portion of its assets, the agreements contain certain accelerated payment rights and indicate that if any portion of the proceeds from such a transaction includes any item other than cash, such item shall be valued at its fair market value as determined under the provisions and subject to the terms of the agreement. As of December 31, 1996 and 1997, a reasonable basis for measuring the market value of the Company was not available and therefore, no amounts have been accrued as compensation in those periods. As of December 31, 1998, the Company's executives were 70% vested and the Company recorded compensation of $2,298,000 under the terms of the agreements. This amount reflects Times Mirror's estimate of fair value, based on the terms of the definitive agreement discussed in Note 9. During the quarter ended March 31, 1999, the Company accrued additional compensation of $1,730,000 based on subsequent payments under these agreements and other indicators of fair value. As of March 31, 1999, no amounts have been paid out under any of the deferred compensation agreements. Under the terms of the definitive agreement discussed in Note 9, the remaining obligation under the deferred compensation agreements will not be funded by the buyer. 5. Income Taxes Hollywood Online is included in Times Mirror's consolidated federal and combined California tax returns. The Company does not have a tax sharing agreement with Times Mirror and, as a result, Times Mirror has utilized the Company's taxable net operating losses without providing a current income tax benefit to the Company. The Company does however record a deferred tax expense or benefit based on the tax effects of temporary differences. 11 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 5. Income Taxes (continued) The income tax expense (benefit) for the year, which was computed as if the Company filed a separate income tax return, consisted of the following: Year ended December 31 1996 1997 1998 ------------------------------------------- Deferred: Federal $ 15,000 $ 9,000 $(24,000) State 4,000 2,000 (6,000) ------------------------------------------- $ 19,000 $ 11,000 $(30,000) =========================================== The difference between the actual income tax benefit and the U.S. federal statutory income tax expense (benefit) is reconciled as follows: Year ended December 31 1996 1997 1998 ------------------------------------------- Loss before taxes $(1,716,000) $(3,503,000) $(6,322,000) Federal statutory income tax rate 35% 35% 35% ------------------------------------------- Federal statutory income tax benefit (601,000) (1,226,000) (2,213,000) Increase/(decrease) in income taxes resulting from: State and local income tax benefit, net of federal effect (77,000) (180,000) (342,000) Goodwill amortization not deductible for tax purposes 124,000 124,000 124,000 Net operating loss utilized by Times Mirror 569,000 1,286,000 1,454,000 Other 4,000 7,000 6,000 Increase in valuation allowance -- -- 941,000 ------------------------------------------- $ 19,000 $ 11,000 $ (30,000) =========================================== 12 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 5. Income Taxes (continued) The tax effect of temporary differences results in deferred income tax assets (liabilities) and balance sheet classifications at December 31 as follows: 1996 1997 1998 ----------------------------------------- Temporary differences: Depreciation and other property differences $ (36,000) $ (85,000) $ (136,000) Valuation and other reserves -- 3,000 10,000 Compensation related liabilities 16,000 50,000 1,067,000 State and local income taxes 1,000 2,000 -- ----------------------------------------- (19,000) (30,000) 941,000 Valuation allowance -- -- (941,000) ----------------------------------------- $ (19,000) $ (30,000) $ -- ========================================= Balance sheet classification: Current deferred tax asset $ 14,000 $ 50,000 $ 64,000 Noncurrent deferred tax asset (liability) (33,000) (80,000) 877,000 ----------------------------------------- (19,000) (30,000) 941,000 Valuation allowance -- -- (941,000) ----------------------------------------- $ (19,000) $ (30,000) $ -- ========================================= 6. Commitments and Contingencies The Company leases office space under an agreement expiring