-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HM6JiLMpcYpTyEfjEwfn6klPjxvuQ1fvSP1uULDMKfKqBgPuAhUXhPbSgLpMxNUh k0miQ0KRD2KScFxwhWvZsw== 0001116502-01-501008.txt : 20010821 0001116502-01-501008.hdr.sgml : 20010821 ACCESSION NUMBER: 0001116502-01-501008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010820 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOLLYWOOD MEDIA CORP CENTRAL INDEX KEY: 0000912544 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 650385686 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14332 FILM NUMBER: 1718790 BUSINESS ADDRESS: STREET 1: 2255 GLADES RD STREET 2: STE 237 W CITY: BOCA RATON STATE: FL ZIP: 33431 BUSINESS PHONE: 5619988000 MAIL ADDRESS: STREET 1: 2255 GLADES RD STREET 2: STE 237 W CITY: BOCA RATON STATE: FL ZIP: 33431 FORMER COMPANY: FORMER CONFORMED NAME: BIG ENTERTAINMENT INC DATE OF NAME CHANGE: 19930924 FORMER COMPANY: FORMER CONFORMED NAME: HOLLYWOOD COM INC DATE OF NAME CHANGE: 20000511 10-Q 1 hollywood-10q.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, 2001 [ ] 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 MEDIA CORP. (Exact name of registrant as specified in its charter) Florida 65-0385686 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2255 Glades Road, Suite 237 West Boca Raton, Florida 33431 (Address of principal executive offices) (zip code) (561) 998-8000 (Registrant's telephone number) Hollywood.com, Inc. ------------------- (Former Name) 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 7, 2001, the number of shares outstanding of the issuer's common stock, $.01 par value, was 26,825,372. HOLLYWOOD MEDIA CORP. Table of Contents
Page(s) ------- PART I FINANCIAL INFORMATION - ------ --------------------- ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000......................................... 3 Condensed Consolidated Statements of Operations for the Six and Three Months ended June 30, 2001 and 2000 (unaudited)................. 4 Condensed Consolidated Statement of Shareholders' Equity for the Six Months ended June 30, 2001 (unaudited)................................ 5 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2000 (unaudited)........................... 6 Notes to Condensed Consolidated Financial Statements (unaudited).......... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................ 19 PART II OTHER INFORMATION - ------- ----------------- ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................................... 31 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................ 33 Signature ................................................................................ 35
-2- HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2001 2000 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,479,338 $ 1,911,224 Receivables, net 2,124,799 1,866,565 Inventories 5,774,090 106,700 Prepaid expenses 996,070 687,028 Other receivables 498,722 866,251 Other current assets 243,487 240,450 Deferred advertising - CBS 18,845,194 19,131,714 ------------- ------------- Total current assets 32,961,700 24,809,932 PROPERTY AND EQUIPMENT, net 2,816,355 2,802,840 INVESTMENTS 74,331 305,045 NONCURRENT DEFERRED ADVERTISING - CBS 82,291,422 91,714,019 INTANGIBLE ASSETS, net 2,780,415 3,745,579 GOODWILL, net 43,434,771 45,173,047 OTHER ASSETS 784,564 727,620 ------------- ------------- TOTAL ASSETS $ 165,143,558 $ 169,278,082 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,488,541 $ 3,194,105 Other accrued expenses 3,115,875 2,444,113 Notes payable 483,333 750,000 Loan from shareholder/officer 250,000 -- Accrued reserve for closed stores 348,561 798,362 Deferred revenue 6,821,819 1,556,841 Current portion of capital lease obligations 484,457 627,597 ------------- ------------- Total current liabilities 13,992,586 9,371,018 ------------- ------------- CAPITAL LEASE OBLIGATIONS, less current portion 346,934 721,521 ------------- ------------- DEFERRED REVENUE 1,872,153 331,559 ------------- ------------- MINORITY INTEREST -- 160,094 ------------- ------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- -- Common stock, $.01 par value, 100,000,000 shares authorized; 26,526,659 and 24,730,968 shares issued at June 30, 2001 and December 31, 2000, respectively. 265,266 247,309 Warrants outstanding 10,332,834 7,007,013 Deferred compensation -- (102,067) Additional paid-in capital 267,654,889 264,332,941 Accumulated deficit (129,321,104) (112,791,306) ------------- ------------- Total shareholders' equity 148,931,885 158,693,890 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 165,143,558 $ 169,278,082 ============= =============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated balance sheets. -3- HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2001 AND 2000 (Unaudited)
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ NET REVENUES $ 26,357,466 $ 9,983,245 $ 15,479,694 $ 5,905,549 COST OF REVENUES 17,059,184 2,879,710 10,425,577 1,843,092 ------------ ------------ ------------ ------------ Gross margin 9,298,282 7,103,535 5,054,117 4,062,457 ------------ ------------ ------------ ------------ OPERATING EXPENSES: General and administrative 3,715,010 5,211,512 1,885,279 2,954,654 Selling and marketing 2,032,495 5,297,684 1,106,902 2,878,953 Salaries and benefits 6,223,580 5,160,505 3,103,744 2,727,590 Amortization of CBS advertising 9,810,064 9,375,904 4,761,772 5,251,707 Amortization of goodwill and intangibles 3,639,889 3,330,569 1,839,709 1,678,635 Depreciation and amortization 747,560 658,475 397,662 341,020 (Reversal) reserve for closed stores and lease termination costs (289,801) 9,755 (17,785) 9,755 ------------ ------------ ------------ ------------ Total operating expenses 25,878,797 29,044,404 13,077,283 15,842,314 ------------ ------------ ------------ ------------ Operating loss (16,580,515) (21,940,869) (8,023,166) (11,779,857) EQUITY IN EARNINGS - INVESTMENTS 476,634 1,253,959 28,759 148,622 OTHER: Interest expense (235,075) (188,418) (179,439) (92,037) Interest income 79,330 72,615 29,605 35,434 Other, net (168,175) 28,407 (173,089) 28,407 ------------ ------------ ------------ ------------ Loss before minority interest (16,427,801) (20,774,306) (8,317,330) (11,659,431) MINORITY INTEREST (101,997) (152,855) (57,124) (93,704) ------------ ------------ ------------ ------------ Net loss $(16,529,798) $(20,927,161) $ (8,374,454) $(11,753,135) ============ ============ ============ ============ Basic and diluted loss per common share $ (0.66) $ (0.93) $ (0.33) $ (0.51) ============ ============ ============ ============ Weighted average common and common equivalent shares outstanding - basic and diluted 25,226,067 22,544,098 25,739,897 23,257,368 ============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements. -4- HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2001 (Unaudited)
Common Stock ------------------------------ Warrants Deferred Shares Amount Outstanding Compensation ------------- ------------- ------------- ------------- Balance - December 31, 2000 24,730,968 $ 247,309 $ 7,007,013 $ (102,067) Issuance of common stock in private placement 1,252,787 12,528 2,869,019 -- Payment of cash and issuance of stock for acquisitions 28,572 286 -- -- Issuance of common stock for services rendered 22,469 225 -- -- Issuance of options and warrants for services rendered -- -- 456,802 -- Issuance of stock to pay capital lease obligation 88,000 880 -- -- Issuance of stock - note extension 15,615 156 -- -- Employee stock bonus 4,138 41 -- -- Issuance of common stock - adjustment shares 270,210 2,702 -- -- Issuance of common stock to pay obligations of the Company 160,000 1,600 -- -- Amortization of employee stock bonuses -- -- -- 102,067 Shares repurchased and retired (46,100) (461) -- -- Net loss -- -- -- -- ------------- ------------- ------------- ------------- Balance - June 30, 2001 26,526,659 $ 265,266 $ 10,332,834 $ -- ============= ============= ============= ============= [RESTUBBED] Additional Paid-in Accumulated Capital Deficit Total ------------- ------------- ------------- Balance - December 31, 2000 $ 264,332,941 $(112,791,306) $ 158,693,890 Issuance of common stock in private placement 2,504,802 -- 5,386,349 Payment of cash and issuance of stock for acquisitions (302,470) -- (302,184) Issuance of common stock for services rendered 94,819 -- 95,044 Issuance of options and warrants for services rendered (171,863) -- 284,939 Issuance of stock to pay capital lease obligation 499,840 -- 500,720 Issuance of stock - note extension 87,026 -- 87,182 Employee stock bonus 14,959 -- 15,000 Issuance of common stock - adjustment shares (2,702) -- -- Issuance of common stock to pay obligations of the Company 797,964 -- 799,564 Amortization of employee stock bonuses -- -- 102,067 Shares repurchased and retired (200,427) -- (200,888) Net loss -- (16,529,798) (16,529,798) ------------- ------------- ------------- Balance - June 30, 2001 $ 267,654,889 $(129,321,104) $ 148,931,885 ============= ============= =============
The accompanying notes to condensed consolidated financial statement is an integral part of this condensed consolidated statement. -5- HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ---------------------------- 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(16,529,798) $(20,927,161) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,387,449 3,989,044 Equity in earnings of investments, net of return of invested capital 230,714 (367,747) Issuance of compensatory stock, stock options and warrants for services rendered 394,983 75,029 Amortization of employee stock bonus 102,067 102,066 Provision for bad debts 143,339 54,502 Provision for inventory obsolescence -- 18,559 Amortization of deferred financing costs -- 4,290 (Reversal) reserve for closed stores and lease terminations costs (289,801) 9,755 Amortization of CBS advertising 9,810,064 9,375,904 Minority interest 101,997 152,855 Changes in assets and liabilities: Receivables (421,073) (1,371,283) Prepaid expenses (309,042) 79,935 Inventories (1,509,922) (23,910) Other current assets (3,037) (25,986) Other assets (20,079) 27,746 Accounts payable 94,000 45,682 Deferred revenue 1,839,312 88,828 Other accrued expenses 35,974 121,692 ------------ ------------ Net cash used in operating activities (1,942,853) (8,570,200) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquisitions, net of cash received -- (232,376) Loan to Beach Wrestling, LLC (123,380) -- Purchase of web addresses -- (1,070,000) Capital expenditures (643,511) (1,178,810) Loans to MovieTickets.com,net 499,000 (200,000) Return of capital from Tekno Books to minority partner (298,956) (323,668) ------------ ------------ Net cash used in investing activities (566,847) (3,004,854) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from shareholder/officer loan 250,000 2,050,000 Net proceeds from issuance of common stock 5,386,349 5,303,030 Proceeds from exercise of stock options and warrants -- 6,756,283 Loan to shareholder 43,591 (1,496,041) Payments to repurchase common stock (200,888) (864,905) Payments under notes payable (266,667) -- Payments under capital lease obligations (134,571) (263,609) ------------ ------------ Net cash provided by financing activities 5,077,814 11,484,758 ------------ ------------ Net increase (decrease) in cash and cash equivalents 2,568,114 (90,296) CASH AND CASH EQUIVALENTS, beginning of period 1,911,224 2,475,345 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 4,479,338 $ 2,385,049 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES: Interest paid $ 108,844 $ 152,843 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements. -6- HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION: In the opinion of management, the accompanying condensed consolidated financial statements have been prepared by Hollywood Media Corp. ("Hollywood Media" or "we") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations. However, we believe that the disclosures contained herein are adequate to make the information presented not misleading. The financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to present fairly Hollywood Media's financial position and results of operations. The results of operations and cash flows for the six months ended June 30, 2001 are not necessarily indicative of the results of operations or cash flows which may be recorded for the remainder of 2001. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2000. In the event that additional funding is required, the Chairman of the Board and Chief Executive Officer and the Vice Chairman and President of Hollywood Media, have indicated their intention to provide to Hollywood Media, if required, with an amount not to exceed $2.25 million in order to meet its working capital requirements during 2001; provided, however, that the commitment will terminate to the extent that Hollywood Media raises no less than $2.25 million from other sources and such additional funding is not expended on acquisitions. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition We changed the revenue recognition process for our ticketing businesses from revenue recognized when collection was assured and at the point of delivery of the ticket to the customer to the date of performance of the show. See Note 15. Per Share Amounts Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. There were 5,482,660 and 3,992,850 options and warrants outstanding at June 30, 2001 and 2000 respectively, that could potentially dilute earnings per share in the future. Such options and warrants were not included in the computation of diluted net loss per share because to do so would have been antidilutive for all periods presented. Accounting Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. -7- Significant estimates and assumptions embodied in the accompanying unaudited condensed financial statements include the adequacy of reserves for accounts receivables and closed stores and Hollywood Media's ability to realize the carrying value of goodwill, intangible assets, investments in less than 50%-owned companies and other long-lived assets, including the remaining carrying value of deferred advertising received from CBS in 2001 and 2000 in exchange for shares of Hollywood Media. Receivables Receivables consist of amounts due from customers from the sale of advertising, syndicated content, live theater tickets, and amounts due from publishers relating to signed contracts, to the extent that the earnings process is complete and amounts are realizable. Receivables are net of allowance for doubtful accounts of $597,422 and $567,702 at June 30, 2001 and December 31, 2000, respectively. In July 2001, the Financial Accounting Standard Board released Statement of Financial Accounting Standards ("SFAS"), Business Combinations, ("SFAS 141"), and SFAS 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS 141 also requires allocation of purchase price to certain classes of identifiable intangibles. Under SFAS 142, goodwill related to acquisitions after June 30, 2001 will not be amortized. In addition, amortization of goodwill related to businesses acquired prior to June 30, 2001 will cease on January 1, 2002. Hollywood Media's annual goodwill amortization is approximately $5.3 million. Upon adoption of SFAS 142, we will no longer record goodwill amortization. However, under SFAS 142 recorded goodwill will be subject to at least an annual assessment for impairment by applying a fair value based test. The fair value test will first be applied as of the transition date, January 1, 2002. SFAS 142 requires continued amortization of identifiable intangibles over their useful lives, except for intangibles with indeterminate lives, which will not be amortized. The lives of intangibles will no longer be subject to the 40 year maximum, which exists under the current rules. We are currently evaluating the provisions of SFAS 141 and 142 and have not yet determined the effect of these pronouncements on our financial position and results of operations. (3) ACQUISITIONS: In January 2000, we completed the acquisition of the web address Broadway.com from Broadway Technologies Group (Seller) for a purchase price of $1.6 million, paid with $1.0 million in cash and 35,294 shares of common stock valued at $17 per share, the stated value per the purchase agreement. The purchase agreement guaranteed to the seller that the shares of common stock issued to it would be worth at least $17 per share one year after their issuance. Because the market value of the common stock was less than $17 per share on the one year anniversary of issuance, Hollywood Media is obligated to pay $452,187 to the seller. The balance outstanding for this liability at June 30, 2001 was $339,687 and is included in accrued expenses. In April 2001, we issued to the seller a warrant to purchase 40,000 shares of common stock at an exercise price of $4.15 per share, with a fair value of $170,593, calculated in accordance with SFAS 123. The value of the warrant was expensed in the accompanying condensed statement of operations as other expense. On May 1, 2000, we 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 common stock valued at $14.00 per share, the closing market price on the date of issuance. The seller of BroadwayTheater.com, Inc. has the right to earn up to a maximum of 85,714 additional shares of Hollywood Media's common stock if the business meets specified gross profit targets during the three years following the closing of the acquisition. These gross profit targets were satisfied for year one and we issued 28,572 shares of common stock valued at $5.25 per share, the closing market price on the date of issuance, and recorded the amount as goodwill. Effective September 15, 2000, we acquired Theatre Direct NY, Inc. ("TDI") for 66,291 shares of common stock valued at $505,719 or $7.63 per share, the fair -8- market value of the common stock as determined by the purchase agreement and $750,000 in promissory notes. In addition, we issued 195,874 shares of common stock as contingent consideration. These shares were placed in escrow and will be delivered to the seller if certain conditions are satisfied at the end of the twelve-month period following the date of acquisition. Most notable is the condition that certain relationships remain in full force and effect for a period of one year from the date of acquisition. The 195,874 contingent shares have not been reflected in the purchase price and are not included in the calculation of weighted average shares outstanding during the period. The acquisitions of BroadwayTheater.com and TDI on May 1, 2000 and September 15, 2000, respectively, were accounted for under the purchase method of accounting and, accordingly, their operating results have been included in the consolidated financial statements since the respective dates of acquisition. The excess of the aggregate purchase price over the fair value of net assets acquired is being amortized over a useful life of ten years. The purchase price of BroadwayTheater.com was allocated to assets and liabilities as follows: 2000 ----------- Tangible assets $ 35,430 Goodwill 1,506,991 Liabilities assumed (145,049) ----------- Total purchase price 1,397,372 Less value of common stock issued 1,164,996 ----------- Paid, net of cash acquired $ 232,376 =========== Purchase price paid as follows: Paid in cash - purchase price, net of cash Acquired $ 205,376 Acquisition costs 27,000 ----------- $ 232,376 =========== The following are unaudited pro forma combined results of operations of Hollywood Media and TDI for the six and three months ended June 30, 2000, as if the acquisition of TDI had occurred on January 1, 2000: Six Months Three Months Ended Ended June 30, 2000 June 30, 2000 ------------- ------------ Net Revenues $ 23,798,834 $ 13,402,488 ============= ============ Net Loss $ (20,839,599) $(11,520,437) ============= ============ Pro Forma Diluted Loss Per Share $ (.92) $ (.49) ============= ============ Weighted Average Shares Outstanding 22,662,969 23,345,606 ============= ============ -9- These unaudited pro forma combined results have been prepared for comparative purposes only and include certain adjustments, such as additional goodwill amortization expense. 