10-Q 1 0001.txt QUARTERLY REPORT 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 June 30, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File No. 0-22908 ------- HOLLYWOOD.COM, INC. (Exact name of registrant as specified in its charter) Florida 65-0385686 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2255 Glades Road, Suite 237 West 33431 Boca Raton, Florida (zip code) (Address of principal executive offices) (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 August 10, 2000, the number of shares outstanding of the issuer's common stock, $.01 par value, was 23,464,533. HOLLYWOOD.COM, INC. Table of Contents
Page(s) ------- PART I FINANCIAL INFORMATION ------ --------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999............................................ 3 Consolidated Statements of Operations for the Six and Three Months ended June 30, 2000 and 1999 (unaudited) ............................. 4 Consolidated Statement of Shareholders' Equity for the Six Months ended June 30, 2000 (unaudited)................................... 5 Consolidated Statements of Cash Flows for the Six Months ended June 30, 2000 and 1999 (unaudited).............................. 6 Notes to Consolidated Financial Statements (unaudited)....................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................... 16 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 ................................................................................... 28
2 HOLLYWOOD.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,385,049 $ 2,475,345 Receivables, net 2,469,369 1,155,999 Merchandise inventories 1,252,084 1,246,733 Prepaid expenses 1,626,218 1,687,347 Other receivables 21,448 18,037 Other current assets 89,237 67,541 Note receivable 1,496,041 -- Deferred advertising - CBS 21,579,445 -- ------------- ------------- Total current assets 30,918,891 6,651,002 PROPERTY AND EQUIPMENT, net 2,565,201 1,877,959 INVESTMENTS 2,117,722 549,975 NONCURRENT DEFERRED ADVERTISING - CBS 104,084,559 -- INTANGIBLE ASSETS, net 4,588,677 3,770,590 GOODWILL, net 45,512,247 46,483,647 OTHER ASSETS 2,401,707 3,149,652 ------------- ------------- TOTAL ASSETS $ 192,189,004 $ 62,482,825 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,371,820 $ 2,181,089 Accrued professional fees 189,888 199,514 Other accrued expenses 1,692,410 1,579,682 Loan from shareholder/officer 2,050,000 -- Deferred advertising - CBS -- 2,344,950 Accrued reserve for closed stores 744,778 2,366,432 Deferred revenue 358,499 308,061 Note payable -- 1,928,138 Current portion of capital lease obligations 548,155 561,015 ------------- ------------- Total current liabilities 7,955,550 11,468,881 ------------- ------------- CAPITAL LEASE OBLIGATIONS, less current portion 774,813 995,213 ------------- ------------- DEFERRED REVENUE 287,507 249,117 ------------- ------------- MINORITY INTEREST 100,015 270,828 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 11) SHAREHOLDERS' EQUITY: Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- -- Common stock, $.01 par value, 100,000,000 shares authorized; 23,501,433 (unaudited) and 15,143,216 shares issued and outstanding at June 30, 2000 235,014 151,432 and December 31,1999, respectively Warrants outstanding 6,096,704 5,096,704 Deferred compensation (204,134) (306,200) Additional paid-in capital 258,814,502 105,500,656 Accumulated deficit (81,870,967) (60,943,806) ------------- ------------- Total shareholders' equity 183,071,119 49,498,786 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 192,189,004 $ 62,482,825 ============= =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 3 HOLLYWOOD.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (Unaudited)
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ----------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ NET REVENUES $ 9,983,245 $ 3,055,190 $ 5,905,549 $ 1,739,416 COST OF REVENUE 2,879,710 1,310,957 1,843,092 629,792 ------------ ------------ ------------ ------------ Gross profit 7,103,535 1,744,233 4,062,457 1,109,624 ------------ ------------ ------------ ------------ OPERATING EXPENSES: General and administrative 5,211,512 2,342,774 2,954,654 1,324,510 Selling and marketing 5,297,684 1,240,528 2,878,953 876,332 Salaries and benefits 5,160,505 1,814,705 2,727,590 1,115,897 Amortization of CBS advertising 9,375,904 -- 5,251,707 -- Depreciation and amortization 658,475 614,039 341,020 333,214 Amortization of goodwill and intangibles 3,330,569 646,832 1,678,635 638,975 Reserve for closed stores and leased termination costs 9,755 47,797 9,755 47,797 ------------ ------------ ------------ ------------ Total operating expenses 29,044,404 6,706,675 15,842,314 4,336,725 ------------ ------------ ------------ ------------ Operating loss (21,940,869) (4,962,442) (11,779,857) (3,227,101) EQUITY IN NET EARNINGS - INVESTMENTS 1,253,959 1,122,591 148,622 28,401 OTHER: Interest, net (115,803) (368,962) (56,603) (178,186) Other, net 28,407 9,062 28,407 (1,035) ------------ ------------ ------------ ------------ Loss before minority interest (20,774,306) (4,199,751) (11,659,431) (3,377,921) MINORITY INTEREST (152,855) (238,952) (93,704) (86,144) ------------ ------------ ------------ ------------ Net loss $(20,927,161) $ (4,438,703) $(11,753,135) $ (3,464,065) ============ ============ ============ ============ Basic and diluted loss per common share $ (0.93) $ (0.45) $ (0.51) $ (0.32) ============ ============ ============ ============ Weighted average common and common equivalent shares outstanding - basic and diluted 22,544,098 10,033,911 23,257,368 10,813,406 ============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 4 HOLLYWOOD.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 (Unaudited)
Additional Common Paid-in Warrants Stock Capital Outstanding ------------- ------------- ------------- Balance - December 31,1999 $ 151,432 $ 105,500,656 $ 5,096,704 Issuance of common stock and common stock warrants pursuant to CBS agreement 66,720 130,037,885 7,114,781 Stock options and warrants exercised 14,117 19,325,448 (7,114,781) Issuance of common stock - acquisition 832 1,164,164 -- Common stock warrants issued in connection with investment in Movietickets.com -- -- 1,000,000 Issuance of stock options and warrants for services rendered -- 75,029 -- Issuance of common stock - payment of note payable 1,525 1,926,613 -- Issuance of common stock - franchise agreement 1,000 1,649,000 -- Amortization of employee stock bonuses -- Shares repurchased (612) (864,293) -- Net loss -- -- -- ------------- ------------- ------------- Balance - June 30, 2000 $ 235,014 $ 258,814,502 $ 6,096,704 ============= ============= =============
[RESTUBBED] Deferred Accumulated Compensation Deficit Total ------------- ------------- ------------- Balance - December 31,1999 $ (306,200) $ (60,943,806) $ 49,498,786 Issuance of common stock and common stock warrants pursuant to CBS agreement -- -- 137,219,386 Stock options and warrants exercised -- -- 12,224,784 Issuance of common stock - acquisition -- -- 1,164,996 Common stock warrants issued in connection with investment in Movietickets.com -- -- 1,000,000 Issuance of stock options and warrants for services rendered -- -- 75,029 Issuance of common stock - payment of note payable -- -- 1,928,138 Issuance of common stock - franchise agreement -- -- 1,650,000 Amortization of employee stock bonuses 102,066 102,066 Shares repurchased -- -- (864,905) Net loss -- (20,927,161) (20,927,161) ------------- ------------- ------------- Balance - June 30, 2000 $ (204,134) $ (81,870,967) $ 183,071,119 ============= ============= =============
