-----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, IDsq+u4mMlHWy7z3hnWIJtAXONMTfzb7+b8JCNIYxu90RA6lzB7HH0aFDzLCaUwa R8WpYjlMTPJvjIoZ8QuhoQ== 0001116502-01-501396.txt : 20020410 0001116502-01-501396.hdr.sgml : 20020410 ACCESSION NUMBER: 0001116502-01-501396 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1791612 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 hollywood10q.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 September 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 November 12, 2001, the number of shares outstanding of the issuer's common stock, $.01 par value, was 27,315,489. HOLLYWOOD MEDIA CORP. Table of Contents PART I FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Page(s) ------ Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000 .............................. 3 Condensed Consolidated Statements of Operations for the Nine and Three Months ended September 30, 2001 and 2000 (unaudited) .................................................... 4 Condensed Consolidated Statement of Shareholders' Equity for the Nine Months ended September 30, 2001 (unaudited) ........... 5 Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 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 ............................. 20 PART II OTHER INFORMATION - ------- ----------------- ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 31 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 32 Signature ............................................................... 34 2 HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2001 2000 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,950,621 $ 1,911,224 Receivables, net 2,105,893 1,866,565 Inventories 7,244,244 106,700 Prepaid expenses 722,588 687,028 Other receivables 484,820 298,751 Other current assets 231,443 240,450 Deferred advertising - CBS 18,845,194 19,131,714 ------------- ------------- Total current assets 31,584,803 24,242,432 PROPERTY AND EQUIPMENT, net 2,747,604 2,802,840 INVESTMENTS AND ADVANCES TO EQUITY METHOD INVESTEES 1,270,482 1,814,214 NONCURRENT DEFERRED ADVERTISING - CBS 77,580,123 91,714,019 INTANGIBLE ASSETS, net 2,766,667 3,745,579 GOODWILL, net 42,163,814 44,231,378 OTHER ASSETS 747,040 727,620 ------------- ------------- TOTAL ASSETS $ 158,860,533 $ 169,278,082 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,940,529 $ 3,194,105 Other accrued expenses 2,243,403 2,444,113 Notes payable 400,000 750,000 Accrued reserve for closed stores 324,089 798,362 Deferred revenue 7,469,339 1,556,841 Current portion of capital lease obligations 482,844 627,597 ------------- ------------- Total current liabilities 12,860,204 9,371,018 ------------- ------------- CAPITAL LEASE OBLIGATIONS, less current portion 260,930 721,521 ------------- ------------- DEFERRED REVENUE 1,872,153 331,559 ------------- ------------- MINORITY INTEREST -- 160,094 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 11) SHAREHOLDERS' EQUITY: Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- -- Common stock, $.01 par value, 100,000,000 shares authorized; 27,043,795 and 24,730,968 shares issued at September 30, 2001 and December 31, 2000, respectively 270,437 247,309 Deferred compensation -- (102,067) Additional paid-in capital 280,954,184 271,339,954 Accumulated deficit (137,357,375) (112,791,306) ------------- ------------- Total shareholders' equity 143,867,246 158,693,890 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 158,860,533 $ 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 NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited)
Nine Months Ended September 30, Three Months Ended September 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ NET REVENUES $ 37,373,358 $ 18,012,265 $ 11,015,892 $ 8,029,020 COST OF REVENUE 23,461,824 6,374,119 6,402,640 3,494,409 ------------ ------------ ------------ ------------ Gross margin 13,911,534 11,638,146 4,613,252 4,534,611 ------------ ------------ ------------ ------------ OPERATING EXPENSES: General and administrative 5,372,297 7,979,538 1,657,287 2,768,025 Selling and marketing 3,163,708 8,057,898 1,131,213 2,760,214 Salaries and benefits 9,335,295 8,364,459 3,111,715 3,203,955 Amortization of CBS advertising 14,571,835 14,855,465 4,761,771 5,479,561 Depreciation and amortization 1,146,867 1,050,316 399,307 391,841 Amortization of goodwill and intangibles 5,480,729 5,065,645 1,840,840 1,735,076 Reserve for closed stores and leased termination costs (289,801) 9,519 -- (236) ------------ ------------ ------------ ------------ Total operating expenses 38,780,930 45,382,840 12,902,133 16,338,436 ------------ ------------ ------------ ------------ Operating loss (24,869,396) (33,744,694) (8,288,881) (11,803,825) EQUITY IN NET EARNINGS - INVESTMENTS 899,060 2,099,865 422,426 845,906 OTHER: Interest expense (285,518) (280,269) (50,443) (91,851) Interest income 104,052 78,382 24,722 5,767 Other, net (147,596) 34,599 20,579 6,192 ------------ ------------ ------------ ------------ Loss before minority interest (24,299,398) (31,812,117) (7,871,597) (11,037,811) MINORITY INTEREST (266,671) (276,996) (164,674) (124,141) ------------ ------------ ------------ ------------ Net loss $(24,566,069) $(32,089,113) $ (8,036,271) $(11,161,952) ============ ============ ============ ============ Basic and diluted loss per common share $ (0.96) $ (1.41) $ (0.30) $ (0.47) ============ ============ ============ ============ Weighted average common and common equivalent shares outstanding - basic and diluted 25,646,794 22,838,794 26,571,807 23,583,009 ============ ============ ============ ============
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 NINE MONTHS ENDED SEPTEMBER 30, 2001 (Unaudited)
Common Stock Additional ---------------------------- Deferred Paid-in Accumulated Shares Amount Compensation Capital Deficit Total ----------- ------------- ------------- ------------- ------------- ------------- Balance - December 31, 2000 24,730,968 $ 247,309 $ (102,067) $ 271,339,954 $(112,791,306) $ 158,693,890 Issuance of common stock in private placements 1,471,128 14,712 -- 6,371,638 -- 6,386,350 Issuance of stock for acquisitions 239,303 2,393 -- 2,078,765 -- 2,081,158 Reclassification of liability for exercised put option -- -- -- (452,187) -- (452,187) Issuance of common stock for services rendered 22,469 225 -- 94,819 -- 95,044 Issuance of options and warrants for services rendered -- -- -- 337,568 -- 337,568 Issuance of stock - note extension 20,931 209 -- 118,763 -- 118,972 Employee stock bonus 4,138 41 -- 14,959 -- 15,000 Issuance of common stock - exercise of warrants 361,438 3,614 -- (3,614) -- -- Issuance of common stock to pay obligations of Hollywood Media 283,000 2,830 -- 1,458,429 -- 1,461,259 Amortization of employee stock bonuses -- -- 102,067 -- -- 102,067 Stock option exercise - net issuance 5,020 50 -- (50) -- -- Shares repurchased and retired (94,600) (946) -- (404,860) -- (405,806) Net loss -- -- -- -- (24,566,069) (24,566,069) ----------- ------------- ------------- ------------- ------------- ------------- Balance - September 30, 2001 27,043,795 $ 270,437 $ -- $ 280,954,184 $(137,357,375) $ 143,867,246 =========== ============= ============= ============= ============= =============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statement. 5 HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, --------------------------------- 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(24,566,069) $(32,089,113) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 6,627,596 6,115,961 Equity in earnings of investments, net of return of invested capital 468,732 (1,099,427) Issuance of compensatory stock, stock options and warrants for services rendered 447,612 189,310 Amortization of employee stock bonuses 102,067 153,100 Provision for bad debts 283,930 145,816 Provision for inventory obsolescence -- 95,010 Amortization of deferred financing costs -- 6,435 (Reversal) reserve for closed stores and lease terminations costs (289,801) 9,519 Amortization of CBS advertising 14,571,835 14,855,465 Minority interest 266,671 276,996 Changes in assets and liabilities: Receivables (1,032,461) (691,061) Prepaid expenses (35,560) 385,057 Inventories (2,980,076) (3,784) Other current assets 9,007 (65,031) Other assets (19,420) (89,181) Accounts payable (454,012) 403,312 Deferred revenue 2,436,359 1,670,954 Other accrued expenses (516,718) 983,425 ------------ ------------ Net cash used in operating activities (4,680,308) (8,747,237) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquisitions, net of cash received 300,000 (247,862) Loan to Beach Wrestling, LLC (171,380) -- Purchase of web addresses -- (1,070,000) Capital expenditures (944,067) (1,410,319) Return of capital from Tekno Books to minority partner (426,765) (395,779) Loans to MovieTickets.com, net 499,000 -- ------------ ------------ Net cash used in investing activities (743,212) (3,123,960) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from shareholder/officer loan 1,120,000 2,050,000 Repayments of shareholder/officer loan (1,120,000) (450,000) Net proceeds from issuance of common stock 6,386,350 8,209,053 Proceeds from exercise of stock options and warrants -- 7,017,363 Loan to shareholder 59,486 (360,516) Payments to repurchase common stock (405,806) (1,793,726) Payments under notes payable (350,000) -- Payments under capital lease obligations (227,113) (388,741) ------------ ------------ Net cash provided by financing activities 5,462,917 14,283,433 ------------ ------------ Net increase in cash and cash equivalents 39,397 2,412,236 CASH AND CASH EQUIVALENTS, beginning of period 1,911,224 2,475,345 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 1,950,621 $ 4,887,581 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES: Interest paid $ 85,314 $ 320,335 ============ ============