in various years through 2003. The office lease requires payment of real estate taxes and maintenance in addition to the minimum rental payments. Minimum future rental payments under the noncancelable operating lease for each of the next five years and in the aggregate are as follows: 1999 $ 324,000 2000 345,000 2001 345,000 2002 345,000 2003 345,000 Thereafter -- --------------- $ 1,704,000 =============== 13 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 6. Commitments and Contingencies (continued) Total rent expense was $141,000, $255,000 and $249,000 in 1996, 1997 and 1998, respectively. The Company is a defendant in a legal matter involving a trademark dispute. The Company does not believe that this legal matter will have a material adverse effect on its financial position, cash flows or results of operations. 7. Profit Sharing Plan In July 1997, the Company began participating in a Times Mirror subsidiary 401(k) profit sharing plan for employees meeting the eligibility requirements. Employees may contribute from 1% to 20% of their annual compensation up to $10,000. The Company may make contributions at the discretion of the board of directors. No Company contribution was made for the year ended December 31, 1997. The Company contributed $20,000 for the year ended December 31, 1998. 8. Related Party Transactions The amount payable to Times Mirror represents the net result of various transactions between the Company, Times Mirror and the Los Angeles Times. The balance is generally due on demand and no interest is charged on outstanding amounts payable. The Company participates in Times Mirror's central cash management program, wherein all the Company's receipts are remitted to Times Mirror and all cash disbursements are funded by Times Mirror. Intercompany charges reflect miscellaneous other administrative 14 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 8. Related Party Transactions (continued) expenses incurred by Times Mirror or the Los Angeles Times on behalf of the Company. The intercompany payable balance also includes revenues billed and collected by the Los Angeles Times on the Company's behalf. Three months ended Year ended December 31 March 31 1996 1997 1998 1998 1999 -------------------------------------------------------------------------------- Balance at beginning of period $ -- $ (1,869,000) $ (4,988,000) $ (4,988,000) $ (8,705,000) Revenues 173,000 344,000 233,000 71,000 -- Expenses (42,000) (191,000) (177,000) (44,000) (176,000) Cash management, net (2,000,000) (3,272,000) (3,773,000) (824,000) (1,627,000) ---------------------------------------------------------------------------- $ (1,869,000) $ (4,988,000) $ (8,705,000) $ (5,785,000) $(10,508,000) ============================================================================ Average balance during the period $ (948,000) $ (3,365,000) $ (6,462,000) $ (5,223,000) $ (9,221,000) ============================================================================ Under the terms of the definitive agreement discussed in Note 9, the intercompany payable to Times Mirror will not be assumed by the buyer. 9. Subsequent Events On January 10, 1999, Times Mirror signed a definitive agreement to sell the stock of Hollywood Online Inc., and the rights to its Web site, hollywood.com. On May 20, 1999, Times Mirror completed the sale. On April 9, 1999, the Board of Directors of the Company approved a resolution to change the name of Hollywood Online, Inc. to hollywood.com, Inc. 10. Year 2000 Issue (Unaudited) The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, computer programs having time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations resulting in the disruption of operations. 15 Hollywood Online Inc. Notes to Financial Statements (continued) (Information at March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 is unaudited) 10. Year 2000 Issue (Unaudited) (continued) The Company's existing hardware and software systems are substantially compliant with Year 2000 requirements. However, the Company has not yet performed an assessment of computer systems belonging to customers, vendors, and other outside parties with whom it does business. Such an assessment is expected to be completed during 1999. It is not anticipated that such an assessment will reveal significant potential problems nor incur significant costs. No significant amounts have been expensed related to these matters for the years ended December 31, 1996, 1997 and 1998. 