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)
Six Months Ended June 30, ---------------------------------- 2000 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(20,927,161) $ (4,438,703) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred advertising - CBS 9,375,904 -- Depreciation and amortization 3,989,044 1,260,871 Equity in earnings, net of return of invested capital (567,747) (578,548) Issuance of stock options and warrants for services rendered 75,029 156,373 Amortization of employee stock bonuses 102,066 102,066 Recognition of deferred gain -- (9,062) Provision for bad debts 54,502 -- Provision for inventory obsolescence 18,559 -- Amortization of deferred financing costs 4,290 204,756 Reserve for closed store and lease termination costs 9,755 47,797 Minority interest 152,855 238,952 Changes in assets and liabilities: Receivables (1,371,283) 392,779 Prepaid expenses 79,935 33,052 Merchandise inventories (23,910) 73,426 Other current assets (25,986) (47,765) Other assets 27,746 50,172 Accounts payable 45,682 (989,207) Accrued professional fees (9,626) (44,233) Deferred revenue 88,828 (17,400) Other accrued expenses 131,318 2,207 ------------ ------------ Net cash used in operating activities (8,770,200) (3,562,467) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquisitions, net of cash received (232,376) (7,245,544) Investment in trademarks (1,070,000) -- Capital expenditures, net (1,178,810) (106,165) Return of capital from Tekno Books to minority partner (323,668) (163,620) ------------ ------------ Net cash used in investing activities (2,804,854) (7,515,329) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments from revolving line of credit -- (758,917) Proceeds from shareholder/officer loan 2,050,000 711,000 Repayments of shareholder/officer loan -- (811,000) Loan to employee, net (1,496,041) -- Net proceeds from issuance of common stock 5,303,030 14,577,334 Proceeds from exercise of stock options and warrants 6,756,283 1,701,814 Payments to repurchase common stock (864,905) -- Repayments under capital lease obligations (263,609) (244,437) ------------ ------------ Net cash provided by financing activities 11,484,758 15,175,794 ------------ ------------ Net (decrease) increase in cash and cash equivalents (90,296) 4,097,998 CASH AND CASH EQUIVALENTS, beginning of period 2,475,345 729,334 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 2,385,049 $ 4,827,332 ------------ ------------ SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES: Interest paid $ 152,843 $ 174,472 ============ ============
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 six months ended June 30, 2000 are not necessarily indicative of the results of operations or cash flows which may be recorded for the remainder of 2000. The accompanying consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. (2) ACQUISITIONS: (a) CinemaSource, Inc.: On May 18, 1999, the Company acquired substantially all of the assets of CinemaSource, Inc. ("CinemaSource"), a privately held company, pursuant to the terms of the Asset Purchase Agreement dated March 29, 1999 for $6.5 million in cash and 436,191 shares of the Company's common stock valued at $12.50 per share. At the closing of the acquisition, the Company directed CinemaSource to transfer the assets sold, on the Company's behalf, to its wholly owned subsidiary, Showtimes.com, Inc. ("Showtimes.com"). The shares of the Company's common stock issued at the time of acquisition were restricted from resale for the first 12 months following the closing of the transaction and are subject to volume limitations regarding resale thereafter. CinemaSource gathers movie data, including showtimes, synopses, photos and trailers, and then licenses this data, in a compiled manner, to 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 website, usatoday.com, latimes.com, iWon.com, The Washington Post website, the Boston Globe website, the Newsday website, and the websites 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 Online Inc., ("hollywood.com"), from The Times Mirror Company ("Times Mirror"). The aggregate consideration paid to Times Mirror by the Company consisted of a one-year unsecured promissory note for $1,928,138 and 2,300,075 shares of common stock, which was valued as of the date of the transaction at $12.64 per share. As part of the transaction costs the Company issued 53,452 shares of common stock for services rendered in connection with the acquisition. Hollywood.com owns and operates the Hollywood.com website 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 website to movie audiences by airing trailers featuring Hollywood.com before the feature films that play in most NATO-member theatres. In exchange, Hollywood.com provides websites for the exhibiting NATO members. The value of this contract was recorded as an intangible asset of $4.6 million and is being amortized over the remaining life of the contract, approximately three years. (c) Baseline II, Inc.: On August 31, 1999, the Company purchased substantially all of the motion picture-related data assets of Baseline II, Inc. and Paul Kagan Associates, Inc., which includes the PKBaseline.com website now (called Hollywoodpro.com), several publications, including the Motion Picture Investor newsletter, and a consumer oriented movie website (the "Baseline assets"). PK Baseline is a subscription pay per use website 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 is integrating part of the content on the PKBaseline.com website into the Hollywood.com website and continues to operate PKBaseline.com as a business to business subscription 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 in 1999 of $48.9 million is being amortized over 10 years. (d) Broadwaytheater.com, Inc.: On May 1, 2000, the Company acquired substantially all of the assets of Broadwaytheater.com, Inc., ("BroadwayTheater.com") a privately held company, for $135,000 in cash and 83,214 shares of the Company's common stock valued at $14.00 per share. The seller of Broadwaytheater.com, Inc. has the right to earn up to a maximum of 85,714 additional shares of the Company's common stock if the business meets specified gross profit targets during the three years following the closing of the acquisition. Broadwaytheater.com sells theater tickets online predominately for Broadway and Off-Broadway theater performances, through the Broadway.com website. This acquisition was accounted for as a purchase and, accordingly, the operating results of Broadwaytheater.com have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the aggregate purchase price over the fair market value of net assets acquired of $1.3 million is being amortized over 10 years. 8 (e) Broadway.com, Inc.: On January 6, 2000 the Company acquired the web address Broadway.com for a purchase price of $1.6 million; $1 million in cash and 35,294 shares of common stock valued at $17.00 per share. The common stock was issued in 1999 and delivered in anticipation of the January 2000 closing. The Company launched the Broadway.com website on May 1, 2000. In addition to selling tickets to live theater events, the Broadway.com website offers the Web's most comprehensive database of professional theater showtime listings, with listings for more than 2,400 venues around the country and in London, as well as show synopses, cast and crew credits and biographies, digitized show previews and showtunes, a community chat area and interviews. The purchase price of CinemaSource (a), hollywood.com (b) and Baseline II (c) and Broadwaytheater.com (d) was allocated to assets and liabilities acquired as follows:
2000(d) 1999(a)(b)(c) ------------ ------------ Tangible assets $ 35,430 $ 2,471,539 Intangible assets -- 4,564,513 Goodwill 1,506,991 39,783,840 Liabilities assumed (145,049) (519,539) ------------ ------------ Total purchase price 1,397,372 46,300,353 Less value of common stock and warrants issued (1,164,996) (37,126,671) Less value of note issued -- (1,928,138) ------------ ------------ Subtotal $ 232,376 $ 7,245,544 ============ ============ Paid in cash - purchase price, net of cash $ 205,376 $ 6,354,805 Paid in cash - acquisition costs 27,000 890,739 ------------ ------------ Total cash paid, net of cash acquired $ 232,376 $ 7,245,544 ============ ============
The Company incurred $185,008 in purchase price adjustments during the six months ended June 30, 2000 relating to acquisitions in 1999 which has been included in Goodwill. 9 The following are unaudited pro forma combined results of operations of the Company, hollywood.com, CinemaSource and Baseline II for the six and three months ended June 30, 1999, as if the acquisitions of hollywood.com, CinemaSource and Baseline II had occurred on January 1, 1999: Six Months Three Months Ended Ended June 30, 1999 June 30, 1999 ------------- ------------- Net Revenues $ 4,395,487 $ 2,185,327 =========== ============ Net Loss $(9,178,411) $ (5,618,674) =========== ============ Pro Forma Diluted Loss Per Share $ (.69) $ (.40) =========== ============ Weighted Average Shares Outstanding 13,262,788 14,042,283 =========== ============ These unaudited pro forma combined results have been prepared for comparative purposes only and include certain adjustments, such as additional amortization expense as a result of goodwill and certain contractual adjustments to salaries. They do not purport to be indicative of the results of operations which actually would have resulted had the acquired companies been under common control prior to the date of the acquisition or which may result in the future. The pre-acquisition results of operations of Broadwaytheater.com are not material to the Company's consolidated results of operations. (3) NOTE RECEIVABLE: On April 14, 2000, the Compay advanced $1,737,513 to an employee of the Company, former shareholder of CinemaSource, in order for the employee to pay his tax liability relating to the sale of CinemaSource by him to the Company. As of June 30, 2000. $241,472 of the loan has been repaid to the Company leaving a balance of $1,496,041. The loan has a 1 year term, bears interest at prime plus 1% and is secured by shares of Common Stock of the Company owned by the borrower. (4) DEBT: On May 20, 1999, the Company delivered a $1,928,138 one-year unsecured promissory note of the Company payable to Times Mirror as partial consideration for the acquisition of hollywood.com, Inc. This note was paid on June 16, 2000 by issuing 152,548 shares of common stock valued at approximately $12.64 per share. During the second quarter of 2000, the Company's Chairman of the Board and Chief Executive Officer and the Company's Vice Chairman and President advanced $2,050,000 to the Company to enable the Company to meet its obligation to lend to a former shareholder of CinemaSource funds to pay the shareholder's taxes under the purchase agreement between the Company and the former shareholder of CinemaSource. The loan bears interest at the JP Morgan Bank prime rate of interest. (5) OTHER ACCRUED EXPENSES: Included in other accrued expenses of $1,692,410 at June 30, 2000 is accrued payroll and payroll taxes, accrued vacation, taxes payable, packaging fees payable and accrued expenses. 10 (6) 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 $7,114,781 as consideration for $100,000,000 of CBS advertising, promotion and content over a seven year period and $5,303,030 in cash. In March 2000 CBS exercised a warrant to acquire an additional approximate 5% equity interest in the Company. The exercise price of these warrants was $10,937,002 consisting of $5,468,501 in cash and $5,468,501 in additional promotional advertising from CBS. The value of the common stock and warrants issued to CBS has been recorded in the balance sheet as deferred advertising and is being amortized over each related contract year. On February 8, 2000 the Company issued 100,000 shares of common stock valued at $1,650,000 in order to reacquire territorial rights as per a franchise agreement. The Company closed its retail operations in December 1999 and $1,650,000 was accrued for in the accompanying December 31, 1999 consolidated balance sheet as accrued reserve for closed stores. On May 1, 2000, the Company acquired substantially all the assets of Broadwaytheater.com for cash and 83,214 shares of common stock valued at $14.00 per share. On June 16, 2000, the Company issued 152,548 shares of common stock valued at approximately $12.64 per share in order to pay-off an unsecured promissory note payable to Times Mirror Company. In 1998, the Company's Board of Directors approved a plan for the repurchase of the Company's common stock. Pursuant to the plan, during the six months ended June 30, 2000 the Company repurchased 61,200 shares of its common stock for an aggregate consideration of $864,905, or an average purchase price of $14.13 per share. During the six months ended June 30, 2000, the Company issued 1,411,624 shares of common stock upon the exercise of outstanding stock options and warrants, for which the Company received $6,756,283 in cash exercise proceeds and $5,468,501 in additional promotional advertising from CBS. (7) INVESTMENTS: (a) NETCO PARTNERS: The Company owns a 50% interest in a joint venture called NetCo Partners. The Company records its investment under the equity method of accounting, recognizing 50% of NetCo Partners' income or loss as Equity in Net Earnings - Investments. NetCo Partners is engaged in the licensing of 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. 11 The revenues, gross profit and net income of NetCo Partners for the six and three months ended June 30, 2000 and 1999 are presented below:
Six Months Ended June 30, Three Months Ended June 30, -------------------------------------- ----------------------------------- 2000 1999 2000 1999 ----------------- -------------------- ---------------- ------------------ Revenues $3,072,773 $2,755,870 $455,647 $66,898 Gross Profit 2,575,918 2,238,158 373,569 56,094 Net Income 2,593,476 2,245,181 382,802 56,802
The revenues, gross profit and net income of NetCo Partners for the three months ended June 30, 2000 is principally attributable to delivery of the manuscripts for various young adult novels in the Tom Clancy's NetForce series of books to the publisher. As of June 30, 2000, NetCo Partners has $1,800,191 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 $767,584 as of June 30, 2000. As of June 30, 2000, the Company has received cumulative profit distributions from NetCo Partners since its formation totaling $4,433,153, in addition to reimbursement of substantially all amounts advanced by the Company to fund the operations of NetCo Partners. (b) MOVIETICKETS.COM, INC.: The Company entered into a joint venture agreement on February 2, 2000 with the movie theater chains AMC Entertainment Inc. and National Amusements, Inc. to form MovieTickets.com,Inc. Each partner owned one-third of the MovieTickets.com, Inc. ("MovieTickets.com") joint venture at June 30, 2000. The Company records its investment under the equity method of accounting, recognizing one-third of MovieTickets.com income or loss as equity in net earnings - investments. For the six months ended June 30, 2000, the Company recorded a loss of $42,779 in its investment in MovieTickets.com. The MovieTickets.com website which launched in late May, 2000 allows users to purchase movie tickets online. At June 30, 2000, the Company contributed $200,000 in cash to MovieTickets.com and issued warrants to acquire 90,573 shares of common stock valued at $1,000,000. (8) 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. 12 The following table sets forth the computation of basic and diluted loss per share for the six and three months ended June 30, 2000 and 1999:
Six Months Ended June 30, Three Months Ended June 30, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Net Loss $(20,927,161) $ (4,438,703) $(11,753,135) $ (3,464,065) Preferred Stock Dividends -- (91,460) -- 7,802 ------------ ------------ ------------ ------------ Net Loss Available to Common $(20,927,161) $ (4,530,163) $(11,753,135) $ (3,456,263) Shareholders Weighted Average Shares Outstanding 22,544,098 10,033,911 23,257,368 10,813,406 ------------ ------------ ------------ ------------ Basic and Diluted Loss per Share $ (0.93) $ (0.45) $ (0.51) $ (0.32) ============ ============ ============ ============
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 six and three months ended June 30, 2000 and 1999. Options and warrants to purchase 3,992,850 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 six months ended June 30, 2000 because the result would be antidilutive. (9) SEGMENT REPORTING: The Company has six reportable segments: Internet ad sales, business to business, ticketing, e-commerce, retail, and intellectual properties. The Internet ad sales segment sells advertising on the Hollywood.com, Broadway.com and Hollywood.com international websites. The business to business segment licenses entertainment content and data and includes the divisions CinemaSource (which licenses movie showtimes and content), EventSource (which licenses local event data) and TheaterSource (which licenses live theater showtimes and content) to Internet and media companies. The ticketing segment sells tickets to live theater events for Broadway, off-Broadway and London's West End on the Internet. 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 intellectual properties created by best-selling authors and media celebrities, which it licenses across all media, including books, film and television. 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. 13 The following table illustrates the financial information regarding the Company's reportable segments.
Six Months Ended June 30, Three Months Ended June 30, --------------------------------- --------------------------------- 2000 1999 2000 1999 ---------------- --------------- ----------------- -------------- Net Revenues: Internet Ad Sales $ 4,868,499 $ 712,195 $ 2,558,144 $ 712,195 Business to Business 2,356,349 197,526 1,353,841 197,526 Ticketing 1,360,850 -- 1,360,850 -- E-Commerce 446,043 182,029 144,309 104,121 Retail 23,370 935,663 23,370 238,763 Intellectual Properties 928,134 1,027,777 465,035 486,811 Other -- -- -- -- ------------ ------------ ------------ ------------ $ 9,983,245 $ 3,055,190 $ 5,905,549 $ 1,739,416 ============ ============ ============ ============ Gross Profit: Internet Ad Sales $ 4,388,861 $ 646,680 $ 2,336,580 $ 646,680 Business to Business 2,217,429 183,684 1,274,985 183,684 Ticketing 212,476 -- 212,476 -- E-Commerce 11,259 28,738 45,524 19,591 Retail -- 269,764 -- 40,112 Intellectual Properties 273,510 615,367 192,892 219,557 Other -- -- -- -- ------------ ------------ ------------ ------------ $ 7,103,535 $ 1,744,233 $ 4,062,457 $ 1,109,624 ============ ============ ============ ============ Operating Income (Loss): Internet Ad Sales (a) $(15,600,589) (550,372) $ (8,437,024) $ (550,372) Business to Business 122,306 76,790 75,830 76,790 Ticketing 125,401 -- 125,401 -- E-Commerce (1,384,155) (492,636) (743,119) (283,764) Retail (42,058) (1,401,828) (13,653) (608,730) Intellectual Properties 141,072 416,767 130,118 105,024 Other (5,302,846) (3,011,163) (2,917,410) (1,966,049) ------------ ------------ ------------ ------------ $(21,940,869) $ (4,962,442) $(11,779,857) $ (3,227,101) ============ ============ ============ ============ Depreciation and Amortization: Internet Ad Sales $ 1,311,817 $ 225,301 $ 666,150 $ 225,301 Business to Business 54,054 1,956 29,234 1,956 Ticketing -- -- -- -- E-Commerce 8,178 -- 4,572 -- Retail -- 167,996 -- 84,595 Intellectual Properties 3,780 2,540 1,575 1,314 Other 2,611,215 863,078 1,318,124 659,023 ------------ ------------ ------------ ------------ $ 3,989,044 $ 1,260,871 $ 2,019,655 $ 972,189 ============ ============ ============ ============ Interest, net: Internet Ad Sales $ 8,984 $ -- $ 8,299 $ -- Business to Business 779 -- 243 -- Ticketing -- -- -- -- E-Commerce -- -- -- -- Retail 85,400 300,488 46,220 145,289 Intellectual Properties (3,812) (1,989) (1,865) (905) Other 24,452 70,463 3,706 33,802 ------------ ------------ ------------ ------------ $ 115,803 $ 368,962 $ 56,603 $ 178,186 ============ ============ ============ ============ Capital Expenditure: Internet Ad Sales $ 893,850 $ 22,490 $ 626,294 $ 22,490 Business to Business 130,735 -- 58,752 -- Ticketing -- -- -- -- E-Commerce 12,378 65,058 2,308 -- Retail -- -- -- -- Intellectual Properties 5,188 -- -- -- Other 136,659 18,617 66,844 -- ------------ ------------ ------------ ------------ $ 1,178,810 $ 106,165 $ 754,198 $ 22,490 ============ ============ ============ ============
(a) Includes $9,375,904 and $5,251,707 in amortization of non-cash CBS advertising for the six and three months ended June 30,2000, respectively. 14 (10) 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 June 30, 2000 will be collected in full, and that no reserve for uncollectible accounts is necessary (see Note 7). (11) COMMITMENTS AND CONTINGENCIES: Litigation - The Company is a party to various legal proceedings arising in the ordinary course of business, none of which are expected to have a material adverse impact on the Company's financial condition or results of operations. (12) RECLASSIFICATION: Certain amounts in the 1999 financial statements have been reclassified to conform with the 2000 classification. (13) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: For the Six Months ended June 30, 2000: o The Company issued 100,000 shares of common stock, valued at $1,650,000. This amount was accrued for at December 31, 1999 in accrued reserve for closed stores. o Warrants to acquire 90,573 shares of common stock valued at $1.0 million were issued in connection with the Company's investment in MovieTickets.com, Inc. o The Company recorded $5,468,501 in deferred advertising in connection with the exercise of warrants by CBS. o Capital lease transactions totaled $30,349. o A note payable for $1,928,138 was paid by issuing 152,548 shares of common stock valued at approximately $12.64 per share. For the Six Months ended June 30, 1999: o The Company recorded the conversion of $5,784,773 of Series A,B,C,D, and D-2 Preferred Stock into 1,472,419 shares of common stock. o Non-cash dividends on its Series A,B,C,D and D-2 Convertible Preferred Stock in the amount of $83,657 were recorded, of which $79,808 was paid through the issuance of 6,675 shares of common stock. o Capital lease transactions totaled $56,068. o The Company issued 2,500 shares of restricted stock valued at $46,250 as an incentive stock bonus to an officer. (14) ACCRUED RESERVE FOR CLOSED STORES : The Company recorded a liability for estimated cost of early lease terminations and other costs related to the closure of the Company's brick and mortar retail operations of $2,366,432 at December 31, 1999. During 2000 $1,650,000 of the liability was satisfied, see Note 6. The balance in accrued reserve for closed stores at June 30, 2000 was $744,778. 