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 nine months ended September 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/A 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 $1.25 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 $1.25 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 method for Hollywood Media's ticketing businesses from revenue recognized when collection was assured and ticket delivery to the customer had occurred, to the date of performance of the show, effective January 1, 2001. We have made purchase accounting adjustments to our January 1, 2001 balance sheet to reflect the ticket inventory and deferred revenue as if our current revenue recognition policy had been followed since the dates of acquisition of our ticketing businesses. See Note 14. 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 5,583,762 and 3,968,898 options and warrants outstanding at September 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. 7 In addition, the investors of the May 2001 private placement will be entitled to receive additional shares of common stock upon the exercise of series B adjustment warrants, for no additional consideration, if the market price Hollywood Media's common stock falls below $5.19 per share during the stated adjustment periods. The number of shares issuable during any adjustment period increases as the average stock price decreases. The maximum number of shares issuable under the warrants is 1,537,380. These warrants were not included in the number of outstanding warrants and options disclosed in the preceding paragraph because the number of adjustment warrants, if any, will be determined at the conclusion of each adjustment period. See Note 7. 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. 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 2000 in exchange for shares and warrants 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 $385,008 and $567,702 at September 30, 2001 and December 31, 2000, respectively. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards ("SFAS" 141), Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. 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 $5.4 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. 8 In June 2001, the Financial Accounting Standards Board issued Statement 143, "Accounting for Asset Retirement Obligations". This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The more significant of these changes includes measuring all future obligations at fair value and discounting obligations to reflect today's dollars. This statement requires a cumulative effect approach to recognizing transition amounts for existing retirement obligations. We do not believe that the adoption of SFAS 143 will have a material impact on our consolidated results of operations. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" and Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of Operations - Reporting the Effects of the Disposal of a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the income statement, but broadens the presentation to include a component of an entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001 and the interim periods within. We are currently evaluating the provisions of SFAS 144 and have not yet determined the effect of this pronouncement on our financial position and results of operations. (3) ACQUISITIONS: In January 2000, we completed the acquisition of the web address Broadway.com from BroadwayTechnologies 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 fair value of the stock on the date of the purchase agreement. The 35,294 shares of common stock issued were restricted from resale for one year. Under the terms of the purchase agreement the seller has the right to require Hollywood Media to repurchase these shares for $17 per share after one year. The seller exercised this right and Hollywood Media became obligated to pay $452,187 to the seller. The fair value of the common stock was originally recorded in equity. Upon exercise of the option we reclassified the amount of the cash liability from equity to other accrued expenses. The outstanding balance for this liability at September 30, 2001 was $227,187 and is included in other accrued expenses. In addition, in April 2001, in exchange for the seller allowing Hollywood Media to pay the obligation over 12 months, 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 using Black Scholes. 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, 83,214 shares of common stock valued at $14.00 per share, the closing market price on the date of issuance and options valued at $128,752 to purchase 12,500 shares of common stock at $9.75 per share. The asset purchase agreement for BroadwayTheater.com includes an earn-out provision which obligates Hollywood Media to issue additional shares of common stock to the seller each year for a three-year period if certain gross profit targets are achieved. The contingent payment is a fixed number of shares each year (28,571) if gross profit targets, representing 25% growth over the prior year, are achieved each year. These gross profit targets were satisfied for year one. As a result, 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. 9 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 and $750,000 in promissory notes. In addition, Hollywood Media issued 195,874 shares of common stock as contingent consideration to be delivered to the seller if certain conditions were satisfied at the end of the twelve-month period following the date of acquisition. On September 26, 2001 these shares were released from escrow and were valued at $3.63 per share or $711,023, the closing market price on the date the conditions were satisfied. The value of the shares was recorded as additional goodwill. On July 27, 2001 we acquired certain assets of Always Independent Entertainment Corp. ("AlwaysI"), a privately held company, for 210,731 shares of common stock valued at $5.79 per share, the closing market price on the date the transaction closed or $1,220,132. AlwaysI offers independent films to subscribers over the Internet and licenses films to third parties. Hollywood Media has integrated the AlwaysI 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 subscription fee to view the films. The acquisition of BroadwayTheater.com, TDI and AlwaysI 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 for acquisitions completed prior to June 30, 2001. The purchase price was allocated to assets and liabilities as follows: BroadwayTheater.com AlwaysI TDI ----------- -------------- 2001 2000 ----------- ----------- Tangible assets (excluding cash acquired) $ 515,000 $ 1,085,019 Goodwill 405,132 3,150,702 Liabilities assumed -- (2,317,143) ----------- ----------- Total purchase price 920,132 1,918,578 Less value of common stock issued 1,220,132 1,670,716 ----------- ----------- Paid, net of cash acquired $ (300,000) $ 247,862 =========== =========== Purchase price paid as follows: Net cash acquired $ (300,000) $ (192,938) Acquisition costs -- 440,800 ----------- ----------- $ (300,000) $ 247,862 =========== =========== The following are unaudited pro forma combined results of operations of Hollywood Media and TDI for the nine and three months ended September 30, 2000, as if the acquisition of TDI had occurred on January 1, 2000: 10 Nine Months Three Months Ended Ended September 30, September 30, 2000 2000 ------------- ------------ Net Revenues $ 35,769,113 $ 13,118,653 ============= ============ Net Loss $ (32,059,956) $(11,119,384) ============= ============ Pro Forma Diluted Loss Per Share $ (1.40) $ (.47) ============= ============ Weighted Average Shares Outstanding 22,903,875 23,645,697 ============= ============ 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 and AlwaysI 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. The note bears interest at Citibank, N.A. prime plus 1% per annum (7.0% at September 30, 2001). The second promissory note is a one year non-interest bearing note with a face value of $250,000. The maturity date of both notes has been extended to March 31, 2002. At September 30, 2001, the outstanding balance of notes payable is $400,000. (5) OTHER ACCRUED EXPENSES: Other Accrued Expenses consist of the following: September 30, December 31, 2001 2000 ---------- ---------- Compensation and benefits $ 750,245 $ 496,032 Insurance 306,690 152,978 Professional fees 184,181 166,182 Licensing fees 47,518 91,800 Interest 140,000 57,159 Royalties 22,597 39,480 Other 792,172 1,440,482 ---------- ---------- $2,243,403 $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 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 $324,089 at September 30, 2001 and 11 $798,362 at December 31, 2000. The accrued reserve was reduced by $289,801 during the nine months ended September 30, 2001 as the result of favorable settlements related to outstanding lease obligations. Additionally, cash payments of $184,472 were made during the nine months ended September 30, 2001. The reserve for closed stores is reviewed by management on a quarterly basis to determine the adequacy of the reserves based on pending claims. We anticipate resolution of all matters within the next three months. (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 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 common stock was valued at the fair value of the outstanding obligations that were paid by the recipient of the stock. 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 $263,650 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 $1,902,280 using Black Scholes. 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 of the May 2001 private placement will be entitled to receive additional shares of common stock upon exercise of the series B adjustment warrants for no additional consideration if the average market price of the common stock (as defined) 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 maximum number of shares issuable under the warrants is 1,537,380. 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 Purchase Agreement. Pursuant to this provision the previous owners are entitled to additional consideration if specified gross profit targets are attained in each of the three years following the acquisition. These targets were satisfied and we issued 28,572 shares of common stock valued 12 at $5.25 per share, the closing market price on the date the earn out contingency was satisfied or $150,003. The value of the shares was recorded as additional 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 the CEO of Tekno Books who is also a director of Hollywood Media. In June 2001, we issued 88,000 shares of common stock valued at $495,795 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. In July 2001, we issued 35,000 shares of common stock valued at $165,900 as part of a settlement of outstanding litigation of Hollywood Media. The shares were valued at the market price of the common stock on the date the litigation was settled. On July 27, 2001 we acquired the assets of AlwaysI by issuing 210,731 shares of common stock valued at $1,220,132 the closing market price on the date the transaction closed. On September 26, 2001, 195,874 shares of common stock were released from escrow and valued at $3.63 per share or $711,023, the closing market price on the date various conditions were satisfied relating to the acquisition of TDI on September 15, 2000. The value of the shares was recorded as additional goodwill. See Note 3. In September 2001, we issued 218,341 shares of restricted common stock in a private placement to an accredited investor and received net proceeds of $1,000,000. During the nine months ended September 30, 2001, we issued 361,438 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 various dates of issuance was $1,771,997. Hollywood Media was 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 was below $9.63. The final adjustment period ended 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. The shares issued pursuant to the adjustment warrants were recorded as additional paid-in capital. We issued a total of 20,931 shares of common stock valued at $118,972 during the nine months ended September 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 $59,486 as interest expense and $59,486 as other receivables. Additionally, during the nine months ended September 30, 2001, we issued stock options and warrants valued at $337,568 for services rendered. We recorded $146,408 as consulting expense, $20,567 as cost of sales and $170,593 as other expense for the nine months ended September 30, 2001. 13 During the three months ended September 30, 2001, Hollywood Media completed a net issuance of 5,020 shares of common stock upon the exercise of outstanding stock options for which no proceeds were received. Pursuant to Hollywood Media's stock repurchase plan, during the nine months ended September 30, 2001, we repurchased 94,600 shares of common stock for an aggregate consideration of $405,806, or an average purchase price of $4.29 per share. (8) INVESTMENTS AND ADVANCES TO EQUITY METHOD INVESTEES: Investments and advances to equity method investees consist of the following: September 30, December 31, 2001 2000 ----------- ----------- NetCo Partners (a) $ 1,082,156 $ 699,331 MovieTickets.com, Inc. (b) 96,699 1,047,383 Beach Wrestling LLC (c) 91,627 67,500 ----------- ----------- $ 1,270,482 $ 1,814,214 =========== =========== (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 Net Earnings - Investments. The revenues, gross profit and net income of NetCo Partners for the nine and three months ended September 30, 2001 and 2000 are presented below: Nine Months Ended Three Months Ended September 30, September 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues $3,518,245 $5,556,639 $1,591,054 $2,483,866 Gross Profit 2,916,109 4,560,878 1,339,265 1,984,960 Net Income 2,845,994 4,546,059 1,280,393 1,952,583 Company's Share of Net income 1,422,997 2,273,030 640,196 976,292 As of September 30, 2001, NetCo Partners has $1,724,818 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 Hollywood Media's condensed consolidated balance sheets. NetCo Partners' deferred revenues, consisting of cash advances received but not yet recognized as revenue, amounted to $105,859 as of September 30, 2001. These deferred revenues are not included in Hollywood Media's condensed consolidated balance sheets. As of September 30, 2001, we received cumulative profit distributions from NetCo Partners since its formation totaling $6,715,415, in addition to reimbursement of substantially all amounts advanced by us to fund the operations of NetCo Partners. 14 (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 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 additional investment and is being amortized over a period of ten years. In March 2001, America Online, Inc. purchased a 3% (non-dividend) convertible 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 September 30, 2001. 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. For the nine and three months ended September 30, 2001, we recorded a loss of $376,684 and $197,770, respectively, from our investment in MovieTickets.com. For the nine and three months ended September 30, 2000, we recorded a loss of $173,165 and $130,386, respectively from our investment in MovieTickets.com. In 2000, we loaned MovieTickets.com $499,000. In 2001, we loaned MovieTickets.com $100,000. All loans made to MovieTickets.com were repaid in cash with interest in March 2001. (c) BEACH WRESTLING LLC: On November 10, 2000, an indirect wholly owned subsidiary of Hollywood Media entered into an agreement with Cisneros Television Group ("CTG") and Siegel Partners to form Beach Wrestling LLC, each having a one-third ownership interest. 