U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 12, 2000, the number of shares outstanding of the issuer's
common stock, $.01 par value, was 23,277,385.
HOLLYWOOD.COM, INC.
Table of Contents
Page(s)
------
PART I FINANCIAL INFORMATION
---------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999......................... 3
Consolidated Statements of Operations for the Three
Months ended March 31, 2000 and 1999 (unaudited) ......... 4
Consolidated Statement of Shareholders' Equity for the
Three Months ended March 31, 2000 (unaudited)............. 5
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2000 and 1999 (unaudited).......... 6
Notes to Consolidated Financial Statements (unaudited).... 7-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.................................................... 16-25
PART II OTHER INFORMATION
-----------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 27
Signature .............................................................. 29
-2-
HOLLYWOOD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
--------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,429,994 $ 2,475,345
Receivables, net 1,985,066 1,155,999
Merchandise inventories 1,145,194 1,246,733
Prepaid expenses 1,760,316 1,687,347
Other receivables 26,998 18,037
Other current assets 93,948 67,541
Deferred advertising - CBS 24,313,695 -
------------ ------------
Total current assets 35,755,211 6,651,002
PROPERTY AND EQUIPMENT, net 2,052,576 1,877,959
INVESTMENT IN NETCO PARTNERS 1,121,868 549,975
INVESTMENT IN MOVIETICKETS.COM 1,066,667 -
NONCURRENT DEFERRED ADVERTISING - CBS 106,602,016 -
INTANGIBLE ASSETS, net 4,946,967 3,770,590
GOODWILL, net 45,261,305 46,483,647
OTHER ASSETS 2,468,662 3,149,652
------------ ------------
TOTAL ASSETS $199,275,272 $ 62,482,825
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 867,670 $ 2,181,089
Accrued professional fees 184,029 199,514
Other accrued expenses 1,833,241 1,579,682
Deferred advertising - CBS - 2,344,950
Accrued reserve for closed stores 716,432 2,366,432
Deferred revenue 238,331 308,061
Note payable 1,928,138 1,928,138
Current portion of capital lease obligations 559,160 561,015
------------ ------------
Total current liabilities 6,327,001 11,468,881
------------ ------------
CAPITAL LEASE OBLIGATIONS, less current portion 872,778 995,213
------------ ------------
DEFERRED REVENUE 249,117 249,117
------------ ------------
MINORITY INTEREST 139,697 270,828
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding - -
Common stock, $.01 par value, 100,000,000 shares authorized; 23,209,546 and
15,143,216 shares issued and outstanding at March 31,2000 and 232,096 151,432
December 31,1999, respectively.
Warrants outstanding 6,096,704 5,096,704
Deferred compensation (255,167) (306,200)
Additional paid-in capital 255,730,878 105,500,656
Accumulated deficit (70,117,832) (60,943,806)
------------ ------------
Total shareholders' equity 191,686,679 49,498,786
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $199,275,272 $ 62,482,825
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
-3-
HOLLYWOOD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-----------------------------------
2000 1999
---------- -----------
NET REVENUES $ 4,077,696 $ 1,315,774
COST OF REVENUES 949,971 660,272
------------ -----------
Gross margin 3,127,725 655,502
------------ -----------
OPERATING EXPENSES:
General and administrative 2,410,965 899,158
Selling and marketing 2,418,731 364,195
Salaries and benefits 2,432,915 698,808
Amortization of CBS advertising 4,124,197 -
Amortization of goodwill and intangibles 1,651,934 7,857
Depreciation 249,995 280,825
------------ -----------
Total operating expenses 13,288,737 2,250,843
------------ -----------
Operating loss (10,161,012) (1,595,341)
EQUITY IN EARNINGS OF NETCO PARTNERS 1,105,337 1,094,190
OTHER (EXPENSE):
Interest, net (59,200) (190,776)
Other, net - (129,903)
------------ -----------
Loss before minority interest (9,114,875) (821,830)
MINORITY INTEREST (59,151) (152,808)
------------ -----------
Net loss $ (9,174,026) $ (974,638)
============ ===========
Basic and diluted loss per common share $ (0.42) $ (0.12)
============ ===========
Weighted average common and common equivalent shares
outstanding - basic and diluted 21,830,827 8,565,528
============ ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
-4-
HOLLYWOOD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(Unaudited)
Additional
Common Paid-in Warrants Deferred Accumulated
Stock Capital Outstanding Compensation Deficit Total
-------- ------------- ----------- ------------ ------------- ------------
Balance - December 31,1999 $151,432 $ 105,500,656 $ 5,096,704 $ (306,200) $(60,943,806) $ 49,498,786
Issuance of common stock and common stock
warrants pursuant to CBS agreement 66,720 119,100,882 18,051,784 - - 137,219,386
Stock options and warrants exercised 13,071 29,627,260 (18,051,784) - - 11,588,547
Common stock warrants issued
in conection with investment in
Movietickets.com - - 1,000,000 - - 1,000,000
Issuance of stock options and warrants
for services rendered - 51,028 - - - 51,028
Non-cash issuance of common stock -
franchise agreement 1,000 1,649,000 - - - 1,650,000
Amortization of employee stock bonuses - 51,033 51,033
Shares repurchased (127) (197,948) - - - (198,075)
Net loss - - - - (9,174,026) (9,174,026)
-------- ------------- ----------- ---------- ------------- -------------