15 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 Viacom. The Company is also subject to other risks detailed herein or detailed from time to time in the Company's filings with the Securities and Exchange Commission. Introduction We are an entertainment-focused Internet company that offers widely recognized brands and one of the broadest and deepest collections of entertainment content data 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 Digital Cities, Excite, Ticketmaster/CitySearch and Zip2, and the sale of merchandise throughout our family of entertainment-related websites. 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 and live theater 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 website and $5.3 million in cash in exchange for an approximate 30% equity interest in the Company. In March 2000 CBS Corporation exercised a warrant to acquire an additional approximate 5% equity interest in the Company for $5,468,501 in cash and $5,468,501 in additional promotional advertising. CBS Corporation merged with and into Viacom Inc. in May 2000. Internet Businesses HOLLYWOOD.COM. Hollywood.com is a premier entertainment related website 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 entertainment awards shows and film festivals and exclusive video coverage of movie premieres. Hollywood.com is established on the Internet as a leading entertainment website with approximately 221.5 million page impressions recorded during the three months ended June 30, 2000. 16 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 website 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 website to movie audiences by airing trailers about Hollywood.com before feature films that play in participating theaters and by displaying posters and other promotional materials in those theaters. In exchange, we develop and maintain websites for many of the theater exhibitors that feature their movie showtimes. In January 2000 we entered into a strategic, seven-year relationship with CBS that provides for extensive promotion of the Hollywood.com website. CBS has agreed to provide Hollywood.com with $100,000,000 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 websites. CBS has agreed to include the Hollywood.com website in all advertising sale programs and presentations that are appropriate for the sale of advertising on the website. We will pay an 8% commission on any additional advertising revenues generated by CBS for us in excess of the $1.5 million guaranteed amount selected by us each year. BROADWAY.COM. We launched the Broadway.com website on May 1, 2000. Broadway.com features theater showtimes for virtually all professional live theater venues in the U.S. as well as London's West End and hundreds of college and local live theater venues; the ability to purchase Broadway, Off-Broadway and West End theater tickets online; the latest theater news; interviews with stage actors and playwrights; opening-night coverage; original theater reviews; and video excerpts from selected shows. The Broadway.com website also offers current box office results, show synopses, cast and crew credits and biographies, digitized show previews, digitized showtunes and an in-depth Tony Awards(R) area. Broadway.com 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 generates revenue from advertising sales, ticket sales and syndication of content to other Internet companies. HOLLYWOOD.COM INTERNATIONAL. We have entered into and are pursuing several strategic relationships geared toward leveraging the Hollywood.com brand internationally. We entered into an agreement with 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 website to be promoted on AOL in countries throughout Latin America. We launched the br.hollywood.com Portuguese-language website in Brazil in November 1999 and the mx.hollywood.com and ar.hollywood.com Spanish-language websites in Mexico and Argentina in May 2000. These websites are tailored to the local movie-going audience and feature much of the same content that is on Hollywood.com, including daily entertainment news, movie descriptions and reviews, movie previews, movie soundtracks, celebrity profiles and biographies and interactive games. Each of these websites are featured and promoted on the entertainment channels of both AOL Latin America and El Sitio.com, a Latin American-based Internet portal. 17 The Company has entered into an agreement in principle to form a strategic partnership to distribute Hollywood.com content, in the Chinese language, throughout China on all new Legend personal computers along with Legend's new Chinese-language portal, FM365.com. Legend's market share of personal computers sales in China has climbed steadily to over 27%. Subsequent to June 30, 2000 the Company launched China.Hollywood.com. The Company has also entered into an agreement in principle to form a strategic partnership to distribute Hollywood.com content across British Telecom's multiple Internet platforms, including narrowband ISP, broadband DSL access and wireless WAP technologies, throughout the United Kingdom. CINEMASOURCE. CinemaSource is the largest supplier of movie showtimes to the Internet and compiles movie showtimes for every movie theater in the United States and Canada, representing approximately 36,000 movie screens. Since its start in 1995, CinemaSource has substantially increased its operations and currently provides movie showtime listings to more than 200 different Internet sites and media outlets, including Yahoo!, Excite, Go Network, Ticketmaster/CitySearch, Zip 2, NBCi, The New York Times website, usatoday.com, latimes.com, iWon.com, The Washington Post website, the Boston Globe website, and the Newsday website. In addition, CinemaSource recently expanded its syndication business to include entertainment news, movie reviews, and celebrity biographies. In addition to charging guaranteed amounts for the data that it provides to its customers, CinemaSource often shares in the advertising revenue generated by its customers in connection with the data. EVENTSOURCE. We launched the EventSource business in mid-1999 as an expansion of the operations of CinemaSource. EventSource compiles and syndicates detailed information on community events in cities around the country, including concerts and live music, sporting events, festivals, fairs and live theater. EventSource entered into an agreement with AOL's Digital Cities in April 2000 to provide event listings for up to 200 cities nationwide. In addition to Digital Cities, other EventSource customers include the websites of The New York Times and Knight Ridder. BASELINE. We own and operate the PKBaseline.com website (now called Hollywoodpro.com), a pay-per-use website 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 website is a comprehensive database of information on over 67,000 films and television programs, as well as biographies on over one million entertainment industry professionals. This rich, interactive database is accessible online to our subscribers and includes credits, synopses, reviews and box office statistics. 