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 consolidated results of operations and have therefore been excluded from pro forma combined results of operations. (4) DEBT: In connection with the TDI acquisition on September 15, 2000, Hollywood Media signed two promissory notes payable to the former owner. The first is an interest bearing note payable with a face value of $500,000, principal payable monthly, with a final principal payment of $75,000 due on September 15, 2001. The note bears interest at Citibank, N.A. prime plus 1% per annum (7.75% at June 30, 2001). The second promissory note is a one year non-interest bearing note with a face value of $250,000 due on September 26, 2001. At June 30, 2001, the outstanding balance of notes payable is $483,333. (5) OTHER ACCRUED EXPENSES: Other Accrued Expenses consist of the following: June 30, 2001 December 31, 2000 ------------- ----------------- Compensation and benefits $ 834,783 $ 496,032 Insurance 376,464 152,978 Professional fees 143,235 166,182 Licensing fees 47,520 91,800 Interest 129,142 57,159 Royalties 25,786 39,480 Other 1,558,945 1,440,482 ---------- ---------- $3,115,875 $2,444,113 ========== ========== (6) ACCRUED RESERVE FOR CLOSED STORES: In December 1999, Hollywood Media closed its brick and mortar retail operation in its entirety and closed its remaining kiosks and in-line stores. Hollywood Media recorded provisions in 1998, 1999 and 2000 for the asset impairments and the estimated cost of early store lease terminations as a result of exiting the brick and mortar retail business. The accrued reserve for estimated liabilities remaining on store lease obligations was $798,362 at December 31, 2000 and $348,561 at June 30, 2001. The accrued reserve was reduced by $289,801 during the six months ended June 30, 2001 and $17,785 during the three months ended June 30, 2001 as the result of favorable settlements related to outstanding lease obligations. Additionally, cash payments by Hollywood Media of $160,000 were made. The reserve for closed stores is reviewed by management on a quarterly basis to determine the adequacy of the reserves based on pending claims, and we anticipate resolution of all matters within the next twelve months. -10- (7) COMMON STOCK: In January 2001, we issued 4,138 shares of restricted common stock valued at $15,000 or $3.625 per share, the closing market price on the date of issuance, as an incentive stock bonus to an officer of Hollywood Media in accordance with an employment agreement. In February 2001, we issued 160,000 shares of common stock valued at $799,564 in exchange for the payment by a third party of $799,564 of certain media, goods and services obligations of Hollywood Media. The shares were valued at the fair value of the obligations paid. During the six months ended June 30, 2001, we issued 270,210 shares of common stock to investors from the August 2000 private placement pursuant to the exercise of certain adjustment warrants. The fair value of these adjustment shares on the dates of issuance was $1,284,049. Hollywood Media is obligated to issue additional shares to those selling shareholders for no consideration if the average of the five lowest volume weighted average prices of the common stock during the final fifteen days of an adjustment period is below $9.63. The final adjustment period ends September 4, 2001. A total of 60,500 shares have been issued in July and August of 2001 and the estimated maximum additional shares to be issued if the weighted average price is $2 is approximately 137,000 shares and if the weighted average price is $5 is approximately 33,000 shares. The precise number of shares of common stock which were issued were determined in accordance with a formula set forth in the adjustment warrants. The shares issued pursuant to the adjustment warrants were recorded as additional paid-in capital. In May 2001, we issued 1,252,787 shares of common stock valued at $4.51 per share in a private placement to three accredited investors (including Viacom) for gross proceeds of $5,650,000. We incurred $263,651 in transaction costs which were charged to additional paid-in-capital. The purchase price per share was 105% of the Market Price of the common stock, which was defined as the average volume weighted average price for 20 business days prior to the closing date. We issued series A warrants to these investors to purchase an aggregate of 614,059 shares of common stock at a price of $6.44 per share. These warrants were valued at $2,869,019 in accordance with SFAS 123. If on each of January 30, 2002 and April 30, 2002, any such investor holds at least seventy-five percent of the investor's shares of common stock issued to it in the transaction, then the exercise price of the series A warrants as to such investor will be decreased to an exercise price of $5.37 per share and $4.51 per share, respectively, on such dates. The investors also received series B adjustment warrants to acquire additional shares of common stock from time to time in amounts in proportion to each of their respective investments. The investors will be entitled to receive additional shares of common stock upon exercise of the series B adjustment warrants for no additional consideration if the market price of the common stock as of October 30, 2001, January 30, 2002, April 30, 2002 or July 30, 2002 is less than $5.19 per share. The series B warrants are exercisable on the last day of each twenty trading day period beginning on each of these four dates. The market price of the common stock under the series B warrants is defined as the average of the ten lowest closing sale prices of the common stock during the twenty trading days following each of these four dates, but can be no less than $2.15. The number of shares issuable upon exercise of a series B warrant on the first of these four exercise dates is equal to (1) $5.19 minus the market price, divided by (2) the market price, and multiplied by (3) a number of shares specified in each series B warrant. The number of shares issuable upon exercise of a series B warrant on each of the subsequent three exercise dates is equal to (1) the lower of $5.19 and the lowest market price as of any prior exercise date minus the market price, divided by (2) the market price, and multiplied by (3) a number of shares specified in each series B warrant. The specified number of shares is 310,425 for Viacom Inc., 465,638 for Societe Generale, and 310,425 for Velocity Investment Partners Ltd. In May 2001, we issued 28,572 shares of common stock to the previous owners of BroadwayTheater.com in accordance with the earn-out provision of the Asset -11- Purchase Agreement. Pursuant to this provision the previous owners are entitled to additional consideration if specified gross profit targets are attained. These targets were satisfied and we issued 28,572 shares of common stock valued at $5.25 per share, the closing market price on the date of issuance and recorded $150,003 as goodwill. In May 2001, we issued 22,469 shares of common stock valued at $4.23 per share, the closing market price on the date of issuance, for payment of book packaging fees to Dr. Martin Greenberg. Dr. Greenberg is a director of Hollywood Media and CEO of Tekno Books. In June 2001, we issued 88,000 shares of common stock valued at $5.69 per share, the closing market price on the date of issuance, as a payment towards outstanding capital lease obligations related to our former brick and mortar retail operations, pursuant to the terms of a settlement agreement. The total settlement was $796,000, payable in common stock with the balance payable in monthly installments of cash. We issued a total of 15,615 shares of common stock valued at $87,182 during the three months ended June 30, 2001 for the extension of the term of a promissory note that Hollywood Media guaranteed. The borrower on the note, an employee of a subsidiary of Hollywood Media, is obligated to pay to Hollywood Media an amount equal to 50% of the value of the shares issued to extend the maturity date of the note. We recorded $43,591 as interest expense and $43,591 as other receivables. Additionally, during the six months ended June 30, 2001, we issued stock options and warrants valued at $284,939 for services rendered. Pursuant to Hollywood Media's stock repurchase plan, during the six months ended June 30, 2001, we repurchased 46,100 shares of its common stock for an aggregate consideration of $200,888, or an average purchase price of $4.36 per share. (8) INVESTMENTS: Investments consist of the following: June 30, 2001 December 31, 2000 ------------- ----------------- NetCo Partners (a) $ 773,784 $ 699,331 MovieTickets.com, Inc. (b) (572,200) (394,286) Beach Wrestling LLC (c) (127,253) -- --------- --------- $ 74,331 $ 305,045 ========= ========= (a) NETCO PARTNERS: Hollywood Media owns a 50% interest in a joint venture called NetCo Partners. This investment is recorded under the equity method of accounting, recognizing 50% of NetCo Partners' income or loss as Equity in Earnings - Investments. The revenues, gross profit and net income of NetCo Partners for the six and three months ended June 30, 2001 and 2000 are presented below: Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 2001 2000 2001 2000 --------- --------- ------- ------- Revenues $1,927,191 $3,072,773 $ 754,713 $ 455,647 Gross Profit 1,576,844 2,575,918 578,058 373,569 Net Income 1,565,601 2,593,476 569,085 382,802 Company's Share of Net income 782,801 1,296,738 284,543 191,401 -12- As of June 30, 2001, NetCo Partners has $1,167,670 in accounts receivable. Management of NetCo Partners believes that these receivables will be collected in full and no reserves have been established. These accounts receivable are not included in the Company's condensed consolidated balance sheets. NetCo Partners' deferred revenues, consisting of cash advances received but not yet recognized as income, amounted to $286,026 as of June 30, 2001. These deferred revenues are not included in the Company's condensed consolidated balance sheets. As of June 30, 2001, we received cumulative profit distributions from NetCo Partners since its formation totaling $6,377,860, in addition to reimbursement of substantially all amounts advanced by us to fund the operations of NetCo Partners. (b) MOVIETICKETS.COM, INC.: Hollywood Media entered into a joint venture agreement on February 29, 2000 with the movie theater chains AMC Entertainment Inc. and National Amusements, Inc. to form MovieTickets.com, Inc. ("MovieTickets.com"), in which each venture partner initially acquired a 33.33% interest in the joint venture. In August 2000, the joint venture sold a five percent interest in the joint venture to Viacom Inc. in exchange for $25 million of advertising over 5 years. In March 2001, America Online, Inc. purchased a 3% (non-dividend) preferred equity interest in MovieTickets.com for $8.5 million in cash. Hollywood Media owned 31.67% of the common stock of MovieTickets.com at June 30, 2001. In 2000, Hollywood Media issued warrants to acquire 90,573 shares of common stock at an exercise price of $17.875 per share valued at $1,000,000 to AMC Entertainment Inc. The fair value of the warrant was recorded as goodwill and is being amortized over a period of ten years. The investment is accounted for under the equity method of accounting, recognizing 31.67% of MovieTickets.com income or loss as Equity in Earnings - Investments. During the three months ended March 31, 2001 and the twelve months ended December 31, 2000, we loaned $100,000 and $499,000, respectively, in cash to MovieTickets.com, which was repaid with interest in March 2001. For the six and three months ended June 30, 2001, we recorded a loss of $178,914 and $128,531, respectively, from our investment in MovieTickets.com. For the six and three months ended June 30, 2000, we recorded a loss of $42,779, from our investment in MovieTickets.com (c) BEACH WRESTLING LLC: On November 10, 2000, an indirect wholly owned subsidiary of Hollywood Media entered into an agreement with Cisnernos Television Group ("CTG") and Siegel Partners to form Beach Wrestling LLC, each having a one-third ownership percentage. Beach Wrestling LLC was formed to develop, market and distribute wrestling events via television and the Internet under the "Beach Wrestling" brand. This investment is recorded under the equity method of accounting, recognizing one-third of Beach Wrestling LLC's income or loss as Equity in Earnings - Investments. For the six and three months ended June 30, 2001, we recorded a loss of $127,253 from our investment in Beach Wrestling LLC. At June 30, 2001, the indirect wholly owned subsidiary of Hollywood Media had loaned $190,880 to Beach Wrestling LLC. All payments by Hollywood Media's indirect wholly owned subsidiary to Beach Wrestling LLC are treated as loans and bear interest at the Bank of America reference rate plus 2% per annum. The loan is included in the accompanying condensed consolidated balance sheet as other receivables. -13- (9) BARTER TRANSACTIONS: Barter arrangements are periodically entered into with other companies to exchange advertising on each other's web sites. In January 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached consensus on EITF Issue No. 99-17, "Accounting for Advertising Barter Transactions." As permitted under EITF 99-17, we adopted the consensus prospectively for transactions occurring after January 20, 2000. EITF 99-17 allows gross reporting of advertising barter transactions only where barter transactions can be supported by an equivalent quantity of similar cash transactions. We also record barter revenue and expense under a contract with the National Association of Theatre Owners ("NATO"). In connection with the NATO contract, we also acquired rights and obligations under ancillary agreements with individual theaters that are members of the NATO organization. Pursuant to these agreements, we provide them with movie showtime information and content, and we host web sites for each of the theaters. In addition, we provide ongoing web site maintenance services for each of the theaters including providing promotional materials, movie and theater information and editorial content. In exchange, the theaters promote the Hollywood.com web site to movie audiences by airing movie trailers about Hollywood.com 40 out of 52 weeks per year, before feature films that play in most NATO-member theaters. Hollywood Media records revenue and expense from these activities measured at the fair value of the services exchanged. Barter transactions by type for the six and three months ended June 30, 2001 and 2000 are as follows: Six Months Ended Three Months Ended June 30, June 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Barter Advertising $ 77,139 $ 808,776 $ 24,009 $ 558,946 Barter - NATO 1,490,875 1,490,875 745,437 745,437 ---------- ---------- ---------- ---------- $1,568,014 $2,299,651 $ 769,446 $1,304,383 ========== ========== ========== ========== Barter transactions accounted for approximately 52% and 47% of net Internet ad sales revenues for the six months ended June 30, 2001 and 2000, respectively, and 50% and 51% of net Internet ad sales revenues for the three months ended June 30, 2001 and 2000, respectively. Barter transactions accounted for 6% and 5% of net revenues for the six and three months ended June 30, 2001, respectively. Barter transactions accounted for 23% and 22% of net revenues for the six and three months ended June 30, 2000, respectively. (10) REPORTABLE SEGMENT: Hollywood Media's reportable segments are ticketing, business to business, Internet ad sales, intellectual properties, e-commerce and retail. The ticketing segment sells tickets to live theater events for Broadway, Off-Broadway and London on the Internet and to domestic and international travel professionals including travel agencies and tour operators, educational institutions and traveling consumers. The business to business segment licenses entertainment content and data. The business to business segment includes Baseline (a pay-per-use subscription web site geared towards professionals in the entertainment industry), CinemaSource (which licenses movie showtimes and other -14- movie content) and EventSource (which licenses local listings of events around the country) to media, wireless and Internet companies. The Internet ad sales segment sells advertising on the Hollywood.com and Broadway.com web sites. The intellectual properties segment owns or controls the exclusive rights to certain intellectual properties created by best-selling authors and media celebrities, which it licenses across all media. This segment also includes a 51% interest in Tekno Books, a book development business. The e-commerce segment, which closed in January 2001, sold entertainment-related merchandise over the Internet. The retail segment operated retail studio stores that sold entertainment-related merchandise and was closed in December 1999. Management evaluates performance based on a comparison of actual profit or loss from operations before income taxes, depreciation, amortization, interest, and nonrecurring gains and losses to budgeted amounts. There are no intersegment sales or transfers. The following table illustrates the financial information regarding Hollywood Media's reportable segments.