Balance - March 31,2000 $232,096 $ 255,730,878 $ 6,096,704 $ (255,167) $ (70,117,832) $ 191,686,679
======== ============= =========== ========== ============= =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
-5-
HOLLYWOOD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------------
2000 1999
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,174,026) $ (974,638)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,901,929 288,683
Equity in earnings, net of return of invested capital (638,560) (1,076,140)
Issuance of compensatory stock options and warrants 51,028 35,798
Amortization of deferred compensation costs 51,033 51,033
Recognition of deferred gain - (10,097)
Provision for bad debts 25,514 -
Provision for inventory 13,444 -
Amortization of deferred financing costs 2,145 103,922
Amortization of deferred advertising - CBS 4,124,197 -
Amortization of service contract 67,460 -
Minority interest 59,151 152,808
Changes in assets and liabilities:
Receivables (863,542) (64,380)
Prepaid expenses (72,969) (79,614)
Merchandise inventories 88,095 300,603
Other current assets (28,552) (173,056)
Other assets 7,561 108,435
Accounts payable (1,313,419) (712,869)
Accrued professional fees (15,485) (17,357)
Deferred revenue (69,730) 14,021
Other accrued expenses 253,558 (87,439)
------------ -----------
Net cash used in operating activities (5,531,168) (2,140,287)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in trademarks (1,000,000) -
Capital expenditures, net (424,612) (83,675)
Return of capital from Tekno Books to minority partner (190,282) (136,970)
------------ -----------
Net cash used in investing activities (1,614,894) (220,645)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments from revolving line of credit - (556,206)
Proceeds from shareholder/officer loan - 571,000
Repayments of shareholder/officer loan - (671,000)
Net proceeds from issuance of common stock 5,303,030 2,468,659
Proceeds from exercise of stock options and warrants 6,120,046 318,818
Dividends on preferred stock - -
Payments to repurchase common stock (198,075) -
Repayments under capital lease obligations (124,290) (167,495)
------------ -----------
Net cash provided by financing activities 11,100,711 1,963,776
------------ -----------
Net increase (decrease) in cash and cash equivalents 3,954,649 (397,156)
CASH AND CASH EQUIVALENTS, beginning of period 2,475,345 729,334
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 6,429,994 $ 332,178
------------ -----------
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 94,065 $ 91,685
============ ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-6-
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 three months ended March 31,
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 are 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 internet companies. CinemaSource licenses this
information to more than 200 different outlets, including customers such
as Yahoo!, Excite, Go Network, Ticketmaster/CitySearch, Zip2, The New York Times
web site, usatoday.com, latimes.com, iWon.com, The Washington Post web site, the
Boston Globe web site, the Newsday web site, and all of the web sites of Knight
Ridder and Advance/Newhouse.
-7-
(b) hollywood.com, Inc.:
On May 20, 1999, the Company acquired all of the capital stock of hollywood.com,
Inc. ("hollywood.com"), formerly called Hollywood Online Inc., 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. Hollywood.com owns and operates the Hollywood.com web site
offering 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 web site 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 web sites 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 Paul Kagan Associates, Inc., including the
PKBaseline.com web site, several publications, including the Motion Picture
Investor newsletter, and a consumer oriented movie web site. PK Baseline is a
subscription pay per use web site for movie professionals. 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 can not be
transferred by the holders for a period of 24 months following the closing of
the transaction. The Company plans to integrate part of the content into the
Hollywood.com website and continue to operate PK Baseline.com as a service
geared to movie professionals.
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 of $48.9 million is being amortized over 10 years.
The purchase price of CinemaSource, hollywood.com and Baseline II was allocated
to assets and liabilities acquired as follows:
Tangible assets $ 2,729,844
Intangible assets 4,567,513
Goodwill 48,932,777
Liabilities assumed (586,877)
------------
Total purchase price 55,643,257
Less value of common stock
and warrants issued (46,290,190)
-8-
Less value of note issued (1,928,138)
------------
Subtotal 7,424,929
------------
Paid in cash - purchase price 6,534,190
Paid in cash - acquisition costs 890,739
------------
Total cash paid $ 7,424,929
============
The following are unaudited pro forma combined results of operations of the
Company, hollywood.com, CinemaSource and Baseline for the three months ended
March 31, 1999, as if the acquisitions of hollywood.com, CinemaSource and
Baseline II had occurred on January 1, 1999:
Net Revenues $ 2,589,659
-----------
Net Loss $(6,047,256)
-----------
Pro Forma Diluted Loss Per Share $ (.51)
-----------
Weighted Average Shares Outstanding 11,794,405
===========
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.