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. 18 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 website 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 websites and the website is promoted on over 12,000 affiliate websites, 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 website. 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 primarily from advertising and syndication. Recent examples of this strategy include the launch of Broadway.com, MovieTickets.com, Mx.hollywood.com and ar.hollywood.com. MOVIETICKETS.COM. MovieTickets.com, a joint venture among Hollywood.com, AMC Entertainment Inc., and National Amusements, Inc was launched in late May 2000. Each of Hollywood.com, AMC Entertainment 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 Viacom Inc. 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., Famous Players Inc and Marcus Theaters and several regional exhibitors. 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 website allows users to purchase movie tickets and retrieve them at "will call" windows or ATM machines at theaters. The website also features movie content from Hollywood.com for all current and future release movies, movie reviews and synopses, digitized movie trailers and photos, and box office results. We expect the website to generate 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. 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. 19 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 Company is currently working to develop an area on the Hollywood.com website initially dedicated to mysteries. 20 Results of Operations The following table summarizes the Company's net revenues, cost of revenues and gross profit by business segment for the six months ended June 30, 2000 ("Y2-00") and 1999 ("Y2-99") and the three months ended June 30, 2000 ("Q2-00") and 1999 ("Q2-99"), respectively:
Internet Business E- Intellectual Ad Sales to Business Ticketing Commerce Properties Retail Total ------------ ------------ ------------ ------------ ------------ ------------ ------------- Y2-00 Net Revenues $4,868,499 $2,356,349 $1,360,850 $ 446,043 $ 928,134 $ 23,370 $9,983,245 Cost of Revenues 479,638 138,920 1,148,374 434,784 654,624 23,370 2,879,710 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross Profit $4,388,861 $2,217,429 $ 212,476 $ 11,259 $ 273,510 $ -- $7,103,535 ========== ========== ========== ========== ========== ========== ========== Y2-99 Net Revenues $ 712,195 $ 197,526 $ -- $ 182,029 $1,027,777 $ 935,663 $3,055,190 Cost of Revenues 65,515 13,842 -- 153,291 412,410 665,899 1,310,957 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross Profit $ 646,680 $ 183,684 $ -- $ 28,738 $ 615,367 $ 269,764 $1,744,233 ========== ========== ========== ========== ========== ========== ========== Q2-00 Net Revenues $2,558,144 $1,353,841 $1,360,850 $ 144,309 $ 465,035 $ 23,370 $5,905,549 Cost of Revenues 221,564 78,856 1,148,374 98,785 272,143 23,370 1,843,092 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross Profit $2,336,580 $1,274,985 $ 212,476 $ 45,524 $ 192,892 $ -- $4,062,457 ========== ========== ========== ========== ========== ========== ========== Q2-99 Net Revenues $ 712,195 $ 197,526 $ -- $ 104,121 $ 486,811 $ 238,763 $1,739,416 Cost of Revenues 65,515 13,842 -- 84,530 267,254 198,651 629,792 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross Profit $ 646,680 $ 183,684 $ -- $ 19,591 $ 219,557 $ 40,112 $1,109,624 ========== ========== ========== ========== ========== ========== ==========
NET REVENUES Total net revenues for the six months ended June 30, 2000 and 1999 were $9,983,245 and $3,055,190, respectively. Net revenues increased $6,928,055 or 227% from Y2-99 to Y2-00. Net revenue for the three months ended June 30, 2000 increased to $5,905,549 from $1,739,416 for the three months ended June 30,1999, an increase of $4,166,133 or 240%. Net revenues increased in both periods predominately due to increases in revenues from the Company's Internet ad sales, business to business, and ticketing segments. The Company acquired the businesses that generate Internet ad sales revenues and business to business revenues in May and August of 1999. In addition, on May 1, 2000 the Company acquired a company that sells live theater tickets over the Internet which was integrated into the Broadway.com website. Internet ad sales revenue for Y2-00 increased to $4,868,499 from $712,195 for Y2-99, an increase of $4,156,304; and increased $1,845,949 or 259% from $712,195 for Q2-99 to $2,558,144 for Q2-00. Internet ad sales revenue is derived from the sale of banner advertisements and sponsorships on the Hollywood.com and Broadway.com websites. 21 The Hollywood.com website was acquired by the Company on May 20, 1999 and the Broadway.com website was launched by the Company on May 1, 2000. Barter transactions that generate non-cash advertising revenue, (included in Internet ad sales revenues), in which the Company received advertising or other services in exchange for content or advertising on its websites was $808,776 for Y2-00 and $558,946 for Q2-00 and accounted for 8.1% and 9.4% of total net revenue for Y2-00 and Q2-00, respectively. Barter transactions related to advertising revenue accounted for less than 1% of total net revenue for Y2-99 and Q2-99. In future periods, management intends to maximize cash advertising revenue, although the Company will continue to enter into barter relationships when deemed appropriate as a cashless method for the Company to market its business. The Company also records barter income earned under a contract with the National Association of Theatre Owners ("NATO"), which the Company acquired through its acquisition of hollywood.com on May 20,1999. This income is included in internet ad sales revenue. Through the NATO contract, the Company promotes its website to movie audiences by airing movie trailers about Hollywood.com, 40 out of 52 weeks per year, before the feature films that play in most NATO-member theaters. In exchange, the Company provides websites for the exhibiting NATO members, promotional materials and movie information, advertising and editorial content. The Company recorded $1,490,875 and $745,437 in promotional non-cash revenue and non-cash expense under the NATO contract for Y2-00 and Q2-00, respectively. Barter income recorded accounted for 15% and 13% of total net revenue for Y2-00 and Q2-00, respectively. In Y2-99 and Q2-99 the Company recorded $422,415 in revenue or 14% and 24% of total net revenue, respectively. Business to business revenue for Y2-00 increased to $2,356,349 from $197,526 for Y2-99, an increase of $2,158,823, and increased $1,156,315 to $1,353,841 for Q2-00 from $197,526 for Q2-99. Business to business revenue is generated by the licensing of movie, event and theater showtimes and other content information to other Internet companies including Yahoo!, Excite, Zip2, NBCi, Go Network, and usatoday.com. The Company acquired the business to business operations of CinemaSource and Baseline on May 18, 1999 and August 31, 1999, respectively. Ticketing revenue for Y2-00 and Q2-00 was $1,360,850. Ticketing revenue is generated from the sales of live theater tickets for Broadway, Off-Broadway and London's West End on the Internet. The Company acquired Broadwaytheater.com on May 1, 2000. Tickets can be purchased