Six Months Ended June 30, Three Months Ended June 30, ---------------------------------- ---------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net Revenues: Ticketing (a) $ 19,160,425 $ 1,360,850 $ 11,906,203 $ 1,360,850 Business to Business 3,232,269 2,356,349 1,565,513 1,353,841 Internet Ad Sales 2,993,889 4,868,499 1,528,987 2,558,144 Intellectual Properties 955,384 928,134 479,393 465,035 E-Commerce (b) 15,499 446,043 (402) 144,309 Retail (d) -- 23,370 -- 23,370 ------------ ------------ ------------ ------------ $ 26,357,466 $ 9,983,245 $ 15,479,694 $ 5,905,549 ============ ============ ============ ============ Gross Margin: Ticketing (a) $ 3,020,586 $ 212,476 $ 2,005,724 $ 212,476 Business to Business 3,080,561 2,217,429 1,491,104 1,274,985 Internet Ad Sales 2,868,480 4,388,861 1,410,607 2,336,580 Intellectual Properties 339,251 273,510 147,599 192,892 E-Commerce (b) (10,596) 11,259 (917) 45,524 Retail (d) -- -- -- -- ------------ ------------ ------------ ------------ $ 9,298,282 $ 7,103,535 $ 5,054,117 $ 4,062,457 ============ ============ ============ ============ Operating Income (Loss): Ticketing (a) $ 546,152 $ 125,401 $ 660,016 $ 125,401 Business to Business 373,526 122,306 98,706 75,830 Internet Ad Sales (c) (11,824,464) (15,600,589) (5,671,336) (8,437,024) Intellectual Properties 139,255 141,072 31,289 130,118 E-Commerce (b) 11,130 (1,384,155) (8,419) (743,119) Retail (d) 285,940 (42,058) 16,877 (13,653) Other (Corporate and other) (6,112,054) (5,302,846) (3,150,299) (2,917,410) ------------ ------------ ------------ ------------ $(16,580,515) $(21,940,869) $ (8,023,166) $(11,779,857) ============ ============ ============ ============ Capital Expenditures: Ticketing (a) $ 35,456 $ -- $ 33,450 $ -- Business to Business 125,875 130,735 115,261 58,752 Internet Ad Sales 401,808 893,850 247,618 626,294 Intellectual Properties -- 5,188 -- -- E-Commerce (b) -- 12,378 -- 2,308 Other (Corporate and other) 80,372 136,659 53,082 66,844 ------------ ------------ ------------ ------------ $ 643,511 $ 1,178,810 $ 449,411 $ 754,198 ============ ============ ============ ============ Depreciation and Amortization Expense: Ticketing (a) $ 29,929 $ -- $ 15,769 $ -- Business to Business 92,322 54,054 47,962 29,234 Internet Ad Sales 1,510,905 1,311,817 776,153 666,150 Intellectual Properties 3,150 3,780 1,575 1,575 E- Commerce (b) 1,551 8,178 -- 4,572 Other (Corporate and other) 2,749,592 2,611,215 1,395,912 1,318,124 ------------ ------------ ------------ ------------ $ 4,387,449 $ 3,989,044 $ 2,237,371 $ 2,019,655 ============ ============ ============ ============
-15- (a) TDI and BroadwayTheater.com, our ticketing businesses, were acquired on September 15, 2000 and May 1, 2000, respectively, and reported amounts include results from the dates of acquisition. (b) The e-commerce segment was closed in January 2001. (c) Includes $9,810,064 and $9,375,904 in amortization of CBS advertising for the six months ended June 30, 2001 and 2000, respectively, and $4,761,772 and $5,251,707 for the three months ended June 30, 2001 and 2000, respectively. (d) The retail segment was closed on December 31, 1999. (11) COMMITMENTS AND CONTINGENCIES: Hollywood Media 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 financial condition or results of operations. Steven B. Katinsky v. The Times Mirror Company, Hollywood.com, Inc. and Hollywood Online Inc. filed on September 8, 2000 in Superior Court of the State of California for the County of Los Angeles. Claim against Tribune Company (formerly The Times Mirror Company) and the Company seeking a performance cycle bonus allegedly owing to the plaintiff by Tribune Company in connection with the sale of Hollywood Online Inc. from Tribune Company to the Company. The claimant is seeking monetary damages in excess of $19.8 million for alleged fraud by the defendants in connection with the sale of Hollywood Online Inc. to us. The lawsuit was dismissed in December 2000 and the parties were ordered to arbitrate the dispute. The lawsuit is presently in consolidated arbitration with the Interviews.com v. Hollywood Online, Inc. arbitration referenced below. Hollywood Media is indemnified by Tribune Company for the amount of any such performance cycle bonus payable to the plaintiff. We believe that all claims by the claimant against us are without merit and we intend to defend them vigorously. Interviews.com v. Hollywood Online, Inc. filed on August 17, 2000 in Superior Court of the State of California for the County of Los Angeles. The claim was dismissed in January 2001 and the parties were given the right to arbitrate the dispute. The lawsuit is presently in consolidated arbitration with the Steven B. Katinsky v. The Times Mirror Company arbitration referenced above. This dispute involves a claim by Interviews.com that Hollywood Media's wholly owned subsidiary, hollywood.com, Inc. (formerly known as Hollywood Online, Inc.), did not timely perform its obligations with respect to the transfer of several domain names under an Assignment Agreement dated December 17, 1997. Interviews.com is owned and controlled by Steven Katinsky, the claimant in the matter described above. All matters related to this claim occurred prior to the acquisition of Hollywood Online, Inc. in May 1999 and all domain names subject to the dispute have been transferred to the claimant. The domain names transferred were not being utilized by us and were not related to our business. The claimant is seeking monetary damages in excess of $5 million. We believe that this claim is without merit and we intend to defend it vigorously. -16- (12) RECLASSIFICATION: Certain amounts in the 2000 financial statements have been reclassified to conform with the 2001 classification. (13) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: For the Six Months ended June 30, 2001: o Warrants to acquire 70,000 shares of common stock at exercise prices of $3.00 and $4.25 per share and valued at $266,322 were granted to placement agents for proceeds raised in August of 2000. o We issued 160,000 shares of common stock valued at $799,564 in exchange for payment of $799,564 in certain media, goods and services statements of Hollywood Media by a third party. o Capital lease transactions totaled $117,564. o We issued 88,000 shares of common stock, valued at $500,720, as a payment towards outstanding capital lease obligations. o We issued 15,615 shares of common stock, valued at $87,182, for the extension of a promissory note. We recorded $43,591 as interest expense and $43,591 as other receivables. o We issued 28,572 shares of common stock valued at $150,003 under the terms of an earnout arrangement. o We issued 270,210 adjustment shares of common stock for no proceeds. For the Six Months ended June 30, 2000: o We 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 investment in MovieTickets.com, Inc. o We 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. (14) SUBSEQUENT EVENT: On July 27, 2001, Hollywood Media issued 210,731 shares of its common stock for an aggregate purchase price of $1,245,000 in accordance with an asset purchase agreement between Independent Hollywood, Inc. an indirect, wholly owned subsidiary of Hollywood Media, and Always Independent Entertainment Corp. ("Always I") to acquire the assets and business called "Always I", which offers films to subscribers over the Internet. Hollywood Media has incorporated the Always I subscription service as a distinct channel on Hollywood.com. Filmmakers are charged a fee to place their films on the web site and subscribers are charged a monthly fee to view the films. (15) CHANGE IN METHOD OF REVENUE RECOGNITION FOR TICKETING BUSINESSES: We acquired our ticketing businesses, BroadwayTheater.com and TDI, in May and September of 2000, respectively. These businesses generally acquire blocks of theater tickets for resale to groups and individuals. Since acquisition, consistent with the revenue recognition methods utilized by both companies prior to our acquisition, we have recognized revenue generally at the time when collection was assured and ticket delivery to the customer had occurred. During the second quarter of 2001, we concluded that in many instances the earnings process for the ticketing businesses was not completed until the performance of the show, as the businesses provide other ancillary services up to the date of performance. As a result, we changed our method of revenue recognition to defer recognition of revenue on ticket sales until the performance takes place. -17- Management of Hollywood Media does not believe the effect of the change in revenue recognition on our previously reported consolidated financial results for the year ended December 31, 2000 was material (reduction in revenue of approximately $350,000 or 1.2% and an increase in net loss of $46,000 or .09%) to our reported results of operations or financial position. The effect of the change in revenue recognition on our previously reported consolidated financial results for the three months ended March 31, 2001 is a reduction in ticketing revenue of $2,474,265 and an increase in net loss of $188,687. The following tables show the effects of this change on the statements of operations for three months ended March 31, 2001:
As Reported As Adjusted ----------- ----------- Net revenues $ 13,352,037 $ 10,877,772 Cost of revenues 8,919,185 6,633,607 ----------- ----------- Gross margin 4,432,852 4,244,165 ----------- ----------- Total operating expenses 12,801,514 12,801,514 ----------- ----------- Operating loss (8,368,662) (8,557,349) Net loss $ (7,966,657) $ (8,155,344) =========== =========== Basic and diluted net loss per common share (0.32) (0.33) =========== =========== Weighted average common and common equivalent shares outstanding - basic and diluted 24,706,527 24,706,527 =========== ===========
For the three months ended June 30, 2001, this change results in an increase in ticketing revenue of $2,220,431 and a decrease in net loss of $100,194 compared to amounts that would have been reported under our prior revenue recognition policy. For the six months ended June 30, 2001, this change results in a decrease in ticketing revenues of $253,834 and an increase in net loss of $88,493 compared to amounts that would have been reported under our prior revenue recognition policy. We have made purchase accounting adjustments to record the proceeds received on ticket sales prior to performance as deferred revenue and payments made to purchase tickets for performances that have not taken place as inventory in the accompanying condensed consolidated balance sheet at June 30, 2001. -18- ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains, in addition to historical information, "forward-looking statements" with respect to Hollywood Media Corp. which represent Hollywood Media's expectations or beliefs, including, but not limited to, statements concerning industry performance, operations, performance, financial condition, growth, acquisition, and divestiture strategies, margins, and growth in sales of our products. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Factors that may affect Hollywood Media's results 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, 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 Inc. Hollywood Media is also subject to other risks detailed herein or detailed in the Annual Report on Form 10-K for the year ended December 31, 2000 and in other filings by us with the Securities and Exchange Commission. Overview We are an entertainment-focused media and Internet company that offers widely recognized brands and a broad collection of entertainment content data and related information in the industry, which we license to media and other companies including The New York Times, AOL Time Warner, Yahoo!, Sprint, AT&T Wireless, Verizon and others. Hollywood Media owns an extensive ticketing network and is engaged in the development and licensing of intellectual properties and licensing of books. We generate revenues through the business-to-business syndication of entertainment-related content, the sale of live theater tickets, the sale of advertising and from advances paid by publishers and royalties received from our library of book titles. Business to Business Syndication Divisions CinemaSource. CinemaSource is the largest supplier of movie showtimes as measured by market share and compiles movie showtimes for every movie theater in the United States and Canada, representing approximately 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 newspapers, wireless companies, Internet sites, and other media outlets, including newspapers such as The New York Times and Newsday, Internet companies including AOL's Digital City, Yahoo!, Lycos, Excite, Ticketmaster, and wireless providers such as Sprint PCS, AT&T Wireless and Verizon. CinemaSource also syndicates 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. -19- EventSource. We launched the EventSource business in mid-1999 as an expansion of the operations of CinemaSource. EventSource compiles and syndicates detailed information on community events in cities around the country, including concerts and live music, sporting events, festivals, fairs and live theater. EventSource entered into an agreement with AOL's Digital City in April 2000 to provide event listings for up to 200 cities nationwide. In addition to Digital City, other EventSource customers include the web sites of The New York Times and Knight Ridder. TheaterSource. We launched the TheaterSource business in mid-2000 as a further expansion of the operations of EventSource. TheaterSource compiles and syndicates a comprehensive database of theater productions and showtimes, covering shows on Broadway, Off-Broadway, touring companies, community playhouses, dinner theaters throughout North America and in London's West End theater district. ConcertSource. We launched this business in October 2000. ConcertSource offers extensive local listings of concerts and music-related events from major arenas to small local jazz clubs, including a complete listing of every performance from major touring groups to hometown bands. ConcertSource currently covers concert and event listings for the top 60 markets in the United States and plans to expand its coverage to more than 200 markets throughout North America. Baseline. We own and operate Baseline, a business which includes a pay-per-use subscription web site (located at Baseline.hollywood.com) and various publications geared to movie studios, investment banks, news agencies, consulting firms and other professionals in the entertainment industry. We acquired Baseline from media analyst Paul Kagan. Based on its 15-year history, we believe that the Baseline business maintains one of the most comprehensive movie and television-related databases. Baseline is a comprehensive database of information on over 67,000 films and television programs, as well as biographies on 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 Bloomberg, Daily Variety, People Magazine, Lexis-Nexis, 20th Century Fox, DreamWorks, Paramount Pictures, Sony Pictures, MGM, Warner Bros., E! Entertainment Television, Boston Consulting Group and Booz, Allen, Hamilton. Ticketing Divisions Theatre Direct International and Broadway.com. We acquired Theatre Direct International ("TDI") as of September 15, 2000. Founded in 1990, TDI is a live theater marketing and sales agency serving over 40,000 domestic and international travel professionals, traveling consumers and New York-area theater patrons. TDI is a ticketing wholesaler to the travel industry that provides groups and individuals with access to theater tickets and knowledgeable service, covering shows on Broadway, long running shows Off-Broadway and shows in London and Toronto. TDI sells tickets through an 800 toll-free number, via the Broadway.com web site and by fax. As a marketing agency, TDI represents 12 producers and 17 Broadway shows to the travel industry around the world. The 17 Broadway shows are Aida, Beauty and the Beast, Blast, Cabaret, Chicago, Contact, 42nd Street, Mamma Mia!, Kiss Me Kate, Les Miserables, Rent, Riverdance, The -20- Full Monty, The Lion King, The Music Man, The Rocky Horror Show and The Phantom of the Opera. In addition, TDI's education division, Broadway Classroom, markets group tickets to schools across the country. TDI's offline ticketing service complements the online ticketing services available on Broadway.com. The combined companies provide live theater ticketing and related content for all Broadway shows and most shows running off-Broadway and in London's West End at over 200 venues in multiple markets to a customer base consisting of over 40,000 travel agencies, tour operators, corporations and educational institutions, in addition to numerous newspapers and web site. MovieTickets.com. MovieTickets.com was launched in late May 2000. At June 30, 2001, each of Hollywood Media, AMC Entertainment, Inc. and National Amusements, Inc. owns approximately 31.67% of the outstanding common stock of MovieTickets.com. MovieTickets.com entered into an agreement with Viacom Inc. effective August 2000 whereby Viacom acquired a five percent interest in MovieTickets.com for $25 million of advertising over five years. MovieTickets.com is promoted through on-screen advertising in each participating exhibitor's movie screens and through Viacom advertising and promotion. In March 2001, America Online Inc. ("AOL") purchased a 3% (non-dividend) preferred equity interest in MovieTickets.com for $8.5 million in cash. In connection with that transaction, MovieTickets.com's ticket inventory is promoted throughout AOL's interactive properties and AOL Moviefone's ticket inventory is featured on MovieTickets.com. MovieTickets.com's current participating exhibitors include AMC Entertainment Inc., National Amusements, Inc., Famous Players Inc., Hoyts Cinemas, Marcus Theaters, Muvico Entertainment and several regional exhibitors. These exhibitors operate theaters located in all of the top 20 markets and approximately 70% of the top 50 markets in the United States and Canada and represent approximately 50% of the top 100 grossing theaters in North America. AMC Entertainment Inc. is the largest movie theater operator in the United States based on box office sales and Famous Players generates approximately half of all box office sales in Canada. The MovieTickets.com web site allows users to purchase movie tickets and retrieve them at "will call" windows or kiosks at theaters. The web site also features bar coded tickets that can be printed at home and presented directly to the ticket taker at the theater. The web site contains movie content from Hollywood Media's various divisions for all current and future release movies, including movie reviews and synopses, digitized movie trailers and photos, and box office results. The web site generates revenues from service fees charged to users for the purchase of tickets and the sale of advertising on both the web site and on the print-at-home ticket. Internet Divisions Hollywood.com. Hollywood.com is a premier entertainment related web site featuring over one million pages of in-depth movie, television and other entertainment content, including movie descriptions and reviews, digitized movie trailers and photos, movie showtimes listings, entertainment news, box office results, interactive games, movie soundtracks, television listings, concert information, celebrity profiles and biographies, comprehensive coverage of entertainment awards shows and film festivals and exclusive video coverage of movie premieres. In addition, Hollywood.com features content from the Baseline database. In July 2001, Alwaysi.com was added as a distinct channel on Hollywood.com offering films to subscribers. We sell banner advertising and sponsorships on Hollywood.com through relationships with advertising rep. firms and through an internal sales staff. Some of our recent advertisers include BMW, General Motors, Universal Studios, The Food Network, Ben & Jerry's Ice Cream, Microsoft, People Magazine, Verizon, Purina, Fox, Proctor & Gamble, Visa, IBM, Diet Coke, New Line Cinema, MGM, US Army, Sprint, AT&T and Warner Brothers. -21- We promote the Hollywood.com web site through our strategic relationships with Viacom Inc. and NATO. Through exclusive contracts with NATO and 73 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 provide them with movie showtime information and content as well as develop and maintain the web sites for many theater exhibitors. In January 2000 we entered into a strategic, seven-year relationship with Viacom Inc. that provides for extensive promotion of the Hollywood.com and Broadway.com web sites. Viacom has agreed to provide Hollywood.com and Broadway.com with $105 million of promotion across its full range of CBS 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 and CBS syndicated television and radio programs. The promotion provided by Viacom is valued based upon the average price charged by Viacom for similar promotions during the applicable time period. Viacom 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. Broadway.com. We launched Broadway.com on May 1, 2000. Broadway.com features the ability to purchase Broadway, Off-Broadway and London's West End theater tickets online (See - Ticketing Divisions); 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 latest theater news; interviews with stage actors and playwrights; opening-night coverage; original theater reviews; and video excerpts from selected shows. Broadway.com also offers current box office results, show synopses, cast and crew credits and biographies, digitized show previews, digitized showtunes, and an in-depth Tony Awards(R) area. Broadway.com generates revenue from ticket sales, advertising sales, and syndication of its content to other media companies. Intellectual Properties Business Intellectual Properties. Our intellectual properties division owns the exclusive rights to intellectual properties, which are complete stories and ideas for stories, created by best-selling authors and media celebrities. Some examples of our intellectual properties are Anne McCaffrey's Acorna the Unicorn Girl, Leonard Nimoy's Primortals, and Mickey Spillane's Mike Danger. We license rights to our intellectual properties to companies such as book publishers, film and television studios, multimedia software companies and producers of other products. These licensees develop books, television series and other products based on the intellectual properties licensed from us. We generally obtain the exclusive rights to the intellectual properties and the right to use the creator's name in the titles of the intellectual properties (e.g., Mickey Spillane's Mike Danger and Leonard Nimoy's Primortals). NetCo Partners. In June 1995, the Company and C.P. Group Inc. ("C.P. Group"), entered into an agreement to form NetCo Partners. NetCo Partners is engaged in the development and licensing of Tom Clancy's NetForce. The Company and C.P. Group are each 50% partners in NetCo Partners. Tom Clancy is a shareholder of C.P. Group. At the inception of the partnership, C.P. Group -22- contributed to NetCo Partners all rights to Tom Clancy's NetForce, and the Company contributed to NetCo Partners all rights to Tad Williams' MirrorWorld, Arthur C. Clarke's Worlds of Alexander, Neil Gaiman's Lifers, and Anne McCaffrey's Saraband. NetCo Partners owns Tom Clancy's NetForce which was licensed to Putnam Berkley for a series of mass market paperbacks and to ABC Television for a television mini-series and video distribution in accordance with the terms of the partnership agreement, and the other properties have reverted back to the Company. 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 developed and executed book projects for approximately 1,200 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. Results of Operations The following table summarizes Hollywood Media's net revenues, cost of revenues and gross margin by division for the six months ended June 30, 2001 ("Y2-01") and 2000 ("Y2-00") and the three months ended June 30, 2001 ("Q2-01") and 2000 ("Q2-00"), respectively:
Business to Internet Ad Intellectual E- Ticketing Business Sales Properties Commerce Retail Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- Y2-01 - ----- Net Revenues $19,160,425 $ 3,232,269 $ 2,993,889 $ 955,384 $ 15,499 $ -- $26,357,466 Cost of Revenues 16,139,839 151,708 125,409 616,133 26,095 -- 17,059,184 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross Margin $ 3,020,586 $ 3,080,561 $ 2,868,480 $ 339,251 $ (10,596) $ -- $ 9,298,282 =========== =========== =========== =========== =========== =========== =========== Y2-00 - ----- Net Revenues $ 1,360,850 $ 2,356,349 $ 4,868,499 $ 928,134 $ 446,043 $ 23,370 $ 9,983,245 Cost of Revenues 1,148,374 138,920 479,638 654,624 434,784 23,370 2,879,710 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross Margin $ 212,476 $ 2,217,429 $ 4,388,861 $ 273,510 $ 11,259 $ -- $ 7,103,535 =========== =========== =========== =========== =========== =========== =========== Q2-01 - ----- Net Revenues $11,906,203 $ 1,565,513 $ 1,528,987 $ 479,393 $ (402) $ -- $15,479,694 Cost of Revenues 9,900,479 74,409 118,380 331,794 515 -- 10,425,577 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross Margin $ 2,005,724 $ 1,491,104 $ 1,410,607 $ 147,599 $ (917) $ -- $ 5,054,117 =========== =========== =========== =========== =========== =========== =========== Q2-00 - ----- Net Revenues $ 1,360,850 $ 1,353,841 $ 2,558,144 $ 465,035 $ 144,309 $ 23,370 $ 5,905,549 Cost of Revenues 1,148,374 78,856 221,564 272,143 98,785 23,370 1,843,092 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross Margin $ 212,476 $ 1,274,985 $ 2,336,580 $ 192,892 $ 45,524 $ -- $ 4,062,457 =========== =========== =========== =========== =========== =========== ===========