(d) Broadway.com
The Company launched the Broadway.com web site on May 1, 2000. The
Broadway.com web site offers the webs most comprehensive database of
professional theater showtimes listings in the US with listings of more than
over 1900 events as well as show synopsis, cast and crew crew credits and
biographies, digitized show previews and show tunes, community chat area, the
ability to purchase Broadway and Off-Broadway theater tickets online, and
interviews. The Company has owned the web addresses Theater.com and Theaters.com
which is being utilized to redirect traffic to Broadway.com. On January 6, 2000
the Company acquired the web address Broadway.com. The purchase price consisted
of $1.0 million in cash and 35,294 in common stock valued at $17 per share. The
common stock was issued and recorded in December 1999, prior to closing, and
delivered in anticipation of the closing. The total purchase price of $1.6
million was recorded as an intangible asset in the accompanying balance sheet
and is being amortized over a life of ten years.
-9-
(3) 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. The promissory note has a maturity
date of May 20, 2000 (at which time the aggregate principal balance thereof must
be repaid in full with cash or Company stock at the Company's option) and bears
interest at the prime rate in effect from time to time of Citibank, N.A. plus 1%
(10% at May 12, 2000). Interest is due quarterly in arrears beginning June 30,
1999 with the final payment due at maturity. The promissory note may be prepaid
in whole or in part at any time without payment of any premiums or penalty.
(4) 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,
with an exercise price of $10,937,002 and valued at $18,051,784 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 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 the accompanying December 31, 1999 consolidated
balance sheet as accrued reserve for closed stores.
In 1998, the Company's Board of Directors approved a plan for the repurchase of
up to $1.0 million of the Company's common stock. Pursuant to the plan, during
2000 the Company repurchased 12,700 shares of its common stock for an aggregate
consideration of $198,075, or an average purchase price of $15.60.
During the three months ended March 31, 2000, the Company issued 1,306,999
shares of common stock upon the exercise of outstanding stock options and
warrants, for which the Company received $6,120,046 in cash exercise proceeds
and $5,468,501 in additional promotional advertising from CBS.
(5) 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 Earnings of NetCo
Partners. NetCo Partners is engaged in the publishing and licensing of
entertainment 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 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 three months ended March 31, 2000 and 1999 are presented below:
-10-
Three Months Ended March 31,
-----------------------------------
2000 1999
----------- -------------
Revenues $ 2,617,126 $ 2,688,972
Gross Profit 2,202,349 2,182,063
Net Income 2,210,674 2,188,380
The revenues, gross profit and net income of NetCo Partners for the three months
ended March 31, 2000 is principally attributable to delivery of the manuscript
for the fourth book in the Tom Clancy's NetForce adult series of books to the
publisher during the quarter. This milestone triggers the recognition of certain
revenues and corresponding expenses for the book under the various domestic and
foreign licensing agreements.
As of March 31, 2000, NetCo Partners has $2,518,650 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 $953,727 as of March 31, 2000.
As of March 31, 2000, the Company has received cumulative profit distributions
from NetCo Partners since its formation totaling $4,023,239, in addition to
reimbursement of substantially all amounts advanced by the Company to fund the
operations of NetCo Partners.
(b) MOVIETICKETS.com
The Company entered into a joint venture agreement with AMC Entertainment Inc.
("AMC") and National Amusements, Inc. Each partner owns one-third of the joint
venture at March 31, 2000. Movietickets.com web site will allow users to
purchase movie tickets online and either print the tickets on a personal
computer or retrieve them at "will call" windows or ATM machines at the
theaters. The web site is expected to launch in late May 2000. At March 31, 2000
the Company contributed $66,667 in cash to movietickets.com plus $1,000,000 of
warrants.
(6) 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 three months ended March 31, 2000 and 1999:
Three Months Ended March 31,
---------------------------------
2000 1999
------------ ------------
Net Loss $ (9,174,026) $ (974,638)
Preferred Stock Dividends - (91,459)
------------ ------------
Net Loss Available to Common Shareholders $ (9,174,026) $ (1,066,097)
Weighted Average Shares Outstanding 21,830,827 8,565,528
------------ ------------
Basic and Diluted Loss per Share $ (0.42) $ (0.12)
============ ============
-11-
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 three months ended March 31,
2000 and 1999. Options and warrants to purchase 4,098,510 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 three months ended March 31, 2000
because the result would be antidilutive.
(7) SEGMENT REPORTING:
The Company has five reportable segments: Internet ad sales, business to
business, e-commerce, retail, and intellectual properties. The Internet ad sales
segment sells advertising on its web site, Hollywood.com and will also include
Broadway.com and the Hollywood.com international sites advertising in subsequent
quarters. The business to business segment licenses entertainment content and
includes the division CinemaSource (which licenses movie showtimes and content),
EventSource (which licenses event related information) and TheaterSource (which
licenses live theater showtimes and content) to internet Companies. E-commerce
sells entertainment related merchandise over the Internet. The retail segment
operated retail studio stores that sold entertainment-related merchandise. The
intellectual properties segment owns or controls the exclusive rights to certain
intellectural properties created by best-selling authors and media celebrities,
which it licenses across all media, including books, film and television,
multimedia software, toys and other products.