16 BIG ENTERTAINMENT, INC. INTRODUCTION TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (Unaudited) The following unaudited pro forma combined condensed financial statements present the pro forma combined condensed balance sheet at March 31, 1999 and the pro forma combined statements of operations for the fiscal year ended December 31, 1998 and the three months ended March 31, 1999. The pro forma combined condensed financial statements: (1) give effect to the acquisition of hollywood.com, Inc. ("Hollywood.com"), (2) give effect to the acquisition of substantially all of the assets of CinemaSource, Inc. ("CinemaSource"), and (3) give effect to the issuance of 569,820 shares of common stock and warrants to acquire 189,947 shares of Big Entertainment, Inc. (the "Company") common stock for $21.25 per share in a private placement to raise funds for the cash portion of the CinemaSource purchase consideration, to pay transaction costs of the CinemaSource and Hollywood.com acquisitions, and for other general purposes. The pro forma combined condensed balance sheet at March 31, 1999 presents the pro forma financial position as if the acquisitions of Hollywood.com and CinemaSource made by the Company and the private placement had been consummated on March 31, 1999. The pro forma combined statements of operations for the year ended December 31, 1998 and the three months ended March 31, 1999 present the pro forma results of operations as if the acquisitions of Hollywood.com and CinemaSource and the private placement had been consummated as of January 1, 1998. The pro forma combined condensed financial statements are based upon available information and certain assumptions considered reasonable by management. The pro forma combined condensed financial statements were prepared utilizing each entity's historical financial statements and should be read in conjunction with the historical financial statements included herein. - 1 - UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1999 Big Entertainment, Hollywood.com, Cinema- Inc. Inc Source, Inc. Pro Forma Pro Forma Historical Historical Historical Adjustments Combined ------------ ------------ ---------- ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 332,178 $ 13,000 $ 141,948 $ (6,500,000)(a) $ 5,167,684 (175,000)(a) (141,948)(a) (559,169)(b) 12,108,675 (c) (52,000)(d) Receivables, net 883,159 575,000 78,134 1,536,293 Merchandise inventories 875,753 875,753 Prepaid expenses 459,272 89,000 548,272 Other current assets 266,111 266,111 ------------ ------------ ---------- ------------- ------------ Total current assets 2,816,473 677,000 220,082 4,680,558 8,394,113 PROPERTY AND EQUIPMENT, net 3,004,118 1,318,000 44,898 4,367,016 INVESTMENT IN NETCO PARTNERS 2,080,813 2,080,813 INTANGIBLE ASSETS, net 148,408 4,567,513 (b) 4,715,921 GOODWILL, net 301,517 621,000 12,551,132 (a) 39,985,141 27,132,492 (b) (621,000)(b) OTHER ASSETS 430,783 31,000 3,000 464,783 ------------ ------------ ---------- ------------- ------------ TOTAL ASSETS $ 8,782,112 $ 2,647,000 $ 267,980 $ 48,310,695 $ 60,007,787 ============ ============ ========== ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 783,507 $ 292,000 $ 22,011 $ (292,000)(b) $ 805,518 Revolving line of credit 202,711 202,711 Accrued expenses 1,311,361 396,000 (320,000)(b) 1,387,361 Deferred revenue 93,556 16,179 109,735 Note payable 1,928,138 (b) 1,928,138 Deferred compensation - current 1,415,000 (1,415,000)(b) -- Due to parent 10,508,000 (10,508,000)(b) -- Current portion of capital lease obligations 763,713 763,713 ------------ ------------ ---------- ------------- ------------ Total current liabilities 3,154,848 12,611,000 38,190 (10,606,862) 5,197,176 ------------ ------------ ---------- ------------- ------------ CAPITAL LEASE OBLIGATIONS, less current portion 1,626,264 1,626,264 ------------ ------------ ---------- ------------- ------------ DEFERRED COMPENSATION 2,613,000 (2,613,000)(b) -- ------------ ------------ ---------- ------------- ------------ DEFERRED REVENUE 376,860 376,860 ------------ ------------ ---------- ------------- ------------ MINORITY INTEREST 250,905 250,905 ------------ ------------ ---------- ------------- ------------ SHAREHOLDERS' EQUITY: Preferred stock 4,152,261 4,152,261 Common stock 89,981 2,000,000 1,000 4,362 (a) 124,003 (1,000)(a) 23,001 (b) 535 (b) (2,000,000)(b) 5,698 (c) 426 (d) Warrants outstanding 834,583 2,866,071 (c) 3,700,654 Deferred compensation (459,300) (459,300) Additional paid-in capital 35,996,835 5,448,025 (a) 82,280,089 511,587 (a) 29,048,866 (b) 2,090,296 (b) 9,236,906 (c) (52,000)(d) (426)(d) Retained earnings (accumulated deficit) (37,241,125) (14,577,000) 228,790 (228,790)(a) (37,241,125) 14,577,000 (b) ------------ ------------ ---------- ------------- ------------ Total shareholders' equity 3,373,235 (12,577,000) 229,790 61,530,557 52,556,582 ------------ ------------ ---------- ------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,782,112 $ 2,647,000 $ 267,980 $ 48,310,695 $ 60,007,787 ============ ============ ========== ============= ============ See notes to unaudited pro forma combined condensed financial statements. - 2 - UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 Big Entertainment, Hollywood.com, Cinema- Inc. Inc Source, Inc. Pro Forma Pro Forma Historical Historical Historical Adjustments Combined ----------- ----------- ---------- ----------- ------------ NET REVENUES $ 1,315,774 $ 460,000 $ 434,386 $ (18,024)(e) $ 2,192,136 COST OF SALES 660,272 388,000 30,215 (18,024)(f) 1,060,463 ----------- ----------- ---------- ----------- ------------ Gross profit 655,502 72,000 404,171 -- 1,131,673 ----------- ----------- ---------- ----------- ------------ OPERATING EXPENSES: Selling, general and administrative 1,544,178 752,000 69,214 2,365,392 Salaries and benefits 698,808 2,267,000 319,031 (1,730,000)(g) 1,554,839 Amortization of goodwill and intangibles 7,857 89,000 -- 1,315,877 (h) 1,412,734 ----------- ----------- ---------- ----------- ------------ Total operating expenses 2,250,843 3,108,000 388,245 (414,123) 5,332,965 ----------- ----------- ---------- ----------- ------------ Operating income (loss) (1,595,341) (3,036,000) 15,926 414,123 (4,201,292) EQUITY IN EARNINGS OF NETCO PARTNERS 1,094,190 -- -- 1,094,190 OTHER: Interest, net (190,776) -- 473 (41,600)(i) (231,903) Other, net (129,903) -- (8,911) (138,814) ----------- ----------- ---------- ----------- ------------ Income (loss) before minority interest and taxes (821,830) (3,036,000) 7,488 372,523 (3,477,819) MINORITY INTEREST (152,808) -- -- (152,808) ----------- ----------- ---------- ----------- ------------ Income (loss) before taxes (974,638) (3,036,000) 7,488 372,523 (3,630,627) INCOME TAX BENEFIT (EXPENSE) -- -- (1,816) 1,816 (k) -- ----------- ----------- ---------- ----------- ------------ Net income (loss) $ (974,638) $(3,036,000) $ 5,672 $ 374,339 $ (3,630,627) =========== =========== ========== =========== ============ Basic and diluted earnings (loss) per common share $ (0.12) $ (0.31) =========== ============ Weighted average number of shares outstanding 8,565,528 3,402,138 (l) 11,967,666 =========== =========== ============ See notes to unaudited pro forma combined condensed financial statements. - 3 - UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 Big Entertainment, Hollywood.com, Cinema- Inc. Inc Source, Inc. Pro Forma Pro Forma Historical Historical Historical Adjustments Combined ------------ ------------ ----------- ----------- ------------ NET REVENUES $ 11,126,516 $ 1,622,000 $ 1,282,629 $ (49,757)(e) $ 13,981,388 COST OF SALES 5,987,383 1,517,000 100,480 (49,757)(f) 7,555,106 ------------ ------------ ----------- ----------- ------------ Gross profit 5,139,133 105,000 1,182,149 -- 6,426,282 ------------ ------------ ----------- ----------- ------------ OPERATING EXPENSES: Selling, general and administrative 8,840,049 2,127,000 181,880 11,148,929 Salaries and benefits 4,151,725 3,945,000 795,741 (2,298,000)(g) 6,594,466 Amortization of goodwill and intangibles 31,428 355,000 -- 5,264,506 (h) 5,650,934 Reserve for closed stores and lease termination costs 1,121,028 -- -- 1,121,028 ------------ ------------ ----------- ----------- ------------ Total operating expenses 14,144,230 6,427,000 977,621 2,966,506 24,515,357 ------------ ------------ ----------- ----------- ------------ Operating income (loss) (9,005,097) (6,322,000) 204,528 (2,966,506) (18,089,075) EQUITY IN EARNINGS OF