-23- Composition of our segments is as follows: o Ticketing - Includes our TDI ticketing business as well as the online ticketing operations generated through Broadway.com. TDI and BroadwayTheater.com were acquired on September 15, 2000 and May 1, 2000, respectively therefore the reported numbers presented include ticketing revenue and expenses from the date of acquisition. o Business to Business (b2b) - Includes our CinemaSource, EventSource, TheaterSource, ConcertSource and Baseline syndication operations. o Internet ad sales - Includes advertising sold on the web sites Hollywood.com and Broadway.com. o Intellectual Properties - Includes our book development and book licensing operation through our 51% owned subsidiary Tekno Books and our 50.5% interest in Fedora, publisher of Mystery Scene Magazine. Does not include our 50% interest in NetCo Partners. o E-Commerce - We exited the e-commerce business in January 2001. o Retail - We exited the brick and mortar retail business on December 31, 1999. NET REVENUES Total net revenues for the six months ended June 30, 2001 and 2000 were $26,357,466 and $9,983,245, respectively, an increase of $16,374,221 or 164%. Net revenue for the three months ended June 30, 2001 increased to $15,479,694 from $5,905,549 for the three months ended June 30, 2000, an increase of $9,574,145 or 162%. The increase in revenue is primarily the result of ticketing revenue reported resulting from the acquisitions of TDI on September 15, 2000 and BroadwayTheater.com on May 1, 2000 and additional business to business revenues generated because of the launch of EventSource on April 1, 2000 offset by a decrease in Internet ad sales of $1,874,610 and $1,029,157 for the six and three months ended June 30, 2001, respectively. Ticketing revenue for Y2-01 and Y2-00 was $19,160,425 and $1,360,850, respectively, an increase of $17,799,575. Ticketing revenue for Q2-01 and Q2-00 was $11,906,203 and $1,360,850, respectively, an increase of $10,545,353. Hollywood Media acquired TDI on September 15, 2000 and BroadwayTheater.com on May 1, 2000; therefore reportable revenues are from the dates of acquisition. Ticketing revenue is generated from the sales of live theater tickets for Broadway, Off-Broadway, London's West End and Toronto both online and offline, to domestic and international travel professionals, traveling consumers and New York area theater patrons. In addition, tickets can be purchased on the Broadway.com web site. Revenues from our business to business segment increased $875,920 or 37% from $2,356,349 for Y2-00 to $3,232,269 for Y2-01 and increased $211,672 or 16% from $1,353,841 for Q2-00 to $1,565,513 for Q2-01. These increases are attributable to a growth in revenues in our CinemaSource division and from an increased customer base and revenues from our EventSource division which launched on April 1, 2000 when we entered into a contract with AOL's Digital City to provide event listings for up to 200 markets nationwide. Revenue is generated by the licensing of movie, event and theater showtimes and other information to newspapers such as The New York Times, Internet companies including AOL's Digital City, Yahoo!, Excite, Lycos and wireless providers such as Sprint PCS, AT&T Wireless and Verizon. Internet ad sales revenue for Y2-01 decreased to $2,993,889 from $4,868,499 for Y2-00, a decrease of $1,874,610 or 39%; and decreased $1,029,157 or 40% from $2,558,144 for Q2-00 to $1,528,987 for Q2-01. The decreases in Internet ad sales revenue is primarily the result of a decrease in barter transactions due to a decision by Hollywood Media to accept less barter and the softening of the online advertising market as a whole. Internet ad sales revenue is derived from the sale of banner advertisements and sponsorships on the Hollywood.com and Broadway.com web sites. 24 Barter transactions that generate non-cash advertising revenue, (included in Internet ad sales revenues), in which we received advertising or other services in exchange for content or advertising on its websites was $77,139 for Y2-01 and $808,776 for Y2-00, a decrease of $731,637, or 90%, and accounted for .3% and 8% of total net revenue for Y2-01 and Y2-00, respectively. Barter revenue for Q2-01 was $24,009 as compared to $558,946 for Q2-00, a decrease of $534,937, or 96%, and accounted for .2% and 9% of net revenues for Q2-01 and Q2-00, respectively. In future periods, management intends to maximize cash advertising revenue, although we will continue to enter into barter relationships when deemed appropriate as a cashless method for us to market our business. Hollywood Media also records barter income earned under a contract with NATO. This income is included in Internet ad sales revenue. Through the NATO contract, Hollywood Media promotes its web site to movie audiences by airing movie trailers about Hollywood.com, 40 out of 52 weeks per year, before the feature films that play in most NATO-member theaters. In exchange, we provide them with movie showtime information and content, host and maintain the web sites for the exhibiting NATO members, and provide promotional materials, movie information and editorial content. Barter income of $1,490,875 was recorded under the NATO contract for Y2-01 and Y2-00, and accounted for 6% and 15% of total net revenue for Y2-01 and Y2-00, respectively. In Q2-01 and Q2-00 we recorded $745,437 in revenue or 5% and 13% of total net revenue, respectively. Barter transactions accounted for approximately 52% and 47% of net Internet ad sales revenue for Y2-01 and Y2-00, respectively, and 50% and 51% of net Internet ad sales for Q2-01 and Q2-00, respectively. Revenues from our intellectual properties segment increased $27,250 or 3% to $955,384 for Y2-01 from $928,134 for Y2-00 and increased $14,358 or 3% from $465,035 for Q2-00 to $479,393 for Q2-01. The increase in revenues is attributable to a greater number of manuscripts being delivered for Y2-01 and Q2-01 as compared to Y2-00 and Q2-00. 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. E-commerce revenue decreased $430,544 or 97% from $446,043 for Y2-00 to $15,499 for Y2-01 as a result of the closure of our e-commerce business in January 2001. Retail revenues were $23,370 for Y2-00 and 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 retail locations in December 1999. CHANGE IN METHOD OF REVENUE RECOGNITION FOR TICKETING BUSINESSES We acquired our ticketing businesses, BroadwayTheater.com and TDI, in May and September of 2000, respectively. These businesses generally acquire blocks of theater tickets for resale to groups and individuals. Since acquisition, consistent with the revenue recognition methods utilized by both companies prior to our acquisition, we have recognized revenue generally at the time when collection was assured and ticket delivery to the customer had occurred. During the second quarter of 2001, we concluded that in many instances the earnings process for the ticketing businesses was not completed until the performance of the show, as the businesses provide other ancillary services up to the date of performance. As a result, we changed our method of revenue recognition to defer recognition of revenue on ticket sales until the performance takes place. Management of Hollywood Media does not believe the effect of the change in revenue recognition on our previously reported consolidated financial results for the year ended December 31, 2000 was material (reduction in revenue of approximately $350,000 or 1.2% and an increase in net loss of $46,000 or .09%) to our reported results of operations or financial position. 25 The effect of the change in revenue recognition on our previously reported consolidated financial results for the three months ended March 31, 2001 is a reduction in ticketing revenue of $2,474,265 and an increase in net loss of $188,687. The following tables show the effects of this change on the statements of operations for three months ended March 31, 2001:
As Reported As Adjusted ----------- ----------- Net revenues $ 13,352,037 $ 10,877,772 Cost of revenues 8,919,185 6,633,607 ----------- ----------- Gross margin 4,432,852 4,244,165 ----------- ----------- Total operating expenses 12,801,514 12,801,514 ----------- ----------- Operating loss (8,368,662) (8,557,349) Net loss $ (7,966,657) $ (8,155,344) =========== =========== Basic and diluted net loss per common share (0.32) (0.33) =========== =========== Weighted average common and common equivalent shares outstanding - basic and diluted 24,706,527 24,706,527 =========== ===========
For the three months ended June 30, 2001, this change results in an increase in ticketing revenue of $2,220,431 and a decrease in net loss of $100,194 compared to amounts that would have been reported under our prior revenue recognition policy. For the six months ended June 30, 2001, this change results in a decrease in ticketing revenues of $253,834 and an increase in net loss of $88,493 compared to amounts that would have been reported under our prior revenue recognition policy. We have made purchase accounting adjustments to record the proceeds received on ticket sales prior to performance as deferred revenue and payments made to purchase tickets for performances that have not taken place as inventory in the accompanying condensed consolidated balance sheet at June 30, 2001. 26 COST OF REVENUE Cost of revenue increased to $17,059,184 for Y2-01 from $2,879,710 for Y2-00 and increased to $10,425,577 for Q2-01 from $1,843,092 for Q2-00. As a percentage of net revenues, cost of revenues was 65% for Y2-01 as compared to 29% for Y2-00 and 67% for Q2-01 as compared to 31% for Q2-00. The increase in the cost of revenues is primarily the result of the addition of ticketing cost to our cost of revenues because of the acquisitions of TDI on September 15, 2000 and BroadwayTheater.com on May 1, 2000; therefore ticket cost is included in reported numbers from the dates of acquisition. The ticketing segment accounts for 95% of the cost of revenues for Y2-01 and Q2-01. Cost of revenues consists primarily of the cost of tickets for the ticketing segment; commissions due to ad agencies, ad rep firms and other third parties for revenue generated from the business to business and Internet ad sales segments and fees and royalties paid to authors and co-editors for the intellectual properties segment. GROSS MARGIN Gross margin for Y2-01 was $9,298,282 as compared to $7,103,535 for Y2-00 an increase of $2,194,747 or 31%. Gross margin for Q2-01 was $5,054,117 as compared to $4,062,457 for Q2-00, an increase of $991,660 or 24%. Gross margins increased because of the increase in revenue from the ticketing and business to business segments. As a percentage of net revenues, the gross margin percentage in Y2-01 was 35% as compared to 71% in Y2-00, and 33% for Q2-01 as compared to 69% for Q2-00. The decrease in gross margin percentage is attributable to our ticketing segment which was added as a new business segment through the acquisitions of TDI on September 15, 2000 and BroadwayTheater.com, Inc on May 1, 2000. The ticketing segment generates gross margin percentages of approximately 16% while our business to business and Internet ad sales segments generate gross margin percentages of greater than 90%. The addition of ticketing revenue into our mix of revenue streams has therefore reduced the overall gross margin percentage. EQUITY IN EARNINGS - INVESTMENTS Equity in net earnings of investments consists of the Company's 50% interest in NetCo Partners, 31.67% interest in MovieTickets.com and 33.33% interest in Beach Wrestling LLC.
Six Months Ended June 30 Three Months Ended June 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- NetCo Partners (a) $ 782,801 $ 1,296,738 $ 284,543 $ 191,401 MovieTickets.com (b) (178,914) (42,779) (128,531) (42,779) Beach Wrestling LLC (c) (127,253) -- (127,253) -- ----------- ----------- ----------- ----------- $ 476,634 $ 1,253,959 $ 28,759 $ 148,622 =========== =========== =========== ===========
(a) NetCo Partners: Our 50% share in the earnings of NetCo Partners decreased $513,937 or 40% to $782,801 for Y2-01 from $1,296,738 for Y2-00 due primarily to the delivery of the fifth book in the Net Force Series of novels to the publisher during Y2-00. During Y2-01, a book was not delivered as the sixth book in the Net Force Series was delivered in the third quarter of 2001. Revenue for Q2-01 was $284,543 as compared to $191,401 for Q2-00 an increase of $93,142 or 49%. Revenue is recognized on book contracts when the earnings process is complete based on the terms of the contracts and at a point where ultimate collection is substantially assured. -27- (b) MovieTickets.com: We own approximately 31.67% of the outstanding common stock of MovieTickets.com Inc. at June 30, 2001. The MovieTickets.com web site launched in May 2000. We recorded our 31.67% share of losses generated of $178,914 and $42,779 for Y2-01 and Y2-00, respectively, and $128,531 and $42,779 for Q2-01 and Q2-00, respectively. MovieTickets.com generates revenues from service fees charged to users for the purchase of tickets and the sale of advertising on its web site and on print-at-home tickets. Service fees were introduced in November 2000. (c) Beach Wrestling LLC: We own 33.33% of Beach Wrestling LLC ("Beach Wrestling") and recorded our share of losses generated of $127,253 for the six and three months ended June 30, 2001. Beach Wrestling was formed to develop, market and distribute wrestling events via television and the Internet. Beach Wrestling is currently in the developmental stage. OPERATING EXPENSES General and administrative expenses. General and administrative expenses decreased $1,496,502 or 29% to $3,715,010 for Y2-01 from $5,211,512 for Y2-00, and $1,069,375 or 36% to $1,885,279 for Q2-01 from $2,954,654 for Q2-00. These decreases are primarily attributable to cost savings and consolidation measures implemented company-wide, including closing our Santa Monica, California office in January 2001 as well as closing our e-commerce business division in January 2001 and savings in the areas of recruitment, consulting and freelance fees of $2,143,178 and $1,405,508 for Y2-01 and Q2-01, respectively. The reductions in general and administrative expenses were offset by an increase in general and administrative expenses of $646,676 and $336,133 for Y2-01 and Q2-01, respectively, in our ticketing businesses as a result of the acquisitions of the ticketing businesses in May and September of 2000. As a percentage of revenue, general and administrative expenses decreased to 14% for Y2-01 from 52% for Y2-00 and decreased to 12% for Q2-01 from 50% for Q2-00. Selling and marketing expenses. Selling and marketing expenses decreased $3,265,189 or 62% to $2,032,495 for Y2-01 from $5,297,684 for Y2-00 and decreased $1,772,051 or 62% to $1,106,902 for Q2-01 from $2,878,953 for Q2-00. Included in selling and marketing are non-cash barter transactions of $1,568,014 and $2,299,651 for Y2-01 and Y2-00, respectively, and $769,446 and $1,304,383 for Q2-01 and Q2-00, respectively. Barter transactions accounted for approximately 77% and 43% of selling and marketing expense for Y2-01 and Y2-00, respectively, and 70% and 45% for Q2-01 and Q2-00, respectively. The decrease in selling and marketing was primarily due to the reductions of on-line advertising and media production. As a percentage of revenue, selling and marketing expenses decreased to 8% for Y2-01 from 53% for Y2-00 and decreased to 7% for Q2-01 from 49% for Q2-00. Salaries and benefits. Salaries and benefits increased $1,063,075 or 21% to $6,223,580 for Y2-01 from $5,160,505 for Y2-00 and increased $376,154 or 14% to $3,103,744 for Q2-01 from $2,727,590 for Q2-00. This increase is attributable to payroll costs of $1,152,612 and $584,373 for Y2-01 and Q2-01 respectively, associated with TDI, which we did not own and operate during Y2-00, launch of our EventSource business in April 2000, and an increase in personnel at the corporate offices to support the growth of Hollywood Media, offset by reductions in salaries from consolidation of technology and production from our Santa Monica, California location into our South Florida location and the closing of our e-commerce division. As a percentage of revenue, salaries and benefits decreased to 24% for Y2-01 from 52% for Y2-00 and decreased to 20% for Q2-01 from 46% to Q2-00. -28- Amortization. Amortization of goodwill and intangibles was $3,639,889 and $3,330,569 for Y2-01 and Y2-00, respectively, an increase of $309,320 or 9%, and $1,839,709 and $1,678,635 for Q2-01 and Q2-00, respectively, an increase of $161,074 or 10%. The increases in amortization are primarily attributable to goodwill amortization related to acquisitions made in 2000. Amortization of CBS advertising relating to the agreement with Viacom was $9,810,064 for Y2-01 and $9,375,904 for Y2-00, respectively, and $4,761,772 and $5,251,707 for Q2-01 and Q2-00 respectively. Under the agreement with Viacom, we issued shares of Common Stock and warrants in consideration for CBS's advertising and promotional efforts over seven years across its full range of media properties. The value of the common stock and warrants issued to Viacom have been recorded in the balance sheet as deferred advertising and is being amortized over each related contract year. Depreciation and amortization. Depreciation and amortization was $747,560 for Y2-01 and $658,475 for Y2-00, an increase of $89,085 or 14%, and $397,662 for Q2-01 and $341,020 for Q2-00, an increase of $56,642 or 17%. The increases are attributable to an increased level of property and equipment from June 30, 2000 to June 30, 2001 of approximately $1.5 million. Interest Expense. Interest expense for Y2-01 was $235,075 compared to $188,418 for Y2-00 and $179,439 for Q2-01 as compared to $92,037 for Q2-00. The increases are attributable to an increase in capital lease obligations and $43,591 of interest incurred relating to the extension of the term of a promissory note (Note 7). LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, Hollywood Media had cash and cash equivalents of $4,479,338 and working capital of $18,969,114 compared to cash and cash equivalents of $1,911,224 and a working capital of $15,438,914 at December 31, 2000. Net cash used in operating activities during Y2-01 was $1,942,853 primarily representing cash used to fund the Company's net loss, excluding non-cash expenses and amortization of CBS advertising. Net cash used in investing activities was $566,847, while $5,077,814 in cash was provided by financing activities. As a result of the above, cash and cash equivalents increased by $2,568,114 for the six months ended June 30, 2001. During the six months ended June 30, 2000, net cash used in operating activities was $8,570,200, net cash used in investing activities was $3,004,854, and $11,484,758 in cash was provided by financing activities. Pursuant to Hollywood Media's stock repurchase plan 46,100 shares of its common stock were repurchased during the six months ended June 30, 2001 for an aggregate consideration of $200,888 or an average purchase price of $4.36 per share. In May 2001, we issued 1,252,787 shares of common stock valued at $4.51 per share in a private placement to three accredited investors (including Viacom) for gross proceeds of $5,650,000. We incurred $263,651 in transaction costs which were charged to additional paid-in-capital. The purchase price per share was 105% of the Market Price of the common stock, which was defined as the average volume weighted average price for 20 business days prior to the closing date. We issued Series A warrants to these investors to purchase an aggregate of 614,059 shares of common stock at a price of $6.44 per share. These warrants were valued at $2,869,019. If on each of January 30, 2002 and April 30, 2002, -29- any investor holds at least seventy-five percent of any of the investor's shares of common stock issued to it in the transaction, then the exercise price of the Series A warrants as to such investor will be decreased to an exercise price of $5.37 per share and $4.51 per share, respectively, on such dates. The investors also received Series B adjustment warrants to acquire additional shares of common stock from time to time in amounts in proportion to each of their respective investments. In the event that Hollywood Media requires additional funding, the Chairman of the Board and Chief Executive Officer and the Vice Chairman and President, have indicated their intention to provide, if required, an amount not to exceed $2.25 million in order to enable Hollywood Media to meet its working capital requirements during 2001; provided, however, that the commitment will terminate to the extent that Hollywood Media raises no less than $2.25 million from other sources and such additional funding is not expended on acquisitions. INFLATION AND SEASONALITY Although Hollywood Media cannot accurately determine the precise effects of inflation, it does not believe inflation has a material effect on its revenues or results of operations. We consider our businesses to be somewhat seasonal and expect net revenues to be generally higher during the second and fourth quarters of each fiscal year for its Tekno Books book development and licensing operation as a result of the general publishing industry practice of paying royalties semi-annually. In addition, although not seasonal, our 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. We believe that advertising sales in traditional media, such as television generally are lower in the first and third quarters of each year, and that advertising fluctuates with economic cycles. -30- PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In May 2001, Hollywood Media issued an aggregate of 1,252,787 shares of common stock to Viacom Inc., Societe Generale and Velocity Investment Partners Ltd. at a purchase price of $4.51 per share for a total purchase price of $5.65 million in cash. The purchase price per share represents 105% of the "Market Price" of the common stock, which is defined as the average volume weighted average price for the 20 business days prior to the closing date. The investors also received series A warrants to acquire an aggregate of 614,059 shares of common stock at a price of $6.44 per share (150% of the Market Price at closing). If on each of January 30, 2002 and April 30, 2002, any investor holds at least seventy-five percent of any of the investor's shares of common stock issued to it in the transaction, then the exercise price of the series A warrants will be decreased to $5.37 per share and $4.51 per share, respectively, on such dates. The series A warrants are exercisable by the investors during the five-year period ending on May 1, 2006. The investors also received series B adjustment warrants to acquire additional shares of common stock from time to time in amounts in proportion to each of their respective investments. The investors will be entitled to receive additional shares of common stock upon exercise of the series B adjustment warrants for no additional consideration if the market price of the common stock as of October 30, 2001, January 30, 2002, April 30, 2002 or July 30, 2002 is less than $5.19 per share. The Series B warrants are exercisable on the last day of each twenty trading day period beginning on each of these four dates. The market price of the common stock under the series B warrants is defined as the average of the ten lowest closing sale prices of the common stock during the twenty trading days following each of these four dates, but can be no less than $2.15. The number of shares issuable upon exercise of a series B warrant on the first of these four exercise dates is equal to (1) $5.19 minus the market price, divided by (2) the market price, and multiplied by (3) a number of shares specified in each series B warrant. The number of shares issuable upon exercise of a series B warrant on each of the subsequent three exercise dates is equal to (1) the lower of $5.19 and the lowest market price as of any prior exercise date minus the market price, divided by (2) the market price, and multiplied by (3) a number of shares specified in each series B warrant. The specified number of shares is 310,425 for Viacom Inc., 465,638 for Societe Generale, and 310,425 for Velocity Investment Partners Ltd. The series A warrants and series B adjustment warrants issued to each of Societe Generale and Velocity Investment Partners Ltd. prohibit each of them from beneficially owning more than 4.9% of our common stock at any time. The series A warrants and series B adjustment warrants issued to each of the investors contain anti-dilution provisions, which, upon certain specified events, such as certain specified changes in common stock (i.e., dividends or distributions, or a reclassification, subdivision or combination of common stock), and certain specified issuances of common stock or convertible securities, require us to adjust the number of shares of common stock of Hollywood Media issuable upon exercise of such warrants, to prevent dilution of the number of shares of common stock issuable upon exercise of such warrants. The foregoing description does not purport to be complete and is qualified in its entirety by reference to agreements attached as exhibits 10.2, 10.3, 10.4 and 10.5 to our quarterly report for the quarterly period ending March 31, 2001 filed with the Securities and Exchange Commission, which Exhibits are incorporated herein by reference to such exhibits in such filing. During the three months ended June 30, 2001, we issued 144,334 shares of common stock to investors from the August 2000 private placement pursuant to the exercise of certain adjustment warrants. Hollywood Media is obligated to issue additional shares to those selling shareholders for no consideration if the average of the five lowest volume weighted average prices of the common stock during the final fifteen days of an adjustment period is below $9.63. The -31- final adjustment period ends September 4, 2001. The precise number of shares of common stock which were issued were determined in accordance with a formula set forth in the adjustment warrants. In May 2001, Hollywood Media issued 28,572 shares of common stock to the previous owners of BroadwayTheater.com in accordance with the earn-out provision of the Asset Purchase Agreement. Pursuant to this provision, the previous owners are entitled to additional consideration if specified gross profit targets are attained. These targets were satisfied and Hollywood Media issued 28,572 shares of common stock valued at $5.25 per share, the closing market price on the date of issuance. In May 2001 we issued 22,469 shares of common stock valued at $4.23 per share for payment of book packaging fees to Dr. Martin Greenberg. Dr. Greenberg is a director of Hollywood Media and CEO of Tekno Books. In June 2001, we issued 88,000 shares of common stock valued at $5.69 per share, the closing market price on the date of issuance as a payment towards outstanding capital lease obligations pursuant to the terms of a settlement agreement. We issued a total of 15,615 shares of common stock valued at $87,182 during the three months ended June 30, 2001 for the extension of the term of a promissory note that Hollywood Media guaranteed. The borrower on the note, an employee of a subsidiary of Hollywood Media, is obligated to pay to Hollywood Media an amount equal to 50% of the costs incurred for payment of the extension by Hollywood Media. During the quarter ended June 30, 2001, we issued stock options and warrants to purchase an aggregate 705,059 shares of common stock, including 56,000 stock options granted to employees at exercise prices ranging from $4.07 per share to $5.98 per share and warrants to purchase a total of 649,059 shares at exercise prices ranging from $3.70 per share to $6.44 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 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. -32- Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits:
Incorporated by Exhibit Description Reference From ------- ----------- -------------- 3.1 Third Amended and Restated Articles of Incorporation (1) 3.2 Articles of Amendment to Articles of Incorporation of the Company for Designation of Preferences, Rights and Limitations of 7% Series D Convertible Preferred Stock (2) 3.3 Articles of Amendment to Articles of Incorporation of the Company for Designation of Preferences, Rights and Limitations of 7% Series D-2 Convertible Preferred Stock (3) 3.4 Articles of Amendment to Articles of Incorporation of the Company amending Designation of Preferences, Rights and Limitations of Series A Variable Rate Convertible Preferred Stock (4) 3.5 Articles of Amendment to Articles of Incorporation of the Company amending Designation of Preferences, Rights and Limitations of Series B Variable Rate Convertible Preferred Stock (4) 3.6 Bylaws (5) 4.1 Form of Common Stock Certificate (5) 4.2 Rights Agreement dated as of August 23, 1996 between the Company and American Stock Transfer & Trust Company, as Rights Agent (6) 10.1 Asset Purchase Agreement dated as of July 19, 2001 among the Company, * Independent Hollywood, Inc. and Always Independent Entertainment Corp.