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 nine and three months ended September 30, 2001, we recorded a loss of $147,253 and $20,000, respectively, from our investment in Beach Wrestling LLC. At September 30, 2001, the indirect wholly owned subsidiary of Hollywood Media had loaned $238,880 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 investment balance. (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 the theaters. In addition, we provide ongoing web site 15 maintenance services for 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 nine and three months ended September 30, 2001 and 2000 are as follows: Nine Months Ended Three Months Ended September 30, September 30, ---------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Barter Advertising $ 104,730 $ 1,464,229 $ 27,591 $ 655,453 Barter - NATO 2,236,313 2,236,313 745,438 745,438 ----------- ----------- ----------- ----------- $ 2,341,043 $ 3,700,542 $ 773,029 $ 1,400,891 =========== =========== =========== =========== Barter transactions accounted for approximately 50% and 49% of net Internet ad sales revenues for the nine months ended September 30, 2001 and 2000, respectively, and 47% and 52% of net Internet ad sales revenues for the three months ended September 30, 2001 and 2000, respectively. Barter transactions accounted for 6% and 7% of net revenues for the nine and three months ended September 30, 2001, respectively. Barter transactions accounted for 21% and 17% of net revenues for the nine and three months ended September 30, 2000, respectively. (10) REPORTABLE SEGMENT: Hollywood Media's reportable segments are ticketing, business to business, Internet ad sales and other, intellectual properties, e-commerce and retail. The ticketing segment sells tickets to live theater events for Broadway, Off-Broadway and London, online and offline, 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 movie content) and EventSource (which licenses local listings of events around the country) to media, wireless and Internet companies. The Internet ad sales and other segment sells advertising on the Hollywood.com and Broadway.com web sites and offers films to subscribers over the Internet. 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. 16
Nine Months Ended Three Months Ended September 30, September 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net Revenues: Ticketing (a) $ 26,757,424 $ 4,382,367 $ 7,596,999 $ 3,021,517 Business to Business 4,532,642 3,872,023 1,300,373 1,515,674 Internet Ad Sales and Other 4,638,165 7,548,400 1,644,276 2,679,901 Intellectual Properties 1,429,628 1,389,595 474,244 461,461 E-Commerce (b) 15,499 796,510 -- 350,467 Retail (d) - 23,370 -- -- ------------ ------------ ------------ ------------ $ 37,373,358 $ 18,012,265 $ 11,015,892 $ 8,029,020 ============ ============ ============ ============ Gross Margin: Ticketing (a) $ 4,460,544 $ 535,070 $ 1,439,958 $ 322,594 Business to Business 4,323,385 3,682,912 1,242,824 1,465,483 Internet Ad Sales and Other 4,448,102 6,832,485 1,579,622 2,443,624 Intellectual Properties 689,899 543,928 350,648 270,418 E-Commerce (b) (10,396) 88,751 200 77,492 Retail (d) -- (45,000) -- (45,000) ------------ ------------ ------------ ------------ $ 13,911,534 $ 11,638,146 $ 4,613,252 $ 4,534,611 ============ ============ ============ ============ Operating Income (Loss): Ticketing (a) $ 831,866 $ 204,489 $ 285,714 $ 79,088 Business to Business 170,849 281,967 (202,678) 159,661 Internet Ad Sales and other (c) (17,438,556) (24,003,727) (5,614,092) (8,472,163) Intellectual Properties 411,319 558,036 272,065 309,133 E-Commerce (b) 25,226 (2,021,911) 14,096 (637,756) Retail (d) 296,349 (91,129) 10,409 (49,071) Other (Corporate and other) (9,166,449) (8,672,419) (3,054,395) (3,192,717) ------------ ------------ ------------ ------------ $(24,869,396) $(33,744,694) $ (8,288,881) $(11,803,825) ============ ============ ============ ============ Capital Expenditures: Ticketing (a) $ 51,373 $ -- $ 15,917 $ -- Business to Business 155,846 180,593 29,971 49,858 Internet Ad Sales and Other 463,741 1,074,532 61,933 180,682 Intellectual Properties -- 5,188 -- -- E-Commerce (b) -- 13,347 -- 969 Other (Corporate and other) 273,107 136,659 192,735 -- ------------ ------------ ------------ ------------ $ 944,067 $ 1,410,319 $ 330,556 $ 231,509 ============ ============ ============ ============ Depreciation and Amortization Expense: Ticketing (a) $ 47,833 $ 3,975 17,904 $ 3,975 Business to Business 142,976 86,768 50,654 32,714 Internet Ad Sales and Other 2,295,794 2,020,084 784,889 708,267 Intellectual Properties 3,722 5,355 572 1,575 E- Commerce (b) 1,551 12,831 -- 4,653 Other (Corporate and other) 4,135,720 3,986,948 1,386,128 1,375,733 ------------ ------------ ------------ ------------ $ 6,627,596 $ 6,115,961 $ 2,240,147 $ 2,126,917 ============ ============ ============ ============
(a) TDI and BroadwayTheater.com, our ticketing businesses, were acquired on September 15, 2000 and May 1, 2000, respectively. Reported amounts include results from the dates of acquisition. (b) The e-commerce segment was closed in January 2001. (c) Includes $14,571,835 and $14,855,465 in amortization of CBS advertising for the nine months ended September 30, 2001 and 2000, respectively, and $4,761,771 and $5,479,561 for the three months ended September 30, 2001 and 2000, respectively. (d) The retail segment was closed on December 31, 1999. 17 (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. (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 Nine Months ended September 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. 18 o We issued 88,000 shares of common stock, valued at $495,795, as a payment towards outstanding capital lease obligations. o We issued 20,931 shares of common stock, valued at $118,972 for the extension of a promissory note. We recorded $59,486 as interest expense and $59,486 as other receivables. o We issued 28,572 shares of common stock valued at $150,003 under the terms of an earnout arrangement. o Pursuant to the exercise of certain adjustment warrants Hollywood Media issued 361,438 shares of common stock. o We issued 35,000 shares of common stock valued at $165,900 to satisfy an outstanding claim against Hollywood Media. o We issued 4,138 shares of restricted common stock valued at $15,000, as an incentive stock bonus to an officer of Hollywood Media. For the Nine Months ended September 30, 2000: o Hollywood Media 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 at an exercise price of $17.875 valued at $1.0 million were issued in connection with Hollywood Media's investment in MovieTickets.com, Inc. o Hollywood Media recorded $5,468,501 in deferred advertising in connection with the exercise of warrants by CBS. o Capital lease transactions totaled $266,822. o A note payable for $1,928,138 was paid by issuing 152,548 shares of common stock valued at approximately $12.64 per share. (14) 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. Post acquisition and through the first quarter of 2001, 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, effective January 1, 2001, 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 result 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 operation or financial position. If the current policy had been applied during 2000, reported ticketing revenues for the three and nine month period ended September 30, 2000 would have (increased/decreased) by $433,934 and $(114,357), respectively and reported gross margin would have increased by $112,291 and $16,164, respectively. 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 Hollywood Media's consolidated balance sheet at January 1, 2001. 19 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., accounting considerations related to our strategic alliance with Viacom Inc., the volatility of our stock price and the effects of outstanding warrants that include market-based adjustment features. Hollywood Media is also subject to other risks detailed herein or detailed in the Annual Report on Form 10-K/A 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. 20 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. 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. 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 16-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 the 800-Broadway toll-free number 1-800-BROADWAY, via the Broadway.com web site and by fax. As a marketing agency, TDI represents 10 producers and 14 Broadway shows to the travel industry around the world. The 14 Broadway shows are Aida, Beauty and the Beast, Cabaret, Chicago, Contact, 42nd Street, Mamma Mia!, Kiss Me Kate, Les Miserables, Rent, The Full Monty, The Lion King, The Music Man and The Phantom of the Opera. In addition, TDI's education division, Broadway Classroom, markets group tickets to schools across the country. TDI's offline ticketing service complements the online 21 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 September 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. 