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.
The following table illustrates the financial information regarding the
Company's reportable segments.
Three Months ended March 31,
---------------------------------------
2000 1999
------------- ----------
REVENUES:
Internet Ad Sales $ 2,310,355 $ -
Business to Business 1,002,508 -
E-Commerce 301,734 77,908
Retail - 696,900
Intellectual Properties 463,099 540,966
Other - -
------------- ----------
$ 4,077,696 $1,315,774
============= ==========
GROSS PROFIT:
Internet Ad Sales $ 2,052,280 $ -
Business to Business 942,444 -
E-Commerce 52,382 30,040
Retail - 229,652
Intellectual Properties 80,619 395,810
Other - -
- -
------------- ----------
$ 3,127,725 $ 655,502
============= ==========
-12-
Three Months ended March 31,
---------------------------------------
2000 1999
------------- ----------
OPERATING LOSS:
Internet Ad Sales $ (7,136,865) $ -
Business to Business 54,288 -
E-Commerce (641,036) (208,871)
Retail (28,405) (793,099)
Intellectual Properties 118,789 311,764
Other (2,527,783) (905,135)
------------ ------------
$(10,161,012) $ (1,595,341)
============ ============
CAPITAL EXPENDITURES:
Internet Ad Sales $ 277,626 $ -
Business to Business 71,983 -
E-Commerce - 65,058
Retail - -
Intellectual Properties 5,188 -
Other 69,815 18,617
------------ ------------
$ 424,612 $ 83,675
============ ============
DEPRECIATION EXPENSE:
Internet Ad Sales $ 157,581 $ -
Business to Business 24,820 -
E-Commerce 3,606 2,342
Retail - 81,059
Intellectual Properties 2,073 1,226
Other 61,915 196,198
------------ ------------
$ 249,995 $ 280,825
============ ============
INTEREST, NET:
Internet Ad Sales $ 685 $ -
Business to Business 536 -
E-Commerce - -
Retail 39,180 176,622
Intellectual Properties (1,947) (1,084)
Other 20,746 15,238
------------ ------------
$ 59,200 $ 190,776
============ ============
-13-
(8) 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 those
estimates.
Significant estimates include management's estimate that accounts receivable of
NetCo Partners as of March 31, 2000 will be collected in full, and that no
reserve for uncollectible accounts is necessary (see Note 5).
(9) COMMITMENTS AND CONTINGENCIES:
Tax Loan - As part of the Asset Purchase Agreement between the Company and
CinemaSource, the Company has agreed to make a loan to the shareholder of
CinemaSource to pay the taxes due on the portion of the purchase price paid in
the form of common stock (not to exceed 24% of the tax gain at the time of
closing). On April 14, 2000, a loan in the amount of $1,737,513 was granted. The
loan has a term of one year, bears interest and is secured by the holders stock
in the Company.
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.
-14-
(10) RECLASSIFICATION:
Certain amounts in the 1999 financial statements have been classified to conform
with the 2000 classification.
(11) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
For the Three Months Ended March 31, 1999:
The Company recorded the conversion of $2,000,000 of Series C Preferred Stock
into 500,000 shares of common stock.
The Company recorded non-cash dividends on its Series A,B,C,D and D-2
convertible Preferred Stock in the amount of $91,459, of which $41,589 was paid
through the issuance of 3,506 shares of common stock.
The Company entered into capital lease transactions totalling $56,068.
For the Three Months ended March 31, 2000:
The Company issued 100,000 shares of common stock, valued at $1,650,000. This
amount was accrued for at December 31, 1999.
The Company issued warrants valued at $1.0 million in connection with it's
investment in Movietickets.com.
The Company recorded $5,468,501 in deferred advertising in connection with the
exercise of warrants by CBS.
(12) SUBSEQUENT EVENT:
On May 1, 2000, the Company purchased the assets of Broadwaytheater.com, Inc.
for $135,000 in cash and 66,572 shares of common stock. Broadwaytheater.com
sells Broadway and Off Broadway theater tickets online. This business has been
incorporated into the Company's Broadway.com web site which launched on May 1,
2000.
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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, our
ability to compete with other Internet companies, technology risks and the
general risk of doing business over the Internet, future government regulation,
dependence on our founders, the interests of our largest shareholder, Viacom
Inc. (formerly CBS Corporation), and accounting considerations related to our
strategic alliance with CBS. 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 Internet company that offers widely
recognized brands and one of the broadest and deepest collections of
entertainment content and related information in the industry. We also continue
to 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, the business-to-business
syndication of our content, to other internet companies including such companies
as Yahoo!, Go Network, AOL DigitalCities, Excite, Ticketmaster/CitySearch and
Zip2 and the sale of merchandise throughout our family of entertainment-related
web sites. Our existing businesses, Hollywood.com, Broadway.com, CinemaSource,
EventSource, TheaterSource and Baseline provide in-depth entertainment
information, including movie and theater descriptions and reviews, showtime
listings, entertainment news and an extensive multimedia library. In January
2000 we entered into a seven-year agreement with CBS Corporation providing for
$100 million of advertising and promotion of the Hollywood.com web site 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. CBS Corporation merged
with and into Viacom Inc. in May 2000.