* 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, 2000. (2) Incorporated by reference from the exhibit filed with the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998. (3) Incorporated by reference from the exhibit filed with the Company's Registration Statement on Form S-3 (No. 333-68209). (4) Incorporated by reference from exhibits filed with the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999. (5) Incorporated by reference from the exhibit filed with the Company's Registration Statement on Form SB-2 (No. 33-69294). (6) Incorporated by reference from exhibit 1 to the Company's Current Report on Form 8-K filed on October 20, 1999. -33- (a) Reports on Form 8-K Hollywood Media did not file any Current Report on Form 8-K during the quarter ended June 30, 2001. -34- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOLLYWOOD MEDIA CORP. Date: August 15, 2001 By: /s/ Mitchell Rubenstein ------------------------------------ Mitchell Rubenstein, Chairman of the Board and Chief Executive Officer (Principal executive, financial and accounting officer) -35- EX-10.1 3 assetpurchase.txt ASSET PURCHASE AGREEMENT EXECUTION COPY ASSET PURCHASE AGREEMENT ------------------------ ASSET PURCHASE AGREEMENT, dated as of July 19, 2001, by and among HOLLYWOOD MEDIA CORP., a Florida corporation ("HOLL"), INDEPENDENT HOLLYWOOD, INC., a Delaware corporation ("Buyer"), and ALWAYS INDEPENDENT ENTERTAINMENT CORP., a California corporation ("Seller"). W I T N E S S E T H : --------------------- WHEREAS, upon the terms and subject to the conditions hereinafter set forth, Seller desires to sell, assign and transfer to Buyer, and Buyer desires to purchase and acquire from Seller, all of Seller's right, title and interest in the Assets (as defined herein); WHEREAS, the parties hereto intend this transaction to be a fully taxable transaction for income tax purposes; and WHEREAS, the parties hereto intend this Agreement to qualify, for California sales and use tax purposes, as a Technology Transfer Agreement pursuant to Sections 6011(c)(10) and 6012(c)(10) of the California Revenue and Taxation Code. NOW THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows: ARTICLE I ACQUISITION AND TRANSFER OF ASSETS Section 1.1. Assets to be Acquired. --------------------- (a) Upon the terms and subject to the conditions hereinafter set forth, Seller shall sell, assign, transfer, convey and deliver to Buyer, and Buyer shall purchase, acquire and accept from Seller (the "Acquisition"), free and clear of all Liens (as defined in Section 1.1(b) below), all right, title and interest of Seller in, to and under all of the assets, properties, rights, contracts, claims, operations and business of Seller (collectively, the "Assets") (but excluding the Excluded Assets, as defined in Section 1.2 below), whether or not appearing on the books of Seller, including, without limitation, the following: (i) all of Seller's contracts or license agreements with individuals or entities, related to the submission of films to Seller that can be assigned by Seller at Closing (the "Film Submission Agreements") and selected business development or affiliate agreements to which Seller is a party (the "Affiliate Agreements"), all of which contracts and other agreements referred to in this clause (i) (collectively, the "Assigned Contracts") are listed on Schedule 1.1(a)(i) hereto, and the database and library of films subject to the Film Submission Agreements; (ii) the website currently located at www.alwaysi.com and all hardware, software, databases and other property related to the operation of the website; (iii) the furniture, supplies, computers office equipment, fixtures and other fixed assets owned by Seller, as listed on Schedule 1.1(a)(iii) (the "Fixed Assets"); (iv) the Intangible Property (as defined in Section 3.12 below); (v) all papers, databases, computer programs, disks, software, and other books, records, documents and materials related to the Assets and owned by Seller (the "Books and Records"); (vi) all assets of Seller (other than Excluded Assets) as to which Buyer assumes any liability; (vii) all rights of Seller under or pursuant to all warranties, representations and guarantees made by suppliers, manufacturers and contractors in connection with any of the foregoing Assets; (viii) all goodwill relating to the foregoing Assets; (ix) three hundred thousand dollars ($300,000) in cash; (x) all subscribers to the alwaysi.com web site and the portion of the accounts receivable in respect of the subscribers; and (xi) an amount of cash equal to the amount payable through the Closing Date under all of Seller's contracts or license agreements with individuals or entities related to the submission of films to Seller (the "Filmmaker Payable"). (b) For the purposes of this Agreement, "Lien" shall mean any lien, pledge, mortgage, deed of trust, security interest, claim, lease, charge, option, right of first refusal, easement or other real estate declaration, covenant, condition, restriction or servitude, transfer restriction under any shareholder or similar agreement, or encumbrance, but excluding with respect to the Assigned Contracts, restrictions on assignment or provisions requiring the consent of third parties to assignment disclosed to Buyer in the Schedule of Disclosures. Section 1.2. Excluded Assets. Notwithstanding anything in Section 1.1 to the contrary, the parties hereto expressly agree that Seller is not hereunder selling, assigning, transferring, conveying or delivering to Buyer, and Buyer is not purchasing, acquiring or accepting, the following assets, rights and properties (collectively, the "Excluded Assets"): (i) any cash, bank deposits or similar cash items of Seller with the exception of that amount of cash specified in Sections 1.1(a)(ix) and 1.1(a)(xi) of this Agreement; 2 (ii) all notes receivable and the portion of the accounts receivable not related to the subscribers (as described in Section 1.1(a)(x)) due to Seller; (iii) any insurance policies, bonds, letters of credit or other similar items, or any cash surrender value in regard thereto; (iv) any claim, right or interest in or to any refund for federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods on or prior to the Closing Date (as defined in Section 9.1 below) and any interest (or similar amount) thereon; (v) any of Seller's corporate books and records of internal proceedings or tax records, and any books and records that Seller is required by law to retain (the "Corporate Records"), but Buyer shall have access to the same to the extent permitted by Section 10.3 below; (vi) any employment, consulting or similar agreement; (vii) any lease for personal or real property; and (viii) the contracts and other agreements listed on Schedule 1.2. Section 1.3. Assumed and Excluded Liabilities. --------------------------------- (a) Buyer shall not assume or be bound by any obligations, liabilities (including without limitation, liabilities in respect of Taxes (as defined in Section 3.13(a) below) and "employee benefit plans" (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended) or any other pension plans or employee benefit arrangements) or commitments of Seller or any of its affiliates of any kind, character or description, whether absolute, accrued, known, unknown, asserted, unasserted, due or to become due, contingent or otherwise ("Liabilities"), in connection with the Assets or otherwise, other than (1) obligations and liabilities arising after the Closing Date under the Assigned Contracts in respect of the period following such Closing Date and (2) payments owing to filmmakers through the Closing Date under all of Seller's contracts or license agreements with individuals or entities related to the submission of films to Seller in an amount equal to the Filmmaker Payable-. (b) Any ad valorem Taxes relating to a period straddling the Closing Date shall be prorated to the Closing Date, and the portion allocable to the period prior to the Closing Date shall be promptly paid or reimbursed by Seller, and the portion allocable to the period after the Closing Date shall be promptly paid or reimbursed by Buyer. All other Liabilities of Seller shall remain the sole responsibility of Seller. 3 ARTICLE II CONSIDERATION Section 2.1. Amount and Form of Consideration. -------------------------------- (a) The aggregate consideration (the "Consideration") to be paid on the Closing Date by Buyer to Seller for the Assets shall consist of the following: (i) fully paid and nonassessable shares of HOLL's common stock, $.01 par value per share (the "Common Stock"), having an aggregate value equal to One Million Two Hundred Forty-Five Thousand Dollars ($1,245,000) using a per share value equal to the average closing price of the Common Stock on the NASDAQ National Market for the five (5) business days preceding the Closing (the "Stock Consideration"); plus (ii) the assumption by Buyer of certain of the obligations and liabilities of Seller pursuant to Section 1.3 above. Section 2.2. Allocation of Purchase Price. The Consideration and other relevant items shall be allocated among the Assets acquired hereunder by Buyer and Seller in accordance with Schedule 2.2 attached hereto. Seller and Buyer each agree to report and file all Tax Returns (as defined in Section 3.13(a)) (including amended Tax Returns and claims for refund) consistent with such allocation, and shall take no position contrary thereto or inconsistent therewith (including, without limitation, in any audits or examinations by any taxing authority or any other proceedings). Seller and Buyer shall cooperate in the filing of any forms (including Form 8594) with respect to such allocation, including any amendments to such forms required with respect to any adjustment to the Consideration, pursuant to this Agreement. Notwithstanding any other provisions of this Agreement, the foregoing agreement shall survive the Closing Date without limitation. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows: Section 3.1. Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. All of the outstanding capital stock of Seller is owned beneficially and of record by the shareholders set forth on Schedule 3.1 (the "Shareholders"). Section 3.2. Authorization of Agreement. Seller has full corporate power and corporate authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement or to be executed by Seller or the Shareholders in connection with the consummation of the transactions contemplated by this Agreement (all such other 4 agreements, documents, instruments and certificates are hereafter collectively referred to as the "Seller Documents") and to perform fully its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and each of the Seller Documents have been duly and validly authorized and approved by the Board of Directors of Seller and by all other necessary corporate action on behalf of Seller. The Board of Directors has recommended that the Shareholders approve this Agreement and the Seller Documents. This Agreement has been, and on or prior to the Closing each of the Seller Documents will be, duly and validly executed and delivered by Seller and (assuming the due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and each of the Seller Documents when so executed and delivered will constitute, the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its respective terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). Section 3.3. Consents and Approvals; No Violation. (a) No filing with, notification to or consent, authorization, waiver, approval, order, license, certificate or Permit (as defined in Section 3.14 below) of, any Government Body (as defined in Section 3.14 below) is necessary for Seller's execution, delivery or performance of this Agreement or any of the Seller Documents or the consummation by Seller of the transactions contemplated by this Agreement and the Seller Documents. (b) Except as set forth on Schedule 3.3(b), none of the execution and delivery by Seller of this Agreement and the Seller Documents, the consummation of the transactions contemplated hereby or thereby or compliance by Seller with any of the provisions hereof or thereof will (i) conflict with or result in any breach of any provision of the Articles of Incorporation, as amended and restated, or By-laws of Seller, (ii) violate any order, injunction, judgment, decree, ruling, writ, assessment or arbitration award (each, an "Order") or statute, rule or regulation of any Government Body by which Seller or any of its properties or assets is bound, (iii) conflict with, violate, result in the breach or termination of, or (with or without due notice or the lapse of time or both) constitute a default or give rise to any "takeback" right or right of termination or acceleration or right to increase the obligations under or otherwise modify any of the terms, conditions or provisions of any note, bond, mortgage, license, franchise, Permit, indenture, contract, agreement or other instrument or obligation to which Seller is a party, or by which Seller or any of its properties or assets is or may be bound, or (iv) result in the creation of any Lien upon any of the Assets. Section 3.4. Title to Assets. Seller has good and marketable title to all of the Assets, free and clear of all Liens. Upon the sale, assignment, transfer and conveyance of the Assets to Buyer hereunder, there will be vested in Buyer good and marketable title to such Assets, free and clear of all Liens other than those placed thereon by Buyer. 5 Section 3.5. No Undisclosed Liabilities. Except as set forth on Schedule 3.5 hereto, to Seller's knowledge, Seller has no Liabilities of any kind, and, there is no basis for the assertion of any claim or Liability of any nature against Seller. Seller has no indebtedness for borrowed money. Section 3.6. Results of Operations; Subscriptions. ------------------------------------ (a) Seller's annual running revenue and annual running operating cash flow, based on actual figures for the month of May 2001 determined in accordance with generally accepted accounting principles ("GAAP") (i.e., multiplying May's amounts by twelve), were no less than $68,907.60 and ($1,517,777.16), respectively. The foregoing revenue and operating cash flow amounts for the month of May 2001 do not include any extraordinary or non-recurring sources of revenue or any revenues resulting from contracts that were not negotiated and entered into by Seller on an arm's length basis. (b) As of May 15, 2001, Seller had a total of 770 paying subscribers for the Alwaysi.com website and approximately 277 subscribers receiving a free thirty-day subscription to the Alwaysi.com website. As of June 15, 2001, Seller had a total of 915 paying subscribers for the Alwaysi.com website and approximately 210 subscribers receiving a free thirty-day subscription to the Alwaysi.com website. The average monthly subscription fee being paid by paying subscribers as of May 30, 2001 was $7.38. Section 3.7. Litigation, etc. There is no judicial, administrative or arbitral action, suit, proceeding (public or private), claim or governmental proceeding (each, a "Legal Proceeding") pending or, to the knowledge of Seller, threatened that questions the validity of this Agreement, the Seller Documents or any action taken or to be taken by Seller in connection with the consummation of the transactions contemplated hereby or thereby. Except as set forth on Schedule 3.7 hereto, (i) no investigation or review by any Government Body with respect to Seller is pending or, to the knowledge of Seller, threatened, nor has any Government Body indicated to Seller an intention to conduct the same, (ii) there is no Legal Proceeding pending or, to the knowledge of Seller, threatened against or affecting Seller or its assets at law or in equity, or before any Government Body (and, to the knowledge of Seller, there is no basis for any such Legal Proceeding not so set forth which, if adversely determined, could adversely affect Seller or Buyer) and (iii) there is no outstanding or, to the knowledge of Seller, threatened Order of any Government Body against, affecting or naming Seller or affecting any of the Assets. Except as set forth on Schedule 3.7 hereto, during the three years preceding the date of this Agreement, no Legal Proceeding has been commenced or, to the knowledge of Seller, threatened against or affecting Seller or its assets at law or in equity, or before any Government Body. On and after the date hereof until the Closing, Seller will notify Buyer of the existence or threat of any investigation, review, Legal Proceeding or Order which would be required to be disclosed on Schedule 3.7. Section 3.8. Compliance with Law. Seller has not violated or failed to comply in any material respect with any statute, law, ordinance, regulation, rule or Order of any Government Body. 6 Section 3.9. Employment Agreements. Except as set forth on Schedule 3.9 hereto, Seller is not now and has never been a party to any employment, compensation, consulting, severance or indemnification agreement or any other agreement with a present or former employee of Seller that provides for severance payments or stay bonuses contingent upon a change in control of Seller or a sale of its business or assets. Section 3.10. Certain Agreements. ------------------ (a) Except as set forth on Schedule 1.1(a)(i) hereto or Schedule 3.10 hereto, neither Seller nor any of its properties or assets is a party to or bound by any (i) Film Submission Agreement, (ii) Affiliate Agreement, (iii) lease or rental agreement, (iv) contract granting a right of first refusal or for the acquisition, sale or lease of any assets of Seller, (v) mortgage, pledge, conditional sales contract, security agreement or other similar contract with respect to any property of Seller, (vi) loan agreement, credit agreement, promissory note, guarantee, subordination agreement, letter of credit or other similar type of contract, (vii) or any other material contract. Seller has delivered to Buyer true, correct and complete copies of the Assigned Contracts, including all amendments, modifications, supplements, side letters or consents affecting the obligations of any party thereunder. (b) Each Assigned Contract (assuming the authorization of the parties thereto other than Seller as specified in Schedule 3.10 hereto) is valid and enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). Seller is not in breach of or in default under any Assigned Contract and, to Seller's knowledge, there has not occurred any event which, after the giving of notice or lapse of time or both, would constitute a default under or result in a breach of an Assigned Contract by any party subject thereto. No previous or current party to any Assigned Contract (i) has given notice of or made a claim with respect to any breach or default under any Assigned Contract or (ii) has given notice of termination or non-renewal of any Assigned Contract. Except as set forth in Schedule 3.10 hereto, each of the Assigned Contracts is freely transferable by Seller to Buyer and no third party consents are required for such transfer. Section 3.11. Real Property. ------------- (a) Seller does not now own and has never owned any real property. (b) Other than the lease agreement, dated July 11, 2000 (the "Lease"), between Vet Med (the "Lessee"), and Nor-Pac Commercial Company (the "Lessor"), which Lease was assigned to Seller effective November 1, 2000 under the Assignment of Lease by and among Lessee, Lessor and Seller and except as set forth on Schedule 3.11(b) hereto, Seller is not now and has never been a party to any lease, sublease, license, sublicense or other agreement or arrangement with respect to any real property, and has not used or occupied, does not use or occupy, and does not have any right to use or occupy, now or in the future, any real property. 7 (c) The Lease is valid and enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject as to enforceability to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). Seller is not in breach of or in default under the Lease and, to Seller's knowledge, there has not occurred any event which, after the giving of notice or lapse of time or both, would constitute a default under or result in a breach of the Lease. Seller has delivered to Buyer a true, correct and complete copy of the Lease, together with all amendments, modifications, supplements or side letters affecting the obligations of any party thereto. No previous or current party to the Lease has given notice of or made a claim with respect to any breach or default thereunder. Section 3.12. Intangible Property. ------------------- (a) Schedule 3.12(a) sets forth all trade names, trademarks, service marks, domain names, and copyrights and their registrations and applications for registration, owned by Seller or in which Seller has any rights or licenses. Seller in the current conduct of its business is not infringing on any copyright, trademark, or service mark, belonging to any other person, firm, or corporation. Except as set forth in Schedule 3.12(a), Seller is not a party to any license, agreement, or arrangement, whether as licensor, licensee, or otherwise, with respect to any trademarks, service marks, trade names, or applications for them, any domain names, or any copyrights. Seller owns, or holds adequate licenses or other rights to use, all trademarks, service marks, trade names, and copyrights and holds current registrations for all domain names listed on Schedule 3.12(a). (b) Seller has no patents, patentable inventions, industrial models, and applications for patents in which they have any rights, licenses, or immunities. (c) Schedule 3.12(c) to this Agreement is a true and complete list, without extensive or revealing descriptions, of Seller's trade secrets, including all secret formulae, customer lists, processes, know-how, computer programs and routines, and other technical data. Seller has taken all reasonable security measures to protect the secrecy, confidentiality, and value of these trade secrets; Seller's employees and any other persons who developed, discovered, programmed, or designed these secrets, or who have knowledge of or access to information relating to them have been put on notice and, if appropriate, have entered into agreements that these secrets are proprietary to Seller. To Seller's knowledge, all these trade secrets are presently not part of the public knowledge or literature; nor to Seller's knowledge have they been used, divulged, or appropriated for the benefit of any past or present employees or other persons, or to the detriment of Seller. Except as set forth in Schedule 3.12(c), Seller is not a party to any license, agreement, or arrangement, whether as licensor, licensee, or otherwise, with respect to any trade secrets. To Seller's knowledge and belief, Seller in the current conduct of its business does not use any trade secrets misappropriated from any person, firm, or corporation. 