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 America Online'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, 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. MovieTickets.com entered into an agreement with Yahoo! Inc. in October 2001, which enables people to purchase movie tickets online through Yahoo!(R) Movies. 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. MovieTickets.com has also entered into an affiliation agreement with Knight Ridder Digital, a subsidiary of Knight Ridder. 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. Through the acquisition of AlwaysI in July 2001, the web site now features a subscription service offering viewers a collection of over 2,000 independent films. 22 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 Sony, General Motors, Universal Studios, The Food Network, Ben & Jerry's Ice Cream, Microsoft, American Movie Classics, Verizon, HBO, Fox, Proctor & Gamble, Visa, Lion's Gate Films, Diet Coke, New Line Cinema, MGM, US Army, AT&T and Warner Brothers. We promote Hollywood.com 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 Hollywood.com and Broadway.com. 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 Hollywood.com in all advertising sale programs and presentations that are appropriate for the sale of advertising on the web site. At September 30, 2001, we had approximately $72 million of advertising remaining with CBS. 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. We launched 1-800-BROADWAY on November 2, 2001. By calling 1-800-BROADWAY, consumers can now purchase live theater tickets via their telephone. We will also be integrating 1-800-BROADWAY into future Broadway.com marketing initiatives, including radio and television. 23 Intellectual Properties Business NetCo Partners. In June 1995, Hollywood Media 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. Hollywood Media 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 contributed to NetCo Partners all rights to Tom Clancy's NetForce, and hollywood Media 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 Hollywood Media. 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 and then licenses them to publishers who publish the books and pay license fees in the form of advances and royalties to Tekno Books. Tekno Books has worked with approximately 50 New York Times best-selling authors, including Tom Clancy, Elizabeth George, Nora Roberts, 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 1,300 books. The Chief Executive Officer of Tekno Books, Dr. Martin H. Greenberg, is also a director of Hollywood Media 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, Hollywood Media directly acquired an additional 25% interest in the magazine. 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). Results of Operations The following table summarizes Hollywood Media's net revenues, cost of revenues and gross margin by division for the nine months ended September 30, 2001 ("Y3-01") and 2000 ("Y3-00") and the three months ended September 30, 2001 ("Q3-01") and 2000 ("Q3-00"), respectively: 24
Internet Ad Business to Sales and Intellectual E- Ticketing Business Other Properties Commerce Retail Total ----------- ---------- ---------- ---------- --------- -------- ----------- Y3-01 - ----- Net Revenues $26,757,424 $4,532,642 $4,638,165 $1,429,628 $ 15,499 $ -- $37,373,358 Cost of Revenues 22,296,880 209,257 190,063 739,729 25,895 -- 23,461,824 ----------- ---------- ---------- ---------- --------- -------- ----------- Gross Margin $ 4,460,544 $4,323,385 $4,448,102 $ 689,899 $ (10,396) $ -- $13,911,534 =========== ========== ========== ========== ========= ======== =========== Y3-00 - ----- Net Revenues $ 4,382,367 $3,872,023 $7,548,400 $1,389,595 $ 796,510 $ 23,370 $18,012,265 Cost of Revenues 3,847,297 189,111 715,915 845,667 707,759 68,370 6,374,119 ----------- ---------- ---------- ---------- --------- -------- ----------- Gross Margin $ 535,070 $3,682,912 $6,832,485 $ 543,928 $ 88,751 $(45,000) $11,638,146 =========== ========== ========== ========== ========= ======== =========== Q3-01 - ----- Net Revenues $ 7,596,999 $1,300,373 $1,644,276 $ 474,244 $ -- $ -- $11,015,892 Cost of Revenues 6,157,041 57,549 64,654 123,596 (200) -- 6,402,640 ----------- ---------- ---------- ---------- --------- -------- ----------- Gross Margin $ 1,439,958 $1,242,824 $1,579,622 $ 350,648 $ 200 $ -- $ 4,613,252 =========== ========== ========== ========== ========= ======== =========== Q3-00 - ----- Net Revenues $ 3,021,517 $1,515,674 $2,679,901 $ 461,461 $ 350,467 $ -- $ 8,029,020 Cost of Revenues 2,698,923 50,191 236,277 191,043 272,975 45,000 3,494,409 ----------- ---------- ---------- ---------- --------- -------- ----------- Gross Margin $ 322,594 $1,465,483 $2,443,624 $ 270,418 $ 77,492 $(45,000) $ 4,534,611 =========== ========== ========== ========== ========= ======== ===========
Composition of our segments is as follows: o Ticketing - Includes our TDI ticketing business as well as our Broadway.com online ticketing operations and 1-800-BROADWAY. 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 and other - Includes advertising sold on the web sites Hollywood.com and Broadway.com and the AlwaysI subscription service which offers films to subscribers over the Internet. 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 nine months ended September 30, 2001 and 2000 were $37,373,358 and $18,012,265 respectively, an increase of $19,361,093 or 107%. Net revenue for the three months ended September 30, 2001 increased to $11,015,892 from $8,029,020 for the three months ended September 30, 2000, an increase of $2,986,872 or 37%. The increase in revenue is primarily the result 25 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 $2,910,235 and $1,035,625 for the nine and three months ended September 30, 2001, respectively. Ticketing revenue for Y3-01 and Y3-00 was $26,757,424 and $4,382,367 respectively, an increase of $22,375,057. Ticketing revenue for Q3-01 and Q3-00 was $7,596,999 and $3,021,517 respectively, an increase of $4,575,482. 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 (which includes CinemaSource, EventSource, and Baseline) increased $660,619 or 17% from $3,872,023 for Y3-00 to $4,532,642 for Y3-01 and decreased $215,301 or 14% from $1,515,674 for Q3-00 to $1,300,373 for Q3-01. The increase in revenue in Y3-01 is attributable to a growth in 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 decreased in Q3-01 as compared to Q3-00 due to a temporary decrease in revenues in our Baseline operations due to the impact of the events of September 11, 2001. Baseline, which operates a pay-per use subscription Web site geared towards professionals in the entertainment industry,is located in lower Manhattan and lost internet connectivity for a period of time following the September 11th events. Internet connectivity has since been restored. The events of September 11 did not impact our CinemaSource or EventSource business as these business units are located in Connecticut. Revenue for CinemaSource and EventSource 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 and Lycos and wireless providers such as Sprint PCS, AT&T Wireless and Verizon. Baseline, which operates a pay-per use subscription Web site geared towards professionals in the entertainment industry, Internet ad sales and other revenue for Y3-01 decreased to $4,638,165 from $7,548,400 for Y3-00, a decrease of $2,910,235 or 39%; and decreased $1,035,625 or 39% from $2,679,901 for Q3-00 to $1,644,276 for Q3-01. The decreases in Internet ad sales and other 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 and other revenue is derived from the sale of banner advertisements and sponsorships on the Hollywood.com and Broadway.com web sites. Barter transactions that generate non-cash advertising revenue, (included in Internet ad sales and other revenues), in which we received advertising or other services in exchange for content or advertising on its websites was $104,730 for Y3-01 and $1,464,229 for Y3-00, a decrease of $1,359,499, or 93%, and accounted for 0.3% and 8% of total net revenue for Y3-01 and Y3-00, respectively. Barter revenue for Q3-01 was $27,591 as compared to $655,453 for Q3-00, a decrease of $627,862, or 96%, and accounted for 0.3% and 8% of net revenues for Q3-01 and Q3-00, 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 revenue earned under a contract with NATO. This revenue is included in Internet ad sales and other revenue. An equal amount of expense is recorded each period in selling and marketing expenses. 