Internet Businesses
Hollywood.com. Hollywood.com is a premier entertainment related web
site featuring over one million pages of in-depth movie, television and music
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
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entertainment awards shows and film festivals and exclusive video coverage of
movie premieres. Hollywood.com is established on the Internet as a leading
entertainment web site with approximately 67 million page impressions and
approximately 3.1 million unique visitors recorded during March 2000.
We sell banner advertising and sponsorships on Hollywood.com through an
internal advertising sales force and through relationships with outside
advertising firms. Some of our recent advertisers include Microsoft, Toyota,
Universal Studios, eBay, P&G, iVillage, Visa, M&Ms, Destination Films, New Line
Cinema, JC Penny, US Army, Nissan and Women.com.
We promote the Hollywood.com web site through our strategic
relationships with CBS and the National Association of Theatre Owners. Through
exclusive contracts with the NATO and over 85 of its member theater exhibitors,
we promote the Hollywood.com web site to movie audiences by airing trailers
about Hollywood.com before feature films that play in participating theaters and
by displaying posters and other promotional materials in those theaters. In
exchange, we develop and maintain web sites 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 web site.
CBS has agreed to provide Hollywood.com with $100,000,000 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 web site. CBS has agreed to
include the Hollywood.com web site in all advertising sale programs and
presentations that are appropriate for the sale of advertising on the web site.
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.
Through our MusicSite.com web site, which serves as the music area on
Hollywood.com, we feature a comprehensive collection of information related to
music, musicians and the music industry, including music news and information,
musician profiles, reviews of current and upcoming releases, artist
discographies and coverage of awards ceremonies. MusicSite.com also features
extensive listings of concerts and music-related events around the country from
the largest to the smallest of venues, which listings are provided by our
EventSource division.
Broadway.com. We launched the Broadway.com web site 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; the ability to purchase
Broadway and Off Broadway 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 web
site also offer 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 also offers a community chat area for users to
chat with fellow users, stage actors, playwrights and reviewers about Broadway
and live theater from around the country and worldwide. Broadway.com expects to
generate revenue from advertising sales, syndication of content to other
internet companies, and ticket sales.
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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 AOL Latin America (a venture
between AOL and Cisneros)in late 1999 pursuant to which we agreed to launch
Portuguese and Spanish versions of the Hollywood.com web site to be promoted on
AOL in countries throughout Latin America. We launched the br.hollywood.com
Portuguese-language web site in Brazil in November 1999 and the mx.hollywood.com
Spanish-language web site in Mexico in May 2000. These web sites 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. We plan to launch ar.hollywood.com in Argentina in May
2000. Our br.hollywood.com web site is featured and promoted on the
entertainment channels of both AOL Latin America and El Sitio.com, a Latin
American-based Internet portal, and our other Latin American web sites will also
be featured on these portals.
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 Legend new PC's along with Legend's new
Chinese-language portal FM365.com. Legend's market share of PC sales in China
has climbed steadily to over 27%.
The Company has also entered into an agreement in principle to form a
strategic partnership to distribute Hollywod.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, Zip 2, NBCi, The New York Times web site, usatoday.com,
latimes.com, iWon.com, The Washington Post web site, the Boston Globe web site,
the Newsday web site, and all of the web sites of Knight Ridder and
Advance/Newhouse.
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. We acquired CinemaSource in mid-1999.
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 Cities in April 2000 to
provide event listings for up to 200 cities nationwide. In addition to Digital
Cities, other EventSource customers include the web sites of The New York Times
and Knight Ridder.
Baseline. We own and operate the PKBaseline.com web site, a pay-per-use
web site geared to movie professionals, which we acquired from media analyst
Paul Kagan. The Baseline business maintains one of the most comprehensive movie
and television-related databases and has been in operation for over 15 years.
The PKBaseline.com web site 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. Baseline continuously tracks production, distribution,
and exhibition of feature films worldwide, including box office projections,
budgets, and trends. Baseline customers include major movie studios, investment
banks, news agencies, consulting firms and other professionals in the
entertainment industry.
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Hollywood.com Studio Store. Our online studio store located at
shopping.hollywood.com is one of the world's largest online movie studio stores.
The studio store features a product line of branded licensed merchandise
including toys, apparel, video games, art, collectibles, movie posters,
housewares, accessories, costumes, games, high tech merchandise and media items.
We currently offer approximately 2,500 different products for sale in the studio
store and our strategy is to make the web site a one-stop shopping experience
for anyone seeking entertainment merchandise. We cross-promote the Hollywood.com
studio store to movie and entertainment enthusiasts through banners and links on
our other web sites and the web site is promoted on over 12,000 affiliate web
sites, including latimes.com, usatoday.com, Yahoo!, Excite, nj.com and others.