on the Broadway.com website. E-commerce revenue increased $264,014 or 145% from $182,029 for Y2-99 to $446,043 for Y2-00 and increased $40,188 or 39% from $104,121 for Q2-99 to $144,309 for Q2-00. Revenue increased due to improved product promotion through the Company's relationship with CBS, other affiliate relationships, and increased traffic on the website. Revenues from the Company's intellectual properties segment decreased $99,643 or 9.7% to $928,134 for Y2-00 from $1,027,777 for Y2-99 and decreased $21,776 or 4.5% from $486,811 for Q2-99 to $465,035 for Q2-00. The decrease in revenues is attributable to a lesser number of manuscripts being delivered for Y2-00 and Q2-00 as compared to Y2-99 and Q2-99. The intellectual properties division generates revenues from several different activities including book development and licensing, intellectural property licensing, and publishing Mystery Scene Magazine. Revenues vary quarter to quarter dependent on the various stages of the book projects. Revenues are recognized when ultimate collection of such revenues is no longer subject to contingencies. Retail revenues decreased from $935,663 for Y2-99 to $23,370 for Y2-00 and from $238,763 for Q2-99 to $23,370 for Q2-00. The revenue recognized in Y2-00 and Q2-00 represents proceeds received for the liquidation of inventory remaining after the closure of all the brick and mortar locations in December 1999. 22 COST OF REVENUE Cost of revenue increased to $2,879,710 for Y2-00 from $1,310,957 for Y2-99. As a percentage of net revenues, cost of revenues was 29% for Y2-00 and 43% for Y2-99. The increase in the cost of revenues was primarily the result of increased Internet ad sales, increased business to business revenues, the addition of ticketing revenues offset by decreased retail revenues which generate lower gross margins. As a percentage of net revenue, cost of revenue was 31% and 36% for Q2-00 and Q2-99, respectively. Cost of revenues consists of the cost of products sold over the Internet, including shipping and handling costs, for the Company's e-commerce and ticketing segments. For the Internet ad sales segment and business to business segment cost of revenues includes commissions due to ad agencies, ad rep firms and other third parties for revenue generated. Cost of revenue for the Company's intellectual properties segment includes fees and royalties paid to authors and co-editors. EQUITY IN NET EARNINGS - INVESTMENTS Equity in net earnings of investments consists of the Company's 50% interest in NetCo Partners and one-third interest in MovieTickets.com,Inc. The Company's equity in net earnings of investments increased by 11.7% or $131,368 to $1,253,959 for Y2-00 from $1,122,591 for Y2-99. Equity in net earnings of investments increased $120,221 from $28,401 for Q2-99 to $148,622 for Q2-00. On book projects, as it relates to NetCo Partners, revenues are typically recognized upon delivery of the manuscripts to the publishers. Equity in earnings increased because more manuscripts were delivered in Y2-00 and Q2-00 than in Y2-99 and Q2-99. This increase was offset by the recognition of $42,779 in losses generated by MovieTickets.com,Inc. for Y2-00 and Q2-00. MovieTickets.com,Inc. began its operations in late May 2000. OPERATING EXPENSES GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $2,868,738 or 122% to $5,211,512 for Y2-00 from $2,342,774 for Y2-99 and $1,630,144 or 123% to $2,954,654 for Q2-00 from $1,324,510 for Q2-99. This increase is primarily attributable to the acquisition of three Internet businesses in May and August of 1999 and expenses relating to the launch and operations of Broadway.com as well as the Hollywood.com international websites during Q2-00. General and administrative expenses for Y2-99 and Q2-99 only reflect five weeks of general and administrative expenses relating to the Internet businesses acquired in 1999 as compared to Y2-00 and Q2-00, which include six months and three months of expenses, respectively from the Internet businesses acquired in 1999 plus the expenses associated with the additional websites launched and operated in 2000. SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased $4,057,156 or 327% to $5,297,684 for Y2-00 from $1,240,528 for Y2-99 and increased $2,002,621 or 229% to $2,878,953 for Q2-00 from $876,332 for Q2-99. Included in selling and marketing are non-cash barter transactions of $2,299,651 and $642,415 for Y2-00 and Y2-99, respectively and $1,304,383 and $422,415 for Q2-00 and Q2-99, respectively. Barter transactions accounted for approximately 43% and 52% of selling and marketing expense for Y2-00 and Y2-99, respectively and 45% and 48% for Q2-00 and Q2-99, respectively. Excluding non-cash barter transactions, the increase in selling and marketing expense of $2,399,920 from Y2-99 to Y2-00 and $1,120,653 from Q2-99 to Q2-00 is primarily the result of increased advertising on radio, television, online and outdoor for the Company's Internet ad sales and e-commerce segments and additional advertising related to the launch of Broadway.com on May 1, 2000. In addition, the Company incurred production costs associated with advertising on CBS's media properties. The Company and CBS entered into a seven year agreement in January 2000 therefore there were no comparable costs in Y2-99 and Q2-99. SALARIES AND BENEFITS. Salaries and benefits increased $3,345,800 or 184% to $5,160,505 for Y2-00 from $1,814,705 for Y2-99 and increased $1,611,693 or 144% to $2,727,590 for Q2-00 from $1,115,897 for Q2-99. This increase is attributable to the addition of three Internet businesses in May and August of 1999, the launch of four websites during the second quarter of 2000 and an increase in the infrastructure to support the growth of the Company. 23 AMORTIZATION. Amortization of goodwill and intangibles was $3,330,569 and $646,832 for Y2-00 and Y2-99, respectively and $1,678,635 and $638,975 for Q2-00 and Q2-99, respectively. The increase in amortization is attributable to goodwill and intangibles recorded with the three Internet businesses acquired in May and August of 1999 and the ticketing company acquired on May 1, 2000. Amortization of CBS advertising relating to the Company's agreement with Viacom was $9,375,904 for Y2-00 and $5,251,707 for Q2-00. Under the Company's agreement with Viacom, the Company issued shares of Common Stock and warrants in consideration for CBS's advertising and promotional efforts over seven years across its full range of media properties. The value of the common stock and warrants issued to CBS has been recorded in the balance sheet as deferred advertising and is being amortized over each related contract year. The agreement with Viacom closed on January 4, 2000; therefore there is no comparable expense for the period Y2-99 and Q2-99. DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $658,475 for Y2-00 and $614,039 for Y2-99 and $341,020 for Q2-00 and $333,214 for Q2-99. The increase in depreciation and amortization expense is attributable to the increase in capital expenditures to support the websites launched during Q2-00, additional capital expenditures required to support the growth in traffic on the Company's websites and additional equipment required for the expansion of the business to business segment. INTEREST EXPENSE, NET. Interest expense, net for Y2-00 was $115,803 compared to $368,962 for Y2-99 and $56,603 for Q2-00 as compared to $178,186 for Q2-99. The decrease is primarily 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 