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 26 information and editorial content. Barter revenue of $2,236,313 was recorded under the NATO contract for Y3-01 and Y3-00, and accounted for 6% and 12% of total net revenue for Y3-01 and Y3-00, respectively. In Q3-01 and Q3-00 we recorded $745,438 in revenue under the NATO contract or 7% and 9% of total net revenue, respectively. Total barter transactions accounted for approximately 50% and 49% of net Internet ad sales and other revenue for Y3-01 and Y3-00, respectively, and 47% and 52% of net Internet ad sales and other revenue for Q3-01 and Q3-00, respectively. Revenues from our intellectual properties segment increased $40,033 or 3% to $1,429,628 for Y3-01 from $1,389,595 for Y3-00 and increased $12,783 or 3% from $461,461 for Q3-00 to $474,244 for Q3-01. The increase in revenues is attributable to a greater number of manuscripts being delivered for Y3-01 and Q3-01 as compared to Y3-00 and Q3-00. 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 $781,011 or 98% from $796,510 for Y3-00 to $15,499 for Y3-01 as a result of the closure of our e-commerce business in January 2001. Retail revenues were $23,370 for Y3-00 and Q3-00. The revenue recognized in Y3-00 and Q3-00 represents proceeds received for the liquidation of inventory remaining after the closure of all the retail locations in December 1999. COST OF REVENUE Cost of revenue increased to $23,461,824 for Y3-01 from $6,374,119 for Y3-00 and increased to $6,402,640 for Q3-01 from $3,494,409 for Q3-00. As a percentage of net revenues, cost of revenues was 63% for Y3-01 as compared to 35% for Y3-00 and 58% for Q3-01 as compared to 44% for Q3-00. The increase in the cost of revenues is primarily the result of the addition of ticketing cost to our cost of revenues following 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% and 96% of the cost of revenues for Y3-01 and Q3-01, respectively. Cost of revenues consists primarily of the cost of tickets for the ticketing segment; commissions due to advertising 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 Y3-01 was $13,911,534 as compared to $11,638,146 for Y3-00 an increase of $2,273,388 or 20%. Gross margin for Q3-01 was $4,613,252 as compared to $4,534,611 for Q3-00, an increase of $78,641 or 2%. Gross margins primarily increased because of the increase in revenue from our ticketing segment which was partially offset by decreased margins in our internet ad sales segment. As a percentage of net revenues, the gross margin percentage in Y3-01 was 37% as compared to 65% in Y3-00, and 42% for Q3-01 as compared to 56% for Q3-00. 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 17% while our 27 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 NET 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. Nine Months Ended Three Months Ended September 30, September 30, ------------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- --------- --------- NetCo Partners (a) $1,422,997 $2,273,030 $ 640,196 $ 976,292 MovieTickets.com (b) (376,684) (173,165) (197,770) (130,386) Beach Wrestling LLC (c) (147,253) -- (20,000) -- ---------- ---------- --------- --------- $ 899,060 $2,099,865 $ 422,426 $ 845,906 =========== ========== ========= ========= (a) NetCo Partners: Our 50% share in the earnings of NetCo Partners decreased $850,033 or 37% to $1,422,997 for Y3-01 from $2,273,030 for Y3-00. Equity in earnings for Q3-01 was $640,196 as compared to $976,292 for Q3-00 a decrease of $336,096 or 34%. Revenue is recognized on book contracts when the earnings process is complete based on the terms of the contracts and at the point where ultimate collection is substantially assured. (b) MovieTickets.com: We own approximately 31.67% of the outstanding common stock of MovieTickets.com Inc. at September 30, 2001. The MovieTickets.com web site launched in May 2000. We recorded our 31.67% share of losses generated of $376,684 and $173,165 for Y3-01 and Y3-00, respectively, and $197,770 and $130,386 for Q3-01 and Q3-00, 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 $147,253 and $20,000 for the nine and three months ended September 30, 2001, respectively. 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 $2,607,241 or 33% to $5,372,297 for Y3-01 from $7,979,538 for Y3-00, and $1,110,738 or 40% to $1,657,287 for Q3-01 from $2,768,025 for Q3-00. 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 division in January 2001 and savings in the areas of recruitment, consulting and freelance fees of $3,393,113 and $1,058,892 for Y3-01 and Q3-01, respectively. The reductions in general and administrative expenses were offset by an increase in general and administrative expenses of $916,646 and $191,288 for Y3-01 and Q3-01, respectively, in our ticketing businesses as a result of the acquisitions of the ticketing businesses 28 in May and September of 2000. As a percentage of revenue, general and administrative expenses decreased to 14% for Y3-01 from 44% for Y3-00 and decreased to 15% for Q3-01 from 34% for Q3-00. Selling and marketing expenses. Selling and marketing expenses decreased $4,894,190 or 61% to $3,163,708 for Y3-01 from $8,057,898 for Y3-00 and decreased $1,629,001 or 59% to $1,131,213 for Q3-01 from $2,760,214 for Q3-00. Included in selling and marketing are non-cash barter transactions of $2,341,043 and $3,700,542 for Y3-01 and Y3-00, respectively, and $773,029 and $1,400,891 for Q3-01 and Q3-00, respectively. Barter transactions accounted for approximately 74% and 46% of selling and marketing expense for Y3-01 and Y3-00, respectively, and 68% and 51% for Q3-01 and Q3-00, 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 Y3-01 from 45% for Y3-00 and decreased to 10% for Q3-01 from 34% for Q3-00. Salaries and benefits. Salaries and benefits increased $970,836 or 12% to $9,335,295 for Y3-01 from $8,364,459 for Y3-00 and decreased $92,240 or 3% to $3,111,715 for Q3-01 from $3,203,955 for Q3-00. The increase for the nine months ended is primarily attributable to payroll costs of $1,715,361 associated with TDI, which we acquired on September 15, 2000 and the 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 25% for Y3-01 from 46% for Y3-00 and decreased to 28% for Q3-01 from 40% to Q3-00. Amortization. Amortization of goodwill and intangibles was $5,480,729 and $5,065,645 for Y3-01 and Y3-00, respectively, an increase of $415,084 or 8%, and $1,840,840 and $1,735,076 for Q3-01 and Q3-00, respectively, an increase of $105,764 or 6%. 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 $14,571,835 for Y3-01 and $14,855,465 for Y3-00, respectively, and $4,761,771 and $5,479,561 for Q3-01 and Q3-00 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 $1,146,867 for Y3-01 and $1,050,316 for Y3-00, an increase of $96,551 or 9%, and $399,307 for Q3-01 and $391,841 for Q3-00, an increase of $7,466 or 2%. The increases are attributable to an increased level of property and equipment from September 30, 2000 to September 30, 2001 of approximately $1.3 million. Interest Expense. Interest expense for Y3-01 was $285,518 compared to $280,269 for Y3-00 and $50,443 for Q3-01 as compared to $91,851 for Q3-00. 29 LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, Hollywood Media had cash and cash equivalents of $1,950,621 and working capital of $18,724,599 compared to cash and cash equivalents of $1,911,224 and a working capital of $14,871,414 at December 31, 2000. Net cash used in operating activities during Y3-01 was $4,680,308 primarily representing cash used to fund Hollywood Media's net loss and additions to ticketing inventory, excluding non-cash expenses and amortization of CBS advertising. Net cash used in investing activities was $743,212, primarily capital expenditures, while $5,462,917 in cash was provided by financing activities, primarily proceeds from issuance of common stock. As a result of the above, cash and cash equivalents increased by $39,397 for the nine months ended September 30, 2001. During the nine months ended September 30, 2000, net cash used in operating activities was $8,747,237, net cash used in investing activities was $3,123,960, and $14,283,433 in cash was provided by financing activities. Pursuant to Hollywood Media's stock repurchase plan 94,600 shares of its common stock were repurchased during the nine months ended September 30, 2001 for an aggregate consideration of $405,806 or an average purchase price of $4.29 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 $263,650 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 $1,902,280. 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 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 September 2001, we issued 218,341 shares of common stock in a private placement to an accredited investor and received net proceeds of $1,000,000. 