NETCO PARTNERS 877,549 -- -- 877,549 OTHER: Interest, net (818,849) -- (6,860) (180,373)(i) (1,006,082) Other, net 42,989 -- 31,829 74,818 ------------ ------------ ----------- ----------- ------------ Income (loss) before minority interest and taxes (8,903,408) (6,322,000) 229,497 (3,146,879) (18,142,790) MINORITY INTEREST (347,081) -- -- (347,081) ------------ ------------ ----------- ----------- ------------ Income (loss) before taxes (9,250,489) (6,322,000) 229,497 (3,146,879) (18,489,871) INCOME TAX BENEFIT (EXPENSE) (1,407,600) 30,000 (86,000) 56,000 (j)(k) (1,407,600) ------------ ------------ ----------- ----------- ------------ Net income (loss) $(10,658,089) $ (6,292,000) $ 143,497 $(3,090,879) $(19,897,471) ============ ============ =========== =========== ============ Basic and diluted earnings (loss) per common share $ (1.47) $ (1.86) ============ ============ Weighted average number of shares outstanding 7,456,651 3,402,138 (l) 10,858,789 ============ =========== ============ See notes to unaudited pro forma combined condensed financial statements. - 4 - Notes to Unaudited Pro Forma Combined Condensed Financial Statements (a) Represents preliminary adjustments to record the acquisition of substantially all of the assets of CinemaSource including: o Payment of $6.5 million in cash and issuance of 436,191 shares of common stock valued at $12.50 per share, which was the market value of the Company's common stock at the time that the Company and the seller of CinemaSource agreed to the transaction, as consideration for the acquisition of substantially all the assets of CinemaSource; o Elimination of the historical cash balance for CinemaSource, as cash was not one of the assets acquired from the seller; o Payment of $175,000 in cash and issuance of warrants to acquire 50,000 shares of the Company's common stock valued at $511,587 to an investment banker representing the estimated total transaction costs incurred in connection with the CinemaSource acquisition; o Elimination of the historical shareholder's equity account balances of CinemaSource; and o Allocation of the excess purchase price over individual assigned balances to goodwill. (b) Represents preliminary adjustments to record the acquisition of substantially all of the assets of Hollywood.com including: o Issuance by the Company of 2,300,075 shares of common stock valued at $12.63953 per share and a one-year unsecured note in the amount of $1,928,138 payable to The Times Mirror Company ("Times Mirror") representing $31.0 million of consideration for the acquisition of Hollywood.com. The value of the Company's common stock of $12.63953 per share represents an average of the per share closing bid price for the Company's common stock for the 15 trading days ending on the third trading immediately preceding and the 15 trading days beginning on the third trading day immediately following the date that the Company and Times Mirror publicly announced that they had agreed to Hollywood.com merger transaction, as stipulated in the merger agreement; o Payment of $559,169 in cash and issuance of 53,452 shares of common stock valued at $675,608 ($12.63953 per share) and warrants to acquire 175,000 shares of the Company's common stock valued at $1,415,223 to investment bankers representing the estimated total transaction costs incurred in connection with the Hollywood.com acquisition; o Recording the fair value of the projected net benefit to be derived from the exclusive contract between Hollywood.com and the National Association of Theatre Owners, Inc. ("NATO") as an intangible asset; o Elimination of the historical accounts payable balance and certain other accrued liabilities for Hollywood.com as these liabilities remain the obligation of Times Mirror; o Elimination of the historical deferred compensation liability on the books of Hollywood.com related to employment agreements between Times Mirror and certain employees of Hollywood.com. The liability payable under these - 5 - Notes to Unaudited Pro Forma Combined Condensed Financial Statements (Continued) agreements became measurable as a result of the Company's agreement to acquire Hollywood.com. These employment agreements are obligations of Times Mirror and are not being assumed by the Company. o Elimination of the historical payable from