obligations and inventory line of credit as it relates to the Company's retail operations that were closed in December 1999. NET LOSS The Company generated a net loss of $20,927,161 for Y2-00 as compared to a net loss of $4,438,703 for Y2-99, an increase of $16,488,458 or 371%. For Q2-00 the net loss increased by $8,289,070 or 239% from $3,464,065 for Q2-99 to $11,753,135 for Q2-00. A significant portion of the increased loss for Y2-00 and Q2-00 is amortization of non-cash CBS advertising and amortization of goodwill and intangibles attributable to the acquisition of three Internet businesses in 1999 and an online theater ticketing business in 2000. These non-cash expenses were $12,706,473 for Y2-00 and $6,930,342 for Q2-00 as compared to $646,832 for Y2-99 and $638,975 for Q2-99.Net loss for Y2-00 compared to Y2-99 excluding amortization of CBS advertising and goodwill and intangibles was $8,220,688 for Y2-00 as compared to $3,791,871 for Y2-99 and $4,822,793 for Q2-00 as compared to $2,825,090 for Q2-99. On a per share basis, the loss per common share increased by $.48 from ($.45) for Y2-99 to ($.93) for Y2-00, while the loss per common share increased by $.19 from ($.32) for Q2-99 to ($.51) for Q2-00. If non-cash amortization of CBS advertising and goodwill and intangibles are excluded from the loss per share calculation then loss per share for Q2-00 decreased by $.05 to ($.21) for Q2-00 from ($.26) for Q2-99. The Company has made several modifications to its initial business plan in an effort to reverse its losses. During 1999, the Company closed its brick and mortar retail operations and focused on its Internet business. The Company acquired three Internet businesses in 1999 and one in 2000. The Company is evaluating the operations of all its new Internet businesses and is working toward achieving economies of scale among all its operations to result in reduced general and administrative expenses and salaries and benefits. The Company is presently focusing its resources on the expansion of its Internet business. The Company plans to expand its Internet operations, both through acquisitions and strategic alliances and through internal development. While the Company believes that these measures will ultimately reverse its operating losses, there can be no assurances that for the foreseeable future the revenues generated by the Internet operations and the intellectual properties division will be sufficient to offset the associated expenses incurred. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000 the Company had cash and cash equivalents of $2,385,049 and working capital of $22,963,341 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 Y2-00 was $8,770,200 primarily representing cash used to fund the Company's net loss, launch and promotion of four websites, and approximately $550,000 of non-recurring expenses. Net cash used in investing activities was $2,804,854, while $11,484,758 in cash was provided by financing activities. As a result of the above, cash and cash equivalents decreased by $90,296 for the six months ended June 30, 2000. During the six months ended June 30, 1999, net cash used in operating activities was $3,562,467, net cash used in investing activities was $7,515,329, and $15,175,794 in cash was provided by financing activities. On January 3, 2000, the Company issued 6,672,031 shares of common stock valued at $19.50 per share and a warrant with an exercise price of $10,937,002 and valued at $7,114,781 as consideration for $100,000,000 of CBS advertising, promotion and content over a seven year period and $5,303,030 in cash. On February 8, 2000, the Company issued 100,000 shares of common stock valued at $1,650,000 in order to reacquire territorial rights 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. 24 On May 1, 2000, the Company acquired substantially all the assets of Broadwaytheater.com for cash and 83,214 shares of common stock valued at $14.00 per share. On June 16, 2000, the Company issued 152,548 shares of common stock valued at approximately $12.64 per share in order to repay an unsecured promissory note. In 1998, the Company's Board of Directors approved a plan for the repurchase of the Company's common stock. Pursuant to the plan, during the six months ended June 30, 2000 the Company repurchased 61,200 shares of its common stock for an aggregate consideration of $864,905, or an average purchase price of $14.13 per share. During the second quarter of 2000, the Company's Chief Executive Officer and President advanced $2,050,000 to the Company to enable the Company to meet its obligation to lend to a former shareholder of CinemaSource funds to pay the shareholder's taxes under the purchase agreement between the Company and the former shareholder of CinemaSource. During the six months ended June 30, 2000, the Company issued 1,411,624 shares of common stock upon the exercise of outstanding stock options and warrants, for which the Company received $6,756,283 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 sufficient revenues to offset expenses we will require further financing to fund our ongoing operations. INFLATION AND SEASONALITY Although the Company cannot accurately determine the precise effects of inflation, it does not believe inflation has a material effect on the Company's sales or results of operations. The Company does, however, consider its business to be somewhat seasonal and expects net revenues to be generally higher during the second and fourth quarters of each fiscal year for its Tekno Books book development and licensing operation as a result of the general publishing industry practice of paying royalties semi-annually. The Company's e-commerce 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. 25 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the quarter ended June 30, 2000, the Company issued a total of 104,625 shares of its common stock upon the exercise of outstanding warrants and options with exercise prices ranging from $5.00 to $6.125 per share. The Company received gross proceeds of $636,239 for issuance of this common stock and paid no fees or commissions related thereto. On May 1, 2000, the Company acquired substantially all the assets of Broadwaytheater.com for cash and 83,214 shares of common stock valued at $14.00 per share. On June 16, 2000, the Company issued 152,548 shares of common stock valued at approximately $12.64 per share in order to satisfy an unsecured promissory note payable. During the quarter ended June 30, 2000, the Company issued stock options and warrants to purchase an aggregate of 355,155 shares of the Company's common stock, including 330,155 stock options granted to employees at exercise prices ranging from $9.25 to $15.625. 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. 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Incorporated by Exhibit 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 Company and American Stock Transfer & Trust Co., as Rights Agent (3) 10.1 Asset Purchase Agreement dated as of April 19, 2000 by and between Hollywood.com, Inc. and BroadwayTheater.com, Inc. (4) 27.1 Financial Data Schedule *
------------------ * 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 June 30, 2000. 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOLLYWOOD.COM, INC. Date: August 14, 2000 By: /s/ Mitchell Rubenstein ------------------------------------ Mitchell Rubenstein, Chairman of the Board and Chief Executive Officer (Principal executive, financial and accounting officer) 28