We also offer for sale a comprehensive collection of merchandise related to
current and classic Broadway shows through the Broadway.com web site.
New Internet Properties.
We plan to leverage our established entertainment Internet platform to
launch additional entertainment-related Internet businesses, which we expect to
significantly increase our ability to generate revenues from advertising,
syndication and e-commerce. Recent examples of this strategy include the launch
of Broadway.com, MusicSite.com and Mx.hollywood.com, and the upcoming launch of
MovieTickets.com
MovieTickets.com. In May 2000 we plan to launch MovieTickets.com, a
joint venture among Hollywood.com, AMC Entertainment Inc., and National
Amusements, Inc. Each of Hollywood.com, AMC Entertainment Inc. and National
Amusements, Inc. owns one-third of the equity of MovieTickets.com, Inc. and the
joint venture has entered into an agreement in principle for CBS Corporation to
acquire a five percent interest. 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 exhibitors include AMC Entertainment Inc., National
Amusements, Inc. and Famous Players Inc. These exhibitors operate theaters
located in all of the top ten markets and approximately 70% of the top 50
markets in the United States. AMC Entertainment Inc. is the largest movie
theater in the United States based on box office sales and Famous Players
generates approximately half of all box office sales in Canada. The
MovieTickets.com web site will allow users to purchase movie tickets online and
either print the tickets on a personal computer or retrieve them at "will call"
windows at theaters. The web site will also feature 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 web site to generate a significant majority of its revenues from the sale of
advertising, and may generate additional revenues from service fees charged to
users for the purchase of tickets. Hollywood.com has the right to sell up to
half of the available advertising inventory on the MovieTickets.com web site and
we will receive a commission equal to 33% of all of the advertising revenue of
MovieTickets.com generated by the Hollywood.com ad sales force.
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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 (the "NetCo Joint
Venture Agreement"). NetCo Partners is engaged in the publishing and licensing
of entertainment properties, including Tom Clancy's NetForce, and has entered
into various licensing agreements described above.
The Company and C.P. Group are each 50% partners in NetCo Partners. Tom
Clancy owns 50% of C.P. Group. 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
(formerly called Criosphinx), Neil Gaiman's Lifers, and Anne McCaffrey's
Saraband.
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.
As an example of one of the many synergistic opportunities between the Company's
Internet and publishing businesses, the
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Company is currently working to develop an area on the Hollywood.com web site
initially dedicated to mysteries, and later to include science fiction and
romance.
Results of Operations
The following table summarizes the Company's revenues, cost of sales and gross
profit by division for the three months ended March 31, 2000 and 1999,
respectively:
Internet Business to Intellectual
Ad Sales Business E-Commerce Properties Retail Total
------------- ------------ ------------ ------------- -------- ----------
March 31, 2000
- --------------
Net Revenues $2,310,355 $ 1,002,508 $ 301,734 $ 463,099 $ - $4,077,696
Cost of Sales 258,075 60,064 249,352 382,480 - 949,971
---------- ----------- --------- --------- -------- ----------
Gross Profit $2,052,280 $ 942,444 $ 52,382 $ 80,619 $ - $3,127,725
========== =========== ========= ========= ======== ==========
March 31, 1999
- --------------
Net Revenues $ - $ - $ 77,908 $ 540,966 $ 696,900 $1,315,774
Cost of Sales - - 47,868 145,156 467,248 660,272
---------- ---------- --------- --------- --------- ----------
Gross Profit $ - $ - $ 30,040 $ 395,810 $ 229,652 $ 655,502
========== ========== ========= ========= ========= ==========
NET REVENUES
Total net revenues for the three months ended March 31, 2000 and 1999 were
$4,077,696 and $1,315,774, respectively. The increase in revenue was primarily
due to increased revenues from the Company's internet divisions (internet ad
sales, business to business and e-commerce). The Company acquired three internet
businesses in May and August of 1999; therefore there were no revenues for these
business divisions for the three months ended March 31, 1999.
Internet sales revenue for the three months ended March 31, 2000 was
$2,310,355. Revenue is derived from sale of banner advertisements and
sponsorships on the Hollywood.com web site. Hollywood.com was acquired by the
Company on May 20, 1999.
Business to business revenue for the three months ended March 31, 2000 was
$1,002,508. Revenue is generated by the licensing of movie showtimes and other
content information to other Internet companies including YAHOO!, Excite, Zip2,
NBCi, Go Network, usatoday.com, which is conducted through CinemaSource and
Baseline. We acquired CinemaSource on May 18, 1999 and Baseline on August 31,
1999.
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E-commerce revenue for the three months ended March 31, 2000 increased 287% to
$301,734 from $77,908 for three months ended March 31, 1999. The principal
contributing factors to increased e-commerce revenue were increased product
assortment and better product promotion through the Company's relationship with
CBS.