8 (d) The items listed on Sections 3.12(a) and (c) are referred to herein as the "Intangible Property." Section 3.13. Taxes. ----- (a) For purposes of this Agreement: (i) "Tax" or "Taxes" shall mean all taxes, charges, fees, imposts, levies or other assessments by any governmental authority, including all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, and all interest, penalties, fines, additions to tax or other amounts imposed by any governmental authority which relate in any way to the assessment of collection of any taxes or the filing of any Tax Return, and shall include any transferee or successor liability in respect of taxes (whether by contract or otherwise) and any liability in respect of any tax as a result of being a member of any Affiliated Group, including any consolidated, combined, unitary or similar group. (ii) "Tax Return" means any return (including any consolidated, combined or unitary return in which Seller is, or was, included or includible), declaration, report, claim for refund, separate election or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. (iii) "Affiliated Group" means any affiliated group within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), or any consolidated, combined, unitary or similar group defined under a similar provision of state, local or foreign law. (b) Except as set forth on Schedule 3.13(b) hereto, Seller has (w) filed when due or will file when due (taking into account extensions) with the appropriate federal, state, local, foreign and other governmental authorities, all Tax Returns required to be filed by it or on its behalf, all of which Tax Returns were true or will be true, complete and correct as of the time of filing, (x) paid when due and payable (and, through the Closing Date, will timely pay) all required Taxes (except for Taxes which are being contested in good faith, as set forth on Schedule 3.13(b), and for which adequate reserves have been established in accordance with GAAP, and (y) established (and through and including the Closing Date will establish) reserves that are adequate for the payment of all Taxes not yet due and payable with respect to the results of operations through the Closing Date. There are no Taxes assessed or asserted or claimed in writing to be due by any governmental authority or otherwise in respect of any Tax Returns filed by Seller or on Seller's behalf, and no issues have been raised (and are currently pending) by any governmental authority in connection with any such Tax returns that Seller is aware of. 9 (c) Seller has duly and timely withheld and paid over to the appropriate governmental authorities all Taxes and other amounts required to be so withheld and paid over for all periods under all applicable laws in connection with amounts paid or owing to any employee, independent contractor, subcontractor, lender, stockholder or other third party or other personnel supplied by any third party. (d) There is no audit, examination, deficiency, or refund proceeding pending with respect to any Taxes or Tax Returns of Seller that Seller is aware of, and no governmental authority has given oral or written notice of the assessment or intent to make any assessment or has given written or oral notice of the commencement of any audit, examination or deficiency proceeding with respect to any Taxes or Tax Returns of Seller. Seller has not received written or oral notice of any claim by a governmental authority in a jurisdiction where Seller does not file Tax Returns that Seller is or may be subject to Tax by that jurisdiction or is obliged to act as withholding agent under the laws of that jurisdiction. (e) Set forth on Schedule 3.13(e) is a complete list of all federal, state, local, and foreign Tax Returns filed by, or on behalf of, Seller for taxable periods since its inception, and all jurisdictions in which Seller is currently subject to tax. (f) Set forth on Schedule 3.13(f) is a complete list of all notices required to be filed (whether by Buyer or Seller), in connection with the transactions contemplated herein, with any governmental authority with respect to Taxes of Seller. (g) Except as set forth in Schedule 3.13(g), Seller is not a party to or bound by any Tax sharing, Tax indemnification or similar agreements (or portions of any agreements) with respect to Taxes. (h) Seller does not have, nor has Seller ever had, a permanent establishment (within the meaning of any applicable Tax treaty) in any foreign country, nor does it engage or has it ever engaged in a trade or business in any foreign country that has subjected its business to Tax in such foreign country. (i) Except as set forth in Schedule 3.13(i), Seller is not a party to any joint venture, partnership or other arrangement that constitutes a partnership for federal income tax purposes. (j) Except as set forth in Schedule 3.13(j), the performance of the transactions contemplated by this Agreement will not (either alone or upon the occurrence of any additional or subsequent event) result in, nor do the Liabilities assumed by Buyer otherwise provide for, any payment by Buyer that would constitute an "excess parachute payment" within the meaning of Section 280G of the Code. (k) Except as set forth in Schedule 3.13(k), none of the Assets are (i) property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Code; (ii) "tax-exempt use property" within the meaning of Section 168(h)(l) of the Code; (iii) tax exempt bond financed property within the meaning of Section 168(g) of the Code; (iv) property used "predominantly outside of the United States" within the meaning of Section 168(g)(4); or (v) "limited use property" (as defined in Rev. Proc. 76-30). 10 (l) There are no Security Interests on any of the assets of Seller that arose in connection with any failure (or alleged failure) to pay any Tax. (m) Except as set forth in Schedule 3.13(n), Seller (i) is not and has never been a member of any Affiliated Group and (ii) has no liability for the Taxes of any Person under Treasury Regulation ss. 1.1502-6 or any similar provision of state, local or foreign law. Section 3.14. Permits. Schedule 3.14 hereto sets forth a list of all approvals, authorizations, consents, franchises, licenses, permits or certificates (collectively, "Permits") granted by any government or governmental or regulatory body thereof or political subdivision thereof, whether federal, state, local or foreign, or any agency or instrumentality thereof, or any court or arbitrator (public or private) (each, a "Government Body") and applications, if any, for any of the foregoing, held by Seller. Seller is the holder of all Permits necessary or appropriate to enable it to continue to conduct its business in all material respects as presently conducted. Each of the Permits is in full force and effect. Section 3.15. Related Parties; Related Party Transactions. Neither Seller nor any employee of Seller owns any direct or indirect interest of any kind in, or controls or is a director, officer, employee or partner of, or consultant to, or lender to or borrower from or has the right to participate in the profits of, any Person which is (A) a competitor, supplier, customer, landlord, tenant, creditor or debtor of Seller, (B) engaged in a business related to the business of Seller, (C) participating in any transaction to which Seller is a party, or (D) a party to any contract, agreement, indenture, note, bond, loan, instrument, lease, conditional sale contract, mortgage, license, franchise, insurance policy, commitment or other arrangement or agreement with Seller. Section 3.16. Options. Except as set forth on Schedule 3.16 hereto, there are no outstanding securities of Seller convertible into or evidencing the right to purchase or subscribe for any shares of capital stock of Seller and there are no outstanding or authorized options, warrants, calls, subscriptions, rights, commitments or any other agreements of any character obligating Seller to issue any shares of its capital stock or any securities convertible into or evidencing the right to purchase or subscribe for any shares of such stock. Section 3.17. Year 2000. Each computer program used by Seller in its business is Year 2000 Compliant. "Year 2000 Compliant" means that such program is capable of managing and manipulating data involving dates after the year 1999 without any functional or data abnormality and without inaccurate results related to such dates. Section 3.18. Investor Representations. The shares of Common Stock received by Seller pursuant to this Agreement will be acquired for Seller's own account and not with a view to or in connection with the sale or distribution of any part thereof except for distributions to the Shareholders on the anticipated dissolution and liquidation of Seller. 11 Section 3.19. Exemption from Registration; Restricted Securities. Seller understands that the shares of Common Stock received by Seller pursuant to this Agreement will not be registered under the Securities Act on the ground that the sale provided for in this Agreement is exempt from registration under the Securities Act, and that the reliance of Buyer on such exemption is predicated in part on Seller's representations set forth in this Agreement. The certificates representing the shares of Common Stock issued to Seller pursuant to this Agreement will bear an appropriate legend reflecting such exempt issuance without registration. Seller understands that the shares of Common Stock received by Seller pursuant to this Agreement are restricted securities within the meaning of Rule 144 under the Securities Act. Section 3.20. Brokers. No broker, finder or investment banker is entitled to any brokerage fee, finder's fee or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND HOLL Buyer and HOLL represent and warrant to Seller as follows: Section 4.1. Organization. Each of Buyer and HOLL is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Buyer is an indirect, wholly owned subsidiary of HOLL. Section 4.2. Authorization of Agreement. Each of Buyer and HOLL has full corporate power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement or to be executed by Buyer or HOLL in connection with the consummation of the transactions contemplated hereby and thereby (all of such agreements, documents, instruments and certificates required to be executed by Buyer or HOLL being hereinafter referred to, collectively, as the "Buyer Documents"), and to perform fully its obligations hereunder and thereunder. The execution, delivery and performance by Buyer and HOLL of this Agreement and each Buyer Document have been duly authorized by the Board of Directors of Buyer and HOLL and by all other necessary corporate action on the part of Buyer and HOLL. This Agreement has been, and at or prior to the Closing, each of the Buyer Documents will be, duly and validly executed and delivered by Buyer or HOLL, as applicable, and (assuming the due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and each of the Buyer Documents when so executed and delivered will constitute, the legal, valid and binding obligation of Buyer and HOLL, enforceable against Buyer and HOLL, as applicable, in accordance with its respective terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 12 Section 4.3. Consents and Approvals; No Violations. ------------------------------------- (a) Except for filings, notifications, authorizations, consents and approvals as may be required under federal and state securities or blue sky laws, no filing with, notification to or consent, authorization, waiver, approval, order, license, certificate or Permit of, any Government Body is necessary for Buyer's or HOLL's execution, delivery or performance of this Agreement or any of the Buyer Documents or the consummation by Buyer or HOLL of the transactions contemplated by this Agreement and the Buyer Documents. (b) None of the execution and delivery by Buyer or HOLL of this Agreement or the Buyer Documents, the consummation of the transactions contemplated hereby or thereby or compliance by Buyer or HOLL with any of the provisions hereof or thereof will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or By-laws of Buyer or the Articles of Incorporation, as amended and restated, or By-laws of HOLL, (ii) to the best of Buyer's and HOLL's knowledge, violate any Order or statute, rule or regulation of any Government Body by which Buyer or HOLL or any of their respective properties or assets is bound, or (iii) conflict with, violate, result in the breach or termination of, or (with or without due notice or the lapse of time or both) constitute a default or give rise to any "takeback" right or right of termination or acceleration or right to increase the obligations under or modify any of the terms, conditions or provisions of any note, bond, mortgage, license, franchise, Permit, indenture, agreement or other instrument or obligation to which Buyer or HOLL is a party, or by which Buyer or HOLL or any of their respective properties or assets is or may be bound. Section 4.4. Litigation. There are no Legal Proceedings pending or, to the knowledge of Buyer or HOLL, threatened that question the validity of this Agreement, the Buyer Documents or any action taken or to be taken by Buyer or HOLL in connection with the consummation of the transactions contemplated hereby or thereby. On and after the date hereof until the Closing, Buyer will notify Seller of the existence or threat of any such Legal Proceeding. Section 4.5. Capital Stock of HOLL. --------------------- (a) The authorized capital stock of HOLL consists of (i) 100,000,000 shares of Common Stock, of which, as of July 10, 2001, 26,774,769 shares of Common Stock were issued and outstanding (each together with a Common Stock purchase right issued pursuant to the Rights Agreement, dated as of August 23, 1996 by and between HOLL and American Stock Transfer & Trust Company); and (ii) one million shares of Preferred Stock, of which, as of the date hereof, no shares of preferred stock are issued and outstanding. All of the outstanding shares of Common Stock are duly authorized, validly issued fully paid and nonassessable. Except as set forth in HOLL's annual report filed with the Securities and Exchange Commission ("SEC") on Form 10-K for the year ended December 31, 2000 (the "December 31, 2000 Form 10-K") or HOLL's quarterly report filed with the SEC on Form 10-Q for the quarter ended March 31, 2001 (the "March 31, 2001 Form 10-Q"), and except for outstanding options and warrants to acquire Common Stock of HOLL, HOLL has no other authorized, issued or outstanding equity securities or securities containing any equity features, or any other securities convertible into, exchangeable for or entitling any person to otherwise acquire any other securities of Buyer containing any equity features. 13 (b) The Common Stock constitutes the only class of equity securities of HOLL or its subsidiaries registered or required to be registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Section 4.6. SEC Reports; Financial Statements. --------------------------------- (a) HOLL has filed all required forms, reports and documents required to be filed by it ("HOLL SEC Reports") with the SEC since January 1, 1999, each of which has complied as to form in all material respects with all applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act, each as in effect on the dates such forms, reports and documents were filed. HOLL SEC Reports, including the December 31, 2000 Form 10-K and the March 31, 2001 Form 10-Q, do not contain any untrue statement of material fact required to be stated therein or necessary to make the statements made therein in light of the circumstances under which they were made, not misleading. (b) The audited consolidated financial statements of HOLL included in the HOLL SEC Reports were prepared in accordance with GAAP and present fairly the consolidated financial position of HOLL and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended. Section 4.7. Brokers. No broker, finder or investment banker is entitled to any brokerage fee, finder's fee or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Buyer or HOLL. ARTICLE V COVENANTS OF SELLER Section 5.1. Access to Information. From the date of this Agreement until the Closing Date, Seller shall permit Buyer and its representatives, including, without limitation, its legal counsel and accountants, to conduct an appropriate due diligence examination and investigation with respect to Seller. Seller will reasonably cooperate with Buyer's diligence, and such cooperation will include, without limitation, the following: (i) providing Buyer and its representatives with reasonable access to all data, records and other information that they may request in connection with their evaluation of the transactions contemplated by this Agreement (including, without limitation, lists of contact persons, marketing information, and records of negotiations with existing and prospective customers); (ii) allowing Buyer and its representatives to conduct a complete business, financial and legal review of all aspects of Seller; 14 (iii) affording Buyer and its representatives the opportunity to discuss the affairs, finances, operations and accounts of Seller with Seller's officers, directors, agents and other appropriate personnel; and (iv) facilitating conversations between Buyer and its representatives and representatives of the other parties to the Assigned Contracts. Section 5.2. Exclusivity. From the date of this Agreement until the termination of this Agreement in accordance with its terms, neither Seller nor the Shareholders shall, nor shall Seller permit its officers, directors, affiliates, representatives or agents to (including, without limitation, investment bankers, financial advisors, brokers and other advisors) (collectively, the "Representatives"), to directly or indirectly do any of the following: (i) discuss, negotiate, undertake, authorize, recommend, propose or enter into, either as the proposed surviving, merged, acquiring or acquired corporation, any transaction (an "Acquisition Transaction") involving any disposition or other change of ownership or control of a substantial portion of Seller's stock or assets or any assumption by Seller of substantial liabilities, including, without limitation, any joint venture or partnership involving any of the foregoing (other than the transaction contemplated in this Agreement); (ii) facilitate, encourage, solicit or initiate or in any way engage in discussions, negotiations or submissions of proposals or offers in respect of an Acquisition Transaction (other than the transaction contemplated in this Agreement); (iii) furnish or cause to be furnished to any Person (other than Buyer or its representatives) any information concerning the business, operations, properties or assets of Seller in connection with an Acquisition Transaction; or (iv) otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. Seller shall inform Buyer by telephone, within 24 hours, of Seller's receipt of any proposal or bid (including the terms thereof and the Person making such proposal or bid) in respect of any Acquisition Transaction other than the transaction described in this Agreement. Seller shall, immediately upon execution of this Agreement, instruct its Representatives to cease all further activities with respect to the sale of Seller or Seller's assets, including, without limitation, the dissemination of information. Section 5.3. Conduct of Business. From the date of this Agreement until the earlier of the Closing Date or the Termination Date (as defined in Section 12.1 below) Seller (i) shall not, without the prior written consent of Buyer, amend or modify (or agree to amend or modify), enter into or cancel any agreement of the type to be included in the Assets, (ii) shall use its best efforts to preserve its present relationships with Persons having business dealings with Seller, (iii) (A) shall maintain the books, accounts and records 15 of Seller in the ordinary course of business consistent with past practices and (B) shall comply in all material respects with all contractual and other obligations applicable to the operations of Seller, (iv) shall not subject any of the properties or assets (whether tangible or intangible) of Seller to any Lien, or incur any indebtedness for borrowed money, (v) shall not acquire any properties or assets or sell, assign, transfer, convey, lease or otherwise dispose of any of the properties or assets of Seller other than as set forth on Schedule 5.3, (vi) shall not cancel or compromise any debt or claim or waive or release any right of Seller, (vii) shall not introduce any change with respect to the operation of Seller and (viii) shall operate only in the ordinary course of business. The foregoing shall not restrict Seller from canceling any agreement not included in the Assets. Seller shall pay all Liabilities that are due and owing by it to any party as of the Closing Date other than those Liabilities expressly assumed by Buyer pursuant to Section 1.3 and those Liabilities set forth on Schedule 5.3. Section 5.4. Public Announcements. Seller agrees that it shall not issue any press release or make any public statement, announcement or filing concerning this Agreement or any aspect of the transactions contemplated hereby, except as may be required by applicable law or with the prior consent of Buyer. Seller agrees that it shall not issue any such release or make any such statement, announcement or filing required by applicable law except after prior consultation with and prior written approval of Buyer, which approval shall not be unreasonably withheld. Section 5.5. No Breach of Representations and Warranties. Seller agrees that it shall not take any action, and shall use its reasonable commercial efforts not to permit any event to occur, which would result in any of the representations and warranties of Seller contained in this Agreement not being true and correct in any material respect on and as of the Closing Date with the same force and effect as if such representations and warranties had been made on and as of the Closing Date. Section 5.6. Updating Information. Seller shall promptly deliver to Buyer any information concerning events subsequent to the date of this Agreement which is necessary to supplement the representations and warranties contained herein, including the Schedules hereto, or the information delivered by Seller pursuant to any of the covenants contained herein, in order that such representations and warranties (including such Schedules) or the information so delivered be complete and accurate in all material respects, it being understood and agreed that the delivery of such information shall not in any manner constitute a waiver by Buyer of any of the conditions precedent to the Closing hereunder, including, without limitation, the conditions contained in Section 7.1. Section 5.7. Consents. Seller shall use its diligent, good faith efforts to obtain, at the earliest practicable date, all consents and approvals required to consummate the transactions contemplated by this Agreement. Section 5.8. Taxable Transaction. Seller agrees to treat this transaction as a fully taxable transaction for income tax purposes and shall not take any actions inconsistent with such treatment. 