Hollywood.com to Times Mirror, which was cancelled effective with the closing of the acquisition of Hollywood.com from Times Mirror. o Elimination of the historical shareholder's equity account balances of Hollywood.com; and o Allocation of the excess purchase price over individual assigned balances to goodwill. (c) Represents proceeds from the private placement of 569,820 shares of common stock and warrants valued at $2,866,071 to acquire 189,947 shares of common stock of the Company for $21.25 per share. (d) Represents the estimated issuance costs for the private placement consisting of $52,000 in cash plus 42,600 shares of common stock and warrants to acquire 14,200 shares of common stock at $21.25 per share issued to the placement agent. (e) Represents elimination of revenues generated by CinemaSource for services provided to Hollywood.com. (f) Represents elimination of Hollywood.com's expense for showtimes data provided by CinemaSource. (g) Represents elimination of deferred compensation costs attributable to employment contracts between Times Mirror and certain individuals at Hollywood.com. These contracts are obligations of Times Mirror and are not being assumed by the Company. (h) Represents elimination of historical goodwill amortization on the books of Hollywood.com, amortization, on a straight-line basis, of goodwill totaling $28,048,487 associated with the acquisition of Hollywood.com and goodwill totaling $12,663,480 associated with the acquisition of CinemaSource over a period of ten (10) years, and amortization, on a straight-line basis, of the intangible asset representing the value of Hollywood.com's exclusive contract with NATO estimated at $4,567,513 over a period of approximately three (3) years. (i) Represents interest at prime plus 1% on the $1,928,138 note payable to Times Mirror issued as partial consideration in the acquisition of Hollywood.com. (j) Represents elimination of the income tax benefit recorded by Hollywood.com as such amount would not be recorded by the Company because the Company has established a valuation allowance equal to 100% of its deferred tax asset. (k) Represents elimination of the pro forma income tax expense for CinemaSource as no tax would be payable based on the pro forma combined loss before income taxes. - 6 - Notes to Unaudited Pro Forma Combined Condensed Financial Statements (Continued) (l) Includes 2,300,075 shares of Big Entertainment, Inc. common stock issued to Times Mirror as partial consideration in the acquisition of Hollywood.com, 436,191 shares of common stock issued to the seller of the assets of CinemaSource as partial consideration therefor, and 569,820 shares of common stock issued in a private placement (the net proceeds from which were used to pay the cash portion of the purchase price for the assets of CinemaSource, transaction costs related to the two acquisitions and other general purposes), 42,600 shares of common stock issued to the placement agent as fees for the private placement, and 53,452 shares of common stock issued to an investment banking firm for services provided in connection with the Hollywood.com acquisition. - 7 - EXHIBIT INDEX Exhibit Number Description - -------------- ----------- *2.1 Asset Purchase Agreement dated as of March 29, 1999 by and among Big Entertainment, Inc., CinemaSource, Inc., Brett West and Pamela West (previously filed on March 17, 1999 with the Company's Annual Report on Form 10-KSB as Exhibit 10.33 thereto). *2.2 Agreement and Plan of Merger dated as of January 10, 1999, as amended May 14, 1999, by and among The Times Mirror Company, Hollywood.com, Inc. (formerly Hollywood Online, Inc.), Big Entertainment, Inc. and Big Acquisition Corp. (previously filed on January 19, 1999 with the Company's Current Report on Form 8-K dated such date as Exhibit 2.1 thereto), as amended by the Waiver and Consent and Other Modifications dated as of May 14, 1999. 23.1 Consent of Reynolds & Rowella LLP, Independent Auditors 23.2 Consent of Ernst & Young LLP, Independent Auditors *99 Press Release dated as of May 20, 1999. - -------- * Previously filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BIG ENTERTAINMENT, INC. By: /s/ Mitchell Rubenstein ------------------------------ Mitchell Rubenstein Chairman of the Board and Chief Executive Officer Date: June 23, 1999