Revenues from the Company's intellectual properties division decreased by
$77,867 or 14% from $540,966 to $463,099 for the three months ended March 31,
2000. The decrease in revenues is attributable to a lesser number of manuscripts
being delivered for the three months ended March 31, 2000 as compared to March
31, 1999. The intellectual properties division generates revenues from several
different activities including book development and licensing, intellectual
property licensing, and publishing Mystery Scene magazine. Revenues vary quarter
to quarter dependent on the various stages of the book projects. Revenues are
recognized when the earnings process has been completed based on the terms of
the various agreements and when ultimate collection of such revenues is no
longer subject to contingencies.
The Company closed all its brick and mortar retail locations in December 1999,
therefore there were no revenues for the three months ended March 31, 2000.
Barter transactions that generate advertising revenue, (included in Internet ad
sales) in which the Company received advertising or other services in exchange
for content or advertising on its web sites accounted for approximately 6% of
total net revenue for the three months ended March 31, 2000. In future periods,
management intends to maximize cash advertising revenue, although the Company
will continue to enter into barter relationships when deemed appropriate.
The Company records barter income earned under a contract with NATO, which the
Company acquired through its acquisition of Hollywood.com. 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 for the exhibiting NATO members, promotional materials and movie
information, advertising and editorial content. For the three months ended March
31, 2000 the Company recorded $745,438 in promotional revenue and expense under
the NATO Contract.
COST OF REVENUE
Cost of revenue for the three months ended March 31, 2000 and 1999 was $949,971
and $660,272, respectively. The increase in the cost of sales was primarily the
result of decreased retail revenues which generate lower gross margins offset by
increase in Hollywood.com ad sales and business to business revenues which
generate much higher gross margins. As a percentage of net revenue, cost of
sales was 23% and 50% for the three months ended March 31, 2000 and 1999,
respectively. The company's e-commerce division generally produces a lower gross
margin than other revenue categories.
EQUITY IN EARNINGS OF NETCO PARTNERS
The Company's 50% share in the earnings of Netco Partners increased by 1% or
$11,147 to $1,105,337 for the three months ended March 31, 2000 from $1,094,190
for the three months ended March 31, 1999. On book projects, revenues are
typically recognized upon delivery of the
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manuscripts to the publishers. In both quarters NetCo Partners delivered one
adult novel to the publisher.
OPERATING EXPENSES
General and administrative expenses. General and administrative expenses
increased $1,511,807 or 168% to $2,410,965 for the three months ended March 31,
2000 from $899,158 for the three months ended March 31, 1999. This increase is
primarily attributable to the addition of three internet businesses which were
acquired in May and August of 1999.
Selling and marketing expenses. Selling and marketing expenses increased
$2,054,536 to $2,418,731 for the three months ended March 31, 2000 from $364,195
for the three months ended March 31, 1999. Included in selling and marketing are
non-cash barter transactions of $995,268 and $220,000 for the three months ended
March 31, 2000 and 1999, respectively. Barter transactions accounted for
approximately 41% and 60% of selling and marketing expense for the three months
ended March 31, 2000 and 1999. respectively. The increase in selling and
marketing expense was primarily the result of increased advertising on the
radio, television and outdoor. In addition, these expenses are related to the
Company's internet divisions which were acquired in May and August 1999.
Salaries and benefits. Salaries and benefits increased $1,734,107 to $2,432,915
for the three months ended March 31, 2000 from $698,808 for the three months
ended March 31, 1999. This increase is attributable to the addition of three
internet businesses and an increase in the infrastructure to support the growth
of the Company..
Amortization. Amortization of goodwill and intangibles was $1,651,934 and $7,857
for the three months ended March 31, 2000 and 1999, respectively. The increase
of $1,644,077 is attributable to goodwill and intangibles recorded with the
three internet businesses acquired in May and August of 1999. In addition, the
Company acquired the Broadway.com URL in January 2000 and the amortization of
the purchase price is included above for the three months ended March 31, 2000.
Amortization of CBS advertising relating to the Company's agreement with CBS was
$4,124,197 for the three months ended March 31, 2000. Under the Company's
agreement with CBS, the Company issued shares of common stock and warrants to
purchase common stock in consideration of 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 CBS has been recorded in the balance
sheet as deferred advertising and is being amortized over each related contract
year.
Depreciation. Depreciation was $249,995 and $280,825 for the three months ended
March 31, 2000 and 1999, respectively. The decrease of $30,830 in depreciation
expense is attributable to the closure of the Company's brick and mortar retail
division in December of 1999. All depreciable assets relating to the retail
operations were fully written off. The decrease in depreciation expense is
offset by depreciation of assets relating to the three internet businesses
acquired in May and August of 1999.
Interest Expense, net. Interest expense, net for the three months ended March
31, 2000 was $59,200 compared to $190,776 for the three months ended March 31,
1999. The decrease is
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attributable to an increase in interest income earned on a higher average
balance of cash and a decrease in interest paid on the Company's capital lease
obligation and inventory line of credit.