16 Section 5.9. Further Actions. Seller agrees to execute and deliver such instruments and promptly take such other actions as may reasonably be required to consummate the transactions contemplated hereby in accordance with the terms hereof. ARTICLE VI COVENANTS OF buyer Section 6.1. No Breach of Representations and Warranties. Buyer agrees that it shall not take any action, and shall use its reasonable commercial efforts not to permit any event to occur, which would result in any of the representations and warranties of Buyer contained in this Agreement not being true and correct in any material respect on and as of the Closing Date with the same force and effect as if such representations and warranties had been made on and as of the Closing Date. Section 6.2. Consents and Conditions. Buyer shall use its reasonable efforts to assist Seller in causing each of the conditions precedent to the obligations of Seller to be satisfied. Section 6.3. Taxable Transaction. Buyer agrees to treat this transaction as a fully taxable transaction for income tax purposes and shall not take any actions inconsistent with such treatment. Section 6.4. Further Actions. Buyer agrees to execute and deliver such instruments and take such other actions as may reasonably be required to consummate the transactions contemplated hereby in accordance with the terms hereof. ARTICLE VII CONDITIONS PRECEDENT TO buyer's OBLIGATIONS Section 7.1. Conditions. The obligation of Buyer to consummate the Acquisition on the Closing Date is subject to the satisfaction of the following conditions (any or all of which may be waived by Buyer, in its sole discretion, in whole or in part, to the extent permitted by applicable law): (i) each of the representations and warranties of Seller contained herein shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though the same had been made on and as of the Closing Date; (ii) Seller shall have performed and complied, in all material respects, with the covenants and provisions of this Agreement required to be performed or complied with by it between the date hereof and the Closing Date; 17 (iii) since the date of this Agreement, no event or circumstance shall have occurred that has had, or is reasonably likely to have, a material adverse effect on the business, assets, properties, liabilities, financial condition or results of operations of Seller; (iv) (A) no Legal Proceeding shall have been instituted or threatened or claim or demand made against Seller, Buyer, or HOLL seeking to restrain or prohibit or to obtain damages with respect to the consummation of the transactions contemplated by this Agreement, or which might, in the reasonable opinion of Buyer, result in a material adverse change in the Assets of Seller and (B) there shall not be in effect any Order of a Government Body of competent jurisdiction restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement; (v) Buyer, HOLL and Seller shall have received all necessary governmental and regulatory approvals and all other consents that Buyer or HOLL may reasonably require with respect to its assumption of any contracts, licenses, agreements, understandings and other arrangements and instruments to which Seller is a party; (vi) Buyer shall not have obtained or discovered, in the course of its due diligence review referred to in Section 5.1 above, information concerning Seller or the Assets which, in the sole judgment of Buyer, could materially adversely affect the business, assets, financial condition or results of operations of the Seller or Buyer. This condition shall lapse on the earlier of ten (10) calendar days from the date hereof or the date Buyer advises Seller of the completion of its due diligence; (vii) Buyer shall have received a certificate to the effect set forth in clauses (i), (ii) and (iii) above, dated the Closing Date and signed by a duly authorized officer of Seller; (viii) Buyer shall have received a certificate of the Secretary of Seller, dated the Closing Date, setting forth resolutions of the Board of Directors and of the Shareholders of Seller authorizing the execution and delivery of this Agreement and each document and instrument required to be executed and delivered by Seller hereunder and the consummation of the transactions contemplated hereby and thereby, and certifying that such resolutions were duly adopted and have not been rescinded or amended as of the Closing Date; and (ix) Seller shall have executed and delivered to Buyer (A) all documents to be delivered at the Closing in accordance with the terms of this Agreement and (B) such other documents and instruments as Buyer may reasonably request and which Seller can obtain with reasonable commercial efforts in order to consummate the transactions contemplated by this Agreement. 18 ARTICLE VIII CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS Section 8.1. Conditions. The obligation of Seller to consummate the Acquisition on the Closing Date is subject to the satisfaction of the following conditions (any or all of which may be waived by Seller, at the sole option of Seller, in whole or in part to the extent permitted by applicable law): (i) each of the representations and warranties of Buyer and HOLL contained herein shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though the same had been made on and as of the Closing Date; (ii) Buyer shall have performed and complied, in all material respects, with the covenants and provisions of this Agreement required to be performed or complied with by it between the date hereof and the Closing Date; (iii) Seller shall have received a certificate to the effect set forth in clauses (i) and (ii) above, dated the Closing Date and signed by a duly authorized officer of Buyer and HOLL; (iv) Seller shall have received certificates of the Secretary of Buyer and HOLL, dated the Closing Date, setting forth resolutions of the Board of Directors of Buyer and HOLL authorizing the execution and delivery of this Agreement and each document and instrument required to be executed and delivered by Buyer and HOLL hereunder and the consummation of the transactions contemplated hereby and thereby, and certifying that such resolutions were duly adopted and have not been rescinded or amended as of the Closing Date; (v) Buyer shall have executed and delivered to Seller (A) all documents to be delivered at the Closing in accordance with the terms of this Agreement and (B) such other documents and instruments as Seller may reasonably request and which Buyer can obtain with reasonable commercial efforts in order to consummate the transactions contemplated by this Agreement; and (vi) The Agreement and the Seller Documents shall have been approved by the required percentage of shares held by the Shareholders. ARTICLE IX THE CLOSING Section 9.1. Closing Date. Except as hereinafter provided, the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Buyer, or such other place as mutually agreed upon in writing by the parties, at 10:00 a.m. on the third business day following the date on which each of the 19 conditions specified in Section 7.1 and Section 8.1 (other than those as to which the parties agree will be satisfied at the Closing) of this Agreement has been fulfilled (or waived by the party entitled to waive that condition) or at such other time and place as Seller and Buyer may mutually agree in writing, but in no event shall the Closing occur later than twenty (20) calendar days subsequent to the date hereof unless mutually agreed upon in writing by the parties hereto. The date on which the Closing of the Acquisition occurs is referred to herein as the "Closing Date." Section 9.2. Proceedings at the Closing. All proceedings to be taken and all documents to be executed and delivered by Seller in connection with the Closing shall be reasonably satisfactory in form and substance to Buyer and its counsel. All proceedings to be taken and all documents to be executed and delivered by Buyer in connection with the Closing shall be reasonably satisfactory in form and substance to Seller and its counsel. All proceedings to be taken and all documents to be executed and delivered by both parties at the Closing shall be deemed to have been taken and executed simultaneously, and no proceedings shall be deemed taken nor any documents executed or delivered until all have been taken and delivered. Section 9.3. Deliveries by Seller to Buyer. At the Closing, Seller shall deliver, or shall cause to be delivered, to Buyer the following: (i) a bill of sale and assignment and assumption agreement in the form of Exhibit A hereto (the "Bill of Sale and Assignment and Assumption Agreement"), duly executed by Seller; (ii) all other assignments and other instruments or documents as shall be reasonably necessary in the judgment of Buyer to evidence the sale, assignment, transfer and conveyance by Seller to Buyer of the Assets in accordance with the terms hereof, free and clear of all Liens, including all documents and consents necessary to transfer ownership through the appropriate registrar of all domain names included in the Assets; (iii) copies of all approvals and consents referred to in clause (v) of Section 7.1 above; (iv) the certificate, signed by a duly authorized officer of Seller, referred to in clause (vii) of Section 7.1 above; (v) the certified resolutions of the Board of Directors and Shareholders of Seller referred to in clause (viii) of Section 7.1 above; (vi) an affidavit of Seller, in a form reasonably satisfactory to Buyer, stating, under penalties of perjury, Seller's United States taxpayer identification number and that Seller is not a foreign person within the meaning of Section 1445(b)(2) of the Code; 20 (vii) a certificate of the Secretary of Seller attesting to the incumbency and signature of each officer of Seller who shall execute this Agreement or any other Seller Document; and (viii) delivery of the assets as set forth in Section 9.5. Section 9.4. Deliveries by Buyer to Seller. At the Closing, Buyer shall deliver to Seller the following: (i) the certificate, signed by a duly authorized officer of Buyer and HOLL, referred to in clause (iii) of Section 8.1 above; (ii) the certified resolutions of the Board of Directors of Buyer and HOLL referred to in clause (iv) of Section 8.1 above; (iii) a certificate of a duly authorized officer of Buyer and HOLL attesting to the incumbency and signature of each officer of Buyer and HOLL who shall execute this Agreement or any other Buyer Document; (iv) the Bill of Sale and Assignment and Assumption Agreement, duly executed by Buyer; and (v) a stock certificate for the Stock Consideration specified in Section 2.1(a)(i). Section 9.5. Delivery of Assets. Those Assets, which are treated as computer programs under Regulation 1502(f) of the California Sales and Use Tax Regulations shall either be transferred by remote telecommunications from Seller's place of business to Buyer's place of business, to or through computer equipment owned by Buyer, or shall be installed by Seller or its representatives directly onto computer equipment owned by Buyer. Those Assets, which constitute tangible personal property under Section 6016 of the California Revenue and Taxation Code shall be delivered by Seller, its agent, or a common carrier to Buyer's place of business in Boca Raton, Florida ARTICLE X ADDITIONAL POST-CLOSING COVENANTS Section 10.1. Further Assurances by Seller. ---------------------------- (a) From time to time after the Closing Date, Seller will, at the request of Buyer, execute and deliver such other and further instruments of sale, assignment, transfer and conveyance and take such other and further actions as Buyer may reasonably request in order to make all the benefits of the Assigned Contracts and rights of Seller included in the Assets available to Buyer, to vest in Buyer and put Buyer in possession of the Assets and to transfer to Buyer any contracts and rights of Seller relating to the Assets and to assure to Buyer the benefits thereof and effectuate fully the purposes of this Agreement. 21 (b) With respect to any Assigned Contract which is not assumed by Buyer at the Closing because a consent to assignment is required but not obtained prior to the Closing, if Seller or Buyer shall thereafter obtain such consent to assignment, then, at Buyer's request, Seller and Buyer shall each execute and deliver such instruments of assignment and assumption as may reasonably be required for Seller to assign and Buyer to assume such Assigned Contract, subject to all the terms and conditions of this Agreement as if such Assigned Contract had been included in the Assets at the Closing. Section 10.2. Seller to Change Name. On the Closing Date or as soon thereafter as practicable (but in no event more than 5 business days thereafter), Seller shall adopt (and shall make all appropriate filings so as to adopt), and shall thereafter do business under, a new name that does not contain the words "Alwaysi" or "Always Independent" or any variations thereof. Section 10.3. Preservation of Corporate Records. Seller shall preserve and keep the Corporate Records for a period of seven years from the Closing Date and shall make such Corporate Records and personnel, if any, of Seller available to Buyer as Buyer may reasonably require (i) in connection with, among other things, any insurance claims by, Legal Proceedings against or governmental investigations of Buyer or (ii) in order to enable Buyer to comply with its obligations under the Code, any other applicable statute with respect to taxation, this Agreement and each other agreement, document or instrument contemplated hereby. Section 10.4. Confidentiality. From and after the Closing Date, none of Seller, nor any of its employees shall divulge, furnish or make available to any person any knowledge or information with respect to the Assets or Buyer or HOLL (other than in the regular course and in furtherance of the Buyer's business) which is, or which Seller is advised or has reason to believe is, confidential (including, but not limited to, information relating to any marketing, financial or personnel matters in connection with the Assets). Section 10.5. Transfer of Shares. Buyer and HOLL acknowledge that Seller intends to dissolve and liquidate subsequent to the Closing and in connection with such dissolution and liquidation will transfer the Stock Consideration to its Shareholders. Buyer and HOLL agree to fully cooperate with such transfer of the Stock Consideration. ARTICLE XI INDEMNIFICATION Section 11.1. Indemnification. --------------- (a) Seller agrees to indemnify and hold Buyer and HOLL harmless from and against any and all losses, liabilities, obligations, judgments, damages, deficiencies, costs, penalties and expenses (including, without limitation, reasonable attorneys' fees and expenses) (collectively, "Losses") based upon, attributable to or resulting from: (i) (A) any misrepresentation or breach of warranty on the part of Seller under this Agreement or any of the Seller Documents or (B) any breach of covenant or other agreement on the part of Seller under this Agreement, or any of the Seller Documents; 22 (ii) any Liabilities of Seller not expressly assumed by Buyer under the terms of this Agreement, including, without limitation: (A) any liabilities and obligations arising out of or based upon the conduct of the business of Seller prior to the Closing Date (other than obligations or liabilities that are expressly assumed by Buyer under the terms of this Agreement); (B) any claims for any injury to person or property attributable to any services rendered by Seller prior to the Closing Date, regardless of whether such claims are asserted prior to or after the Closing; (C) any claims by any employee or former employee of Seller arising out of the employment or termination of employment of the employee or former employee on or prior to the Closing Date or as a result of the transactions contemplated by this Agreement; (D) any third party claims with respect to occurrences or events that occurred on or prior to the Closing Date and relate to Seller, its employees or the Assets, including the Liabilities of Seller listed in Schedule 3.5 hereto; and (iii) any claims related to this Agreement made by any Shareholders under Chapter 13 of the California Corporations Code or otherwise challenging the validity of the transactions contemplated by this Agreement, the amount or nature of the Consideration to be paid by Buyer hereunder, or any other matters related to the consummation of the transactions contemplated by this Agreement. (iv) any liabilities and obligations, based in any way on agreements, arrangements or understandings made by or on behalf of Seller, for any brokerage fees, finder's fees, commissions or like payments in respect of the transactions contemplated by this Agreement; and (v) all actions, suits, proceedings, demands, assessments, judgments, costs, penalties and expenses, including reasonable attorneys' fees, incident to the foregoing. (b) Buyer and HOLL agree to indemnify and hold Seller harmless from and against any and all Losses attributable to or resulting from: (i) (A) any misrepresentation or breach of warranty on the part of Buyer or HOLL under this Agreement or any of the Buyer Documents or (B) any breach of covenant or other agreement on the part of Buyer under this Agreement or any of the Buyer Documents; 23 (ii) any liabilities expressly assumed by Buyer pursuant to Section 1.3 hereof; (iii) to the extent Buyer is not indemnified with respect thereto under Section 11.1(a), any claims that arise from Buyer's ownership or operation of the Assets subsequent to the Closing Date; (iv) any liabilities and obligations, based in any way on agreements, arrangements or understandings made by or on behalf of Buyer or HOLL, for any brokerage fees, finder's fees, commissions or like payments in respect of the transactions contemplated by this Agreement; and (v) all actions, suits, proceedings, demands, assessments, judgments, costs, penalties and expenses, including reasonable attorneys' fees, incident to the foregoing. Section 11.2. Procedures for Indemnification. ------------------------------ (a) Whenever a claim shall arise for indemnification under Section 11.1 above, with the exception of claims for litigation expenses in respect of a litigation as to which a notice of claim, as provided below in this Section 11.2, has previously been given, which expenses shall be funded on an ongoing basis, the party entitled to indemnification (the "Indemnified Party") shall promptly notify the party from whom indemnification is sought (the "Indemnifying Party") of such claim and, when known, the facts constituting the basis for such claim; provided, however, that in the event of any claim for indemnification hereunder resulting from or in connection with any claim or Legal Proceeding by a third party, the Indemnified Party shall give such notice thereof to the Indemnifying Party not later than 10 business days prior to the time any response to the asserted claim is required, if possible, and in any event within 5 business days following receipt of notice thereof. Notwithstanding anything in the preceding sentence to the contrary, the failure of any Indemnified Party to so notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability for indemnification it may have if and to the extent that the Indemnifying Party shall not have been prejudiced by such omission. In the event of any such claim for indemnification resulting from or in connection with a claim or Legal Proceeding by a third party, the Indemnifying Party may, at its sole cost and expense, assume the defense thereof; provided, however, that the Indemnifying Party shall first have agreed in writing that it does not and will not contest its responsibility for indemnifying the Indemnified Party in respect of Losses attributable to such claim or Legal Proceeding; and, provided, further, that Seller shall not be entitled to assume the defense of any claim or Legal Proceeding against Buyer or HOLL for Taxes with respect to a period ending after the Closing Date. If an Indemnifying Party assumes the defense of any such claim or Legal Proceeding, the Indemnifying Party shall be entitled to select counsel and take all steps necessary in the defense thereof; provided, however, that no settlement shall be made without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld (and if the Indemnified Party shall withhold its consent to any monetary settlement proposed by the Indemnifying Party and 24 which the other party to the action has indicated it is prepared to accept, the Indemnified Party shall in no event be deemed for purposes of this Agreement, to have suffered Losses in connection with such claim or proceeding in excess of the proposed amount of such settlement); provided, further, that the Indemnified Party may, at its own expense, participate in any such proceeding with the counsel of its choice without any right of control thereof. So long as the Indemnifying Party is in good faith defending such claim or Legal Proceeding, the Indemnified Party shall not compromise or settle such claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party does not assume the defense of any such claim or Legal Proceeding in accordance with the terms hereof, the Indemnified Party may defend (and, in the case of any claim or Legal Proceeding against Buyer or HOLL for Taxes with respect to a period ending after the Closing Date, shall defend) against such claim or Legal Proceeding in such manner as it may deem appropriate, including, but not limited to, settling such claim or litigation (after giving prior written notice of the same to the Indemnifying Party and obtaining the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld) on such terms as the Indemnified Party may deem appropriate, and the Indemnifying Party will promptly indemnify the Indemnified Party in accordance with the provisions of this Section 11.2; provided, however, that if the Indemnified Party does not obtain the prior written consent of the Indemnifying Party to any such settlement, and such written consent is not unreasonably withheld by the Indemnifying Party, the Indemnified Party shall not be entitled to indemnification hereunder from such Indemnifying Party with respect to the claim settled. Notwithstanding anything in this Section 11.2 to the contrary, if, in any claim or Legal Proceeding with respect to which the Indemnified Party has given the notice required under this Section 11.2, (i) the Indemnifying Party shall not have promptly employed counsel reasonably satisfactory to the Indemnified Party or (ii) such Indemnified Party shall have reasonably concluded, based upon the opinion of its outside legal counsel, that there may be one or more legal defenses available to it that are different from or additional to those available to the Indemnifying Party, then in either event (x) the Indemnified Party may participate in any such proceeding with the counsel of its choice, the expense for which shall be borne by the Indemnifying Party (but in no event shall the Indemnifying Party be required to pay the fees and expenses of more than one counsel employed by the Indemnified Party with respect to such claim or proceeding) and (y) the Indemnifying Party shall not have the right to direct the defense of any such action on behalf of the Indemnified Party. (b) If Buyer or HOLL is the Indemnifying Party, all payments by the Indemnifying Party pursuant to this Article XI shall be in cash and in immediately available funds. If Seller is the Indemnifying Party, Seller, in its sole discretion, may elect to make all payments pursuant to this Article XI in the form of (m) cash; (n) shares of the Stock Consideration valued at the average closing price of the Common Stock on the NASDAQ National Market for the five (5) business days preceding the Closing Date; or (o) some combination of (m) and (n). (c) Notwithstanding any other provision in this Agreement, in the absence of fraud or willful misconduct on the part of the Indemnifying Party or any of its employees or agents, an Indemnifying Party shall not be responsible for Losses indemnifiable under this Article XI in excess of Nine Hundred Thousand Dollars ($900,000); provided, however, that the foregoing cap shall not apply to any Losses in respect of Taxes for which Seller has indemnified Buyer under Section 11.1(a). 25 (d) Except as provided in Section 13.1, the indemnification obligations set forth in Section 11.1 shall expire upon the latter of the filing of a Certificate of Dissolution of Seller with the California Secretary of State or December 31, 2001; provided that such indemnification obligations shall survive with respect to any claims made by an Indemnified Party to the Indemnifying Party under Section 11.1 prior to such latter date. Section 11.3. Determination of Damages and Related Matters. -------------------------------------------- To the extent any payment under this Article XI cannot properly be treated as an adjustment to the Consideration for Tax purposes, then any such amount shall be increased to take account of any net Tax cost actually incurred by the Indemnified Party by reason of the receipt of any indemnity payment (grossed-up for such increase) for the taxable year during which such payment is received. With respect to any Tax Cost arising in a year subsequent to the year in which the indemnity payment is made, the Indemnifying Party shall pay to the Indemnified Party the amount of such Tax Cost when such Tax Cost is actually incurred. Any payment to an Indemnified Party pursuant to this Article XI shall be reduced to take account of any net Tax benefit actually realized by the Indemnified Party in respect of the taxable year in which such Loss is incurred or paid and, with respect to a Tax benefit arising in a year subsequent to the year in which the Loss is paid or incurred, the Indemnified Party shall pay to the Indemnifying Party the amount of such Tax benefit (including, as relevant, any member of its Affiliated Group) when such Tax benefit is actually realized. In computing the amount of any such Tax cost or Tax benefit, the Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any indemnified loss, liability, claim, damage or expense. ARTICLE XII TERMINATION Section 12.1. Termination. This Agreement may be terminated (i) by the written agreement of Seller and Buyer, (ii) by either Seller or Buyer by written notice to the other given after the date that is twenty (20) calendar days after the date of this Agreement if the Closing shall not have occurred on or before such date, and (iii) by Buyer upon written notice given to Seller on or before ten (10) calendar days after the date of this Agreement if, in the course of the due diligence review referred to in Section 5.1, Buyer obtains or discovers information concerning Seller or the Assets, which, in the sole judgment of Buyer, could materially adversely affect the business, assets, financial condition or results of operations of Seller or Buyer (unless, within 10 days after delivery by Buyer of such notice, Seller is able to satisfy Buyer that the event, occurrence, fact or situation discovered or obtained by Buyer has been cured and could not materially adversely affect the business, assets, financial condition or results of operations of Seller or Buyer). The date of any such termination is referred to herein as the "Termination Date." 26 Section 12.2. Liabilities After Termination. Upon any termination of this Agreement pursuant to Section 12.1 above, no party hereto shall thereafter have any further liability or obligation hereunder; provided, however, that no such termination shall relieve any party hereto of any liability for any breach of this Agreement prior to the date of such termination and provided, further, that Seller shall remain bound by Section 5.4 above and each of Seller and Buyer shall remain bound by Section 13.5 below. ARTICLE XIII MISCELLANEOUS Section 13.1. Survival of Representations and Warranties. Seller, Buyer and HOLL hereby agree that the representations and warranties contained in this Agreement, as supplemented or modified by any amendments to the Schedules hereto made on or prior to the Closing Date, shall survive the execution and delivery of this Agreement and shall further survive the Closing hereunder until December 31, 2001, regardless of any investigation made by the parties hereto; provided, however, that the representations and warranties contained in Section 3.13 shall survive for the applicable statute of limitations plus 90 days. Section 13.2. Entire Agreement. This Agreement (with its Schedules and Exhibits) contains, and is intended as, a complete statement of, all of the terms and the arrangements between the parties hereto with respect to the matters provided for herein, and supersedes any previous agreements and understandings among the parties hereto with respect to those matters including, without limitation, the Mutual Non-Disclosure Agreement dated June 4, 2001. Section 13.3. Governing Law; Construction. This Agreement and all agreements related thereto shall be governed by and construed in accordance with the laws of the State of Florida applicable to contracts to be made, executed, delivered and performed wholly in such state, but without regard to conflicts of law principles of such state. The table of contents, captions and headings in this Agreement are for reference purposes only and shall be given no effect in the construction and interpretation of this Agreement. No provision of this Agreement shall be construed against either party because such party drafted or caused to be drafted such provision. Each provision of this Agreement shall be construed as if such provision were proposed by both Buyer and Seller. Section 13.4. Transfer Taxes. Seller shall pay when due (i) all transfer and documentary taxes and fees imposed with respect to instruments of conveyance in the transactions contemplated hereby and (ii) all sales, use and other transfer or similar taxes on the transfer of the Assets contemplated hereby. Buyer shall execute and deliver to Seller at the Closing any certificates or other documents as Seller may reasonably request to perfect any exemption from any such transfer, documentary, sales or use tax. Section 13.5. Expenses. Each of Buyer and Seller shall bear its own expenses (including, without limitation, all fees and expenses of financial institutions, accountants, legal counsel, brokers, investment bankers and other advisors), incurred in connection with the negotiation, preparation, execution, review, delivery and performance of this Agreement, each of the other documents and instruments executed in connection with or contemplated by this Agreement or related hereto, and the consummation of the transactions contemplated hereby and thereby. 27 Section 13.6. Notices. Any notice, request, instruction or other communication to be given under this Agreement or otherwise in connection with the Acquisition shall be in writing and shall be delivered by hand or prepaid telecopy, or sent, postage prepaid, by registered, certified or express mail, or reputable overnight courier service and shall be deemed given when so delivered by hand or telecopied, or if mailed, three days after mailing (one business day in the case of express mail or overnight courier service) to a party at the following address (or at such other address as such party may have specified by notice given to the other party pursuant to this provision): if to Seller at: Prior to the Closing Date: Always Independent Entertainment Corp. 2001 Union Street, Suite 490 San Francisco, California 94123 Attention: Howard Rosenberg Telecopier No.: (415) 614-9001 After the Closing Date: Always Independent Entertainment Corp. 2001 Union Street, Suite 300 San Francisco, California 94123 Attention: Howard Rosenberg Telecopier No.: (415) 614-9001 with a copy to: Preston Gates & Ellis LLP One Maritime Plaza, Suite 2400 San Francisco, California 94111 Attention: Lawrence B. Low Telecopier No.: (415) 788-8819 and if to Buyer at: Independent Hollywood, Inc. 2255 Glades Road Suite 237W Boca Raton, Florida 33431 Attention: Mitchell Rubenstein Telecopier No.: (561) 998-2974 with a copy to: Independent Hollywood, Inc. 2255 Glades Road Suite 237W Boca Raton, Florida 33431 Attention: General Counsel Telecopier No.: (561) 998-2974 28 and if to HOLL at: Hollywood Media Corp. 2255 Glades Road Suite 237W Boca Raton, Florida 33431 Attention: Mitchell Rubenstein Telecopier No.: (561) 998-2974 with a copy to: Hollywood Media Corp. 2255 Glades Road Suite 237W Boca Raton, Florida 33431 Attention: General Counsel Telecopier No.: (561) 998-2974 Section 13.7. Severability. If any provision of this Agreement, or the application of such provision to Buyer, HOLL, Seller, or any Person or circumstance, shall be held invalid, then the remainder of this Agreement, or the application of such provision to persons, entities or circumstances other than those as to which it is held invalid, shall not be affected thereby. Section 13.8. Binding Effect; No Assignment. ----------------------------- (a) This Ag1reement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any Person not party to this Agreement. Except as expressly permitted below, no assignment of this Agreement or of any rights or obligations hereunder may be made by either party (by operation of law or otherwise) without the prior written consent of the other party hereto and any attempted assignment without such required consent shall be void. (b) After the Closing, Buyer may assign any or all of its rights and obligations with respect to the Assets without the consent of Seller, provided that Buyer shall cause its obligations to Seller under this Agreement in respect of the Acquisition to be binding upon any successor to Buyer and Buyer shall directly and unconditionally guarantee the obligations of such successor. Section 13.9. Amendments. This Agreement may be amended, supplemented or modified, and any provision hereof may be waived, only pursuant to a written instrument making specific reference to this Agreement signed by each of the parties hereto. Section 13.10. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 29 IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the date and year first above written. ALWAYS INDEPENDENT ENTERTAINMENT CORP. By: /s/ Howard Rosenberg ------------------------------------------------ Howard Rosenberg President, Chairman of the Board, and Chief Financial Officer INDEPENDENT HOLLYWOOD, INC. By: /s/ W. Robert Shearer ------------------------------------------------ W. Robert Shearer Executive Vice President HOLLYWOOD MEDIA CORP. By: /s/ W. Robert Shearer ----------------------------------------------- W. Robert Shearer Senior Vice President and General Counsel EXECUTION COPY TABLE OF CONTENTS -----------------
Page Article I ACQUISITION AND TRANSFER OF ASSETS................................................1 Section 1.1. Assets to be Acquired......................................................1 Section 1.2. Excluded Assets............................................................2 Section 1.3. Assumed and Excluded Liabilities...........................................3 Article II CONSIDERATION.....................................................................3 Section 2.1. Amount and Form of Consideration...........................................3 Section 2.2. Allocation of Purchase Price...............................................3 Article III REPRESENTATIONS AND WARRANTIES OF SELLER..........................................4 Section 3.1. Organization...............................................................4 Section 3.2. Authorization of Agreement.................................................4 Section 3.3. Consents and Approvals; No Violation.......................................4 Section 3.4. Title to Assets............................................................5 Section 3.5. No Undisclosed Liabilities.................................................5 Section 3.6. Results of Operations; Subscriptions.......................................5 Section 3.7. Litigation, etc............................................................5 Section 3.8. Compliance with Law........................................................6 Section 3.9. Employment Agreements......................................................6 Section 3.10. Certain Agreements.........................................................6 Section 3.11. Real Property..............................................................7 Section 3.12. Intangible Property........................................................7 Section 3.13. Taxes......................................................................8 Section 3.14. Permits...................................................................10 Section 3.15. Related Parties; Related Party Transactions...............................10 Section 3.16. Options...................................................................10 Section 3.17. Year 2000.................................................................11 Section 3.18. Investor Representations..................................................11 Section 3.19. Exemption from Registration; Restricted Securities........................11 Section 3.20. Brokers...................................................................11 i Article IV REPRESENTATIONS AND WARRANTIES OF BUYER..........................................11 Section 4.1. Organization..............................................................11 Section 4.2. Authorization of Agreement................................................11 Section 4.3. Consents and Approvals; No Violations.....................................12 Section 4.4. Litigation................................................................12 Section 4.5. Capital Stock of Buyer....................................................12 Section 4.6. SEC Reports; Financial Statements.........................................13 Section 4.7. Brokers...................................................................13 Article V COVENANTS OF SELLER..............................................................13 Section 5.1. Access to Information.....................................................13 Section 5.2. Exclusivity...............................................................14 Section 5.3. Conduct of Business.......................................................14 Section 5.4. Public Announcements......................................................15 Section 5.5. No Breach of Representations and Warranties...............................15 Section 5.6. Updating Information......................................................15 Section 5.7. Consents..................................................................16 Section 5.8. Taxable Transaction.......................................................16 Section 5.9. Further Actions...........................................................16 Article VI COVENANTS OF buyer...............................................................16 Section 6.1. No Breach of Representations and Warranties...............................16 Section 6.2. Consents and Conditions...................................................16 Section 6.3. Taxable Transaction.......................................................16 Section 6.4. Further Actions...........................................................16 Article VII CONDITIONS PRECEDENT TO buyer's OBLIGATIONS......................................16 Section 7.1. Conditions................................................................18 Article VIII CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS.....................................18 Section 8.1. Conditions................................................................18 Article IX THE CLOSING......................................................................19 Section 9.1. Closing Date..............................................................19 Section 9.2. Proceedings at the Closing................................................19 Section 9.3. Deliveries by Seller to Buyer.............................................19 Section 9.4. Deliveries by Buyer to Seller.............................................20 ii Article X ADDITIONAL POST-CLOSING COVENANTS................................................20 Section 10.1. Further Assurances by Seller..............................................20 Section 10.2. Seller to Change Name.....................................................21 Section 10.3. Preservation of Corporate Records.........................................21 Section 10.4. Confidentiality...........................................................21 Article XI INDEMNIFICATION..................................................................21 Section 11.1. Indemnification...........................................................21 Section 11.2. Procedures for Indemnification............................................23 Section 11.3. Determination of Damages and Related Matters..............................24 Article XII TERMINATION......................................................................25 Section 12.1. Termination...............................................................25 Section 12.2. Liabilities After Termination.............................................25 Article XIII MISCELLANEOUS....................................................................25 Section 13.1. Survival of Representations and Warranties................................25 Section 13.2. Entire Agreement..........................................................26 Section 13.3. Governing Law; Construction...............................................26 Section 13.4. Transfer Taxes............................................................26 Section 13.5. Expenses..................................................................26 Section 13.6. Notices...................................................................26 Section 13.7. Severability..............................................................27 Section 13.8. Binding Effect; No Assignment.............................................27 Section 13.9. Amendments................................................................28 Section 13.10. Counterparts..............................................................28 iii
EXECUTION COPY SCHEDULE OF DISCLOSURES 1.1(a) (i) Assigned Contracts 1.1(a)(iii) Fixed Assets 1.2 Excluded Assets 3.1 Shareholders 3.3(b) Consents 3.5 Liabilities 3.7 Litigation, etc. 3.9 Employment Agreements 3.10 Certain Agreements 3.11(b) Real Property 3.12 Intangible Property 3.13 Taxes 3.14 Permits 3.16 Options 5.3 Conduct of Business ASSET PURCHASE AGREEMENT BY AND AMONG HOLLYWOOD MEDIA CORP., INDEPENDENT HOLLYWOOD, INC. AND ALWAYS INDEPENDENT ENTERTAINMENT CORP. Dated as of July 19, 2001 -----END PRIVACY-ENHANCED MESSAGE-----