OTHER INCOME (EXPENSE)
Other expense for the three months ended March 31, 1999 included an accrual of
$140,000 for a potential payment that may be due in conjunction with
registration of shares underlying the Company's convertible preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had cash and cash equivalents of $6,429,994 and
working capital of $29,428,210 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 the first quarter of 2000 was
$5,531,168, primarily representing cash used to fund the Company's net loss and
a decrease in accounts payable. Net cash used in investing activities was
$1,614,894, while $11,100,711 in cash was provided by financing activities. As a
result of all of the above, cash and cash equivalents increased by $3,954,649
for the three months ended March 31, 2000. During the three months ended March
31, 1999, net cash used in operating activities was $2,140,287, net cash used in
investing activities was $220,645, and $1,963,776 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 $18,051,784 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 as per 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.
In 1998, the Company's Board of Directors approved a plan for the repurchase of
up to $1.0 million of the Company's common stock. Pursuant to the plan, during
2000 the Company repurchased 12,700 shares of its common stock for an aggregate
consideration of $198,075, or an average purchase price of $15.60.
During the three months ended March 31, 2000, the Company issued 1,306,999
shares of common stock upon the exercise of outstanding stock options and
warrants, for which the Company received $6,120,046 in cash exercise proceeds
and $5,468,501 in additional promotional advertising from CBS.
The growth of our Internet 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
-24-
sufficient revenues to offset expenses we will require further financing to fund
our ongoing operations.
YEAR 2000 ISSUES
The Company believes that due to the newness of the Company's Internet
operations, all Internet systems are currently year 2000 compliant and any new
systems acquired or developed to support expansion of the Company's Internet
operations are year 2000 compliant. Significant vendors were contacted to ensure
that their year 2000 issues will be resolved in a timely manner and will not be
disruptive to the Company's operations. Year 2000 had no adverse effects on the
Company's current business operation or financial conditions nor does the
Company expect an adverse effect on future 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. The Company's entertainment
retail business is also seasonal with the holiday season accounting for the
largest percentage of annual net sales. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2000, the Company issued a total of 1,306,999
shares of its common stock upon the exercise of outstanding warrants and options
with exercise prices ranging from $5.00 to $9.28 per share. The Company received
gross proceeds of $11,588,547 for issuance of this common stock and paid no fees
or commissions related thereto. These amounts include issuance of 1,178,892
shares of Common Stock to CBS Corporation upon exercise of a warrant with a
total exercise price of $10.9 million consisting of $5.47 million in cash and
$5.47 million in the form of a commitment to provide advertising and promotion
of the Company's web sites across the full range of CBS media properties.
In February 2000 the Company issued an aggregate of 100,000 shares of Common
Stock to a third party to reacquire franchise rights purchased by this
individual during 1997.
During the quarter ended March 31, 2000, the Company issued stock options and
warrants to purchase an aggregate of 1,457,955 shares of the Company's common
stock, including 185,527 stock options granted to employees at exercise prices
ranging from $14.875 to $19.00 and warrants to purchase a total of 1,272,428
(including a warrant issued to CBS Corporation for 1,178,892 shares) shares at
exercise prices ranging from $9.28 to $17.875 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 Company did not pay any placement fees or commissions in connection with the
issuance of the securities.
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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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Incorporated by
No. Description Reference From
--- ----------- --------------
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 (3)
Company and American Stock Transfer & Trust Company, as
Rights Agent
10.1 Advertising and Promotion Agreement dated January 3, 2000 *
between hollywood.com, Inc, and CBS Corporation
10.2 Content License Agreement dated January 3, 2000 between *
hollywood.com, Inc. and CBS Corporation
10.3 Warrant dated January 3, 2000 issued in the name of CBS *
Corporation for 1,178,892 shares of Common Stock
10.4 Investor's Rights Agreement dated January 3, 2000 between
the Company and CBS Corporation *
10.5 Voting Agreement dated January 3, 2000 among the Company,
CBS Corporation and the other parties signatory thereto *
27.1 Financial Data Schedule *
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- ------------------
* 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.
(b) Reports on Form 8-K
The Company did not file any Current Report on Form 8-K during the quarter ended
March 31, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD, INC.
Date: May 12, 1999 By: /s/ Mitchell Rubenstein
----------------------------------------------------
Mitchell Rubenstein, Chairman of the Board and Chief
Executive Officer (Principal executive officer)
Date: May 12, 1999 By: /s/ Margaret H. Fenton
------------------------------------------------------
Margaret H. Fenton, Vice President of Finance
(Principal financial and accounting officer)
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EXHIBIT INDEX
Exhibit Incorporated by
No. Description Reference From
--- ----------- --------------
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 (3)
Company and American Stock Transfer & Trust Company, as
Rights Agent
10.1 Advertising and Promotion Agreement dated January 3, 2000 *
between hollyywood.com, Inc. and CBS Corporation
10.2 Content License Agreement dated January 3, 2000 between *
hollywood.com, Inc.and CBS Corporation
10.3 Warrant dated January 3,000 issued in the name of CBS *
Corporation for 1,178,892
10.4 Investor's Rights Agreement dated January 3, 2000 between *
the Company and CBS Corporation
10.5 Voting Agreement dated January 3, 2000 among the Company, *
CBS Corporation and the other parties signatory thereto
27.1 Financial Data Schedule *
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