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 $1.25 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 $1.25 million from other sources and such additional funding is not expended on acquisitions. During 2001, we drew $1,120,000 of such funding which was repaid during 2001. 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 During the three months ended September 30, 2001, we issued 91,228 shares of common stock to investors from the August 2000 private placement pursuant to the exercise of certain adjustment warrants. The final adjustment period ended 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. We issued a total of 5,316 shares of common stock valued at $31,790 during the three months ended September 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. In July 2001, we issued 35,000 shares of common stock as part of a settlement of outstanding litigation valued at $165,900. On July 27, 2001, we acquired the assets of AlwaysI by issuing 210,731 shares of common stock valued at $1,220,132. In September 2001, we issued 218,341 shares of common stock in a private placement to an accredited investor and received net proceeds of $1,000,000. During the quarter ended September 30, 2001, we issued stock options to purchase an aggregate of 62,000 shares of common stock, at exercise prices ranging from $4.71 per share to $6.18 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. 31 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 Investment and Subscription Agreement made and entered into as of September 17, 2001, between Hollywood Media Corp. and Zeke, L.P., a Delaware limited partnership. * 10.2 Purchase Agreement made as of October 12, 2001, between Broadway.com, Inc., Robert DeVivio and Peter Falconello. * * 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). 32 (6) Incorporated by reference from exhibit 1 to the Company's Current Report on Form 8-K filed on October 20, 1999. (a) Reports on Form 8-K Hollywood Media did not file any Current Report on Form 8-K during the quarter ended September 30, 2001. 33 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: November 13, 2001 By: /s/ Mitchell Rubenstein ------------------------------------ Mitchell Rubenstein, Chairman of the Board and Chief Executive Officer (Principal executive, financial and accounting officer) EX-10.1 3 ex10-1.txt INVESTMENT AND SUBSCRIPTION AGREEMENT EXHIBIT 10.1 INVESTMENT AND SUBSCRIPTION AGREEMENT ------------------------------------- THIS INVESTMENT AND SUBSCRIPTION AGREEMENT (the "Investment Agreement" or the "Agreement") is made and entered into as of this 17th day of September 2001 (the "Effective Date"), by and between HOLLYWOOD MEDIA CORP., a Florida corporation (the "Company"), on the one hand, and Zeke, L.P., a Delaware limited partnership on the other hand, whose address is 1235 Westlakes Drive, Berwyn, PA 19312 (the "Investor"). WHEREAS, the Company desires to issue and sell to the Investor shares of the Company's common stock, par value $0.01 per share ("Common Stock"), at a purchase price per share as set forth hereinbelow (the "Offering"). NOW, THEREFORE, for and in consideration of the premises and mutual covenants, representations, warranties and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: ARTICLE I SUBSCRIPTION AND PAYMENT; CERTAIN OFFERING TERMS AND PROCEDURES --------------------------------------------------------------- Section 1.1 Purchase and Sale of Shares; Purchase Price. -------------------------------------------- (a ) Purchase and Sale of Shares. The Investor hereby acknowledges that the Investor has received and carefully read this Investment Agreement before signing this Investment Agreement and, in reliance on the information, representations, warranties, covenants and agreements contained herein, and subject to the terms and conditions set forth herein, Investor hereby subscribes for and agrees to purchase, acquire and accept delivery from the Company, and the Company agrees to issue, sell and deliver to the Investor, at the Closing (as hereinafter defined), 218,341 shares of Common Stock (referred to herein as the "Initial Shares"), at a purchase price of one million dollars ($1,000,000) (hereinafter, the "Aggregate Purchase Price"). For purposes of the Investment Agreement, the "Shares" shall mean the Initial Shares and any and all Additional Shares, as applicable. (b) Share Purchase Price. The purchase price per share of Common Stock (the "Share Purchase Price") shall equal $4.58 per share. Section 1.2 Closing. The consummation and closing of the purchase and sale of the Initial Shares to the Investor provided for herein (the "Closing") shall take place at the offices of Hollywood Media Corp., 2255 Glades Road, Suite 237W, Boca Raton, FL 33431, at 10:00 a.m. (Eastern Time) on such date as the Company shall specify, which shall be no later than the third business day after all of the conditions set forth in Article V hereof have been satisfied or waived (other than those conditions which by their terms are intended to be satisfied at the Closing), is referred to herein as the "Closing Date". At the Closing, in consideration of the Investor's payment of the Aggregate Purchase Price, by (federal funds) wire transfer, to the Company, the Company shall deliver to the Investor a certificate, representing the Initial Shares to be purchased by the Investor, duly registered in the name of the Investor and bearing appropriate legends as provided in this Agreement. Article II REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. ---------------------------------------------------------- The Company hereby represents and warrants to, and agrees with, the Investor, as of the date hereof and on the Closing Date, as follows: Section 2.1 Organization, Qualification and Corporate Power. ------------------------------------------------ The Company is organized and validly existing and is in good standing under the laws of the State of Florida and has all requisite corporate power and authority for the ownership and operations of its properties and for the carrying on of its business as now being conducted. The Company is duly qualified and is in good standing as a foreign corporation and authorized to do business in all jurisdictions wherein the character of the property owned or leased, or the nature of the activities conducted by it, makes such qualification or authorization necessary, except where the failure to so qualify or be so authorized would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect(s) on the business, assets, operations or financial condition of the Company and its subsidiaries taken as a whole. The Company has all requisite corporate power and authority to execute and deliver this Agreement, to perform all its obligations hereunder, and to issue, sell and deliver the Shares, upon the terms and subject to the conditions set forth in this Agreement. Section 2.2 Authorization of Agreements. ---------------------------- (a) The execution and delivery by the Company of this Agreement, the performance by the Company of its obligations hereunder, and the issuance, sale and delivery of the Shares (upon the terms and subject to the conditions set forth in this Agreement) have been duly authorized by all requisite corporate action on the part of the Company. (b) The Shares have been duly authorized and, when issued, sold and delivered in accordance with this Agreement upon the terms and conditions and for the consideration expressed herein, will be (i) validly issued, fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof, and (ii) free and clear of all liens, charges and encumbrances of any nature whatsoever except for restrictions under applicable Federal and state securities laws. Section 2.3 Validity. This Agreement when executed shall have been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent any indemnification provisions or agreements therein may be limited by applicable Federal or state securities laws. Section 2.4 Capital Stock. The authorized capital stock of the Company consists of (i) 100,000,000 shares of Common Stock, of which as of September 14, 2001, 27,055,584 shares are issued and outstanding, and (ii) 1,000,000 shares of preferred stock, of which as of the date hereof, no shares are issued and outstanding. Section 2.5 No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Third Amended and Restated Articles of Incorporation of the Company (the "Articles of Incorporation") or the By-laws of the Company; (ii) conflict with, or constitute a default under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including United States federal and state securities laws and regulations and the rules and regulations of the Principal Market) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected, except, in the cases of subsections (ii) and (iii) above, where such violation, conflict, breach, default or lien would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the Securities Act of 1933, as amended (the "1933 Act" or the "Securities Act"), the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency or 2 any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under, or contemplated by, this Agreement in accordance with the terms hereof. Except as disclosed in Schedule 2.5, all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. Section 2.6 Principal Market. The Principal Market for the Common Stock is, and for the forseeable future is anticipated to be, the Nasdaq National Market System. Section 2.7 SEC Documents; Financial Statements. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it from and after December 31, 1999 with the Securities and Exchange Commission (the "SEC") pursuant to the reporting requirements of the Securities and Exchange Act of 1934, as amended (the "1934 Act" or the "Exchange Act") (all of the foregoing filed prior to the date hereof and financial statements and schedules thereto being hereinafter referred to as the "SEC Documents"). The SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents, have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or to the extent such financial statements have been amended, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Section 2.8 Absence of Certain Changes. Except as disclosed in any SEC Documents, since June 30, 2001 no event, liability, development or circumstance has occurred and there has been no adverse change or adverse development in the business, properties, assets, operations, financial condition, liabilities or results of operations of the Company or its subsidiaries which has had a Material Adverse Effect. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR --------------------------------------------------------- As an inducement to the Company to enter into this Agreement, the Investor hereby represents and warrants to and agrees with the Company, as of the date hereof, on the Closing Date and on the date of issuance of the Additional Shares, as follows: Section 3.1 Authorization; Validity; No Conflict; Binding Effect. ----------------------------------------------------- (a) The Investor has the full power and authority to execute and deliver this Investment Agreement, to perform all his obligations hereunder and thereunder, and to purchase, acquire and accept delivery of the Shares purchased hereunder (upon the terms and subject to the conditions set forth in this Investment Agreement). The execution and delivery by the Investor of this Agreement, the performance by the Investor of his or its obligations hereunder and thereunder, and the purchase, acquisition and acceptance of delivery of the Shares by the Investor (upon the terms and subject to the conditions set forth in this Investment Agreement) have been duly and validly authorized by all requisite corporate or other action on the part of the Investor and do not violate, conflict with or result in a breach of or default under (i) the charter, governing or organizational documents or instruments of the Investor, or (ii) any material provision of any mortgage, lease, indenture or other 3 instrument or obligation to which the Investor is a party or under which any of its properties or assets is bound. (b) This Investment Agreement has been duly executed and delivered by the Investor and constitutes the legal, valid and binding obligation of the Investor, enforceable in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent any indemnification provisions or agreements therein may be limited by applicable Federal or state securities laws. Section 3.2 Investment Representations, Warranties and Covenants. ----------------------------------------------------- (a) The Investor is familiar with and understands the business of the Company and its subsidiaries. With respect to individual tax and other economic considerations involved in this investment, the Investor is not relying on the Company. The Investor has carefully considered and has, to the extent the Investor believes such discussion necessary, discussed with the Investor's professional legal, tax, accounting and financial advisers the suitability of an investment in the Shares for the Investor's particular tax and financial situation and has determined that the Shares being subscribed for are a suitable investment for the Investor. (b) The Investor acknowledges that (i) the Investor and the Investor's attorney, accountant or other advisor(s) have had the right to request copies of any documents, records and books pertaining to this investment, the Shares and the business, finances and operations of the Company and (ii) such documents, records, and books which the Investor and the Investor's attorney, accountant or other advisor(s) have requested have been made available for inspection by such persons. The Investor believes that he, she or it has received all the information that he, she or it considers necessary or appropriate for making an investment decision with respect to the Shares, and that the Investor has had an opportunity to conduct a due diligence investigation regarding, and to ask questions and receive answers from the Company and it management regarding, the terms and conditions of this Agreement, and the business, industry, management, technology, properties, financial condition, results of operations and prospects of the Company and to obtain additional information necessary to verify the accuracy of any information furnished to the Investor or to which the Investor had access. (c) The Investor represents and warrants that he or she is a sophisticated investor, has had prior experience with investments of a similar nature and that the Investor's knowledge and experience in business and financial matters are such that Investor is capable of evaluating the merits and risks of investment in the Shares, making an informed investment decision with respect thereto and determining the suitability of the Investor's investment in the Shares. The Investor represents and warrants that the Investor is an "Accredited Investor" as defined in Rule 501 of Regulation D, promulgated by the SEC under the Securities Act. (d) The Investor understands that the Shares are being offered and sold to it, him or her in reliance upon specific exemptions from the registration requirements of the 1933 Act and applicable state exemption(s) and that the Company is relying upon the truth and accuracy of, and the Investor's compliance with, the Investor's representations, warranties, covenants, agreements, acknowledgments and understandings set forth herein in order to determine the availability of such exemptions and his or her eligibility to acquire the Shares. (e) The Investor acknowledges that the Shares herein subscribed for have not been registered under the Securities Act, or under the securities laws of any state and, therefore, cannot be sold, transferred or otherwise disposed of unless (i) they are either registered under the Securities Act and any applicable state securities laws or (ii) unless exemptions from such registration are available, provided that the Investor delivers to the Company an opinion of counsel satisfactory to the Company confirming the availability of such exemption. The Investor represents that the Investor is purchasing the Shares for the Investor's own account, for investment and neither as a nominee, nor with a view to the resale or distribution thereof except in compliance with the Securities Act and the restrictions contained in the immediately preceding sentence. The Investor further covenants that he or she will not make any sale, transfer or other disposition of the Shares in violation of the Securities Act, 4 the Exchange Act, the rules and regulations of the SEC promulgated thereunder or any applicable state securities laws. (f) The Investor shall indemnify and hold harmless the Company and each of its officers, directors, control persons, employees, shareholders and affiliates, and any person acting on behalf of the Company, who is or may be a party or is or may be threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of or arising from (i) Investor's breach or violation of this Investment Agreement or (ii) actual or alleged misrepresentation or misstatement of facts or other matters made or alleged to have been made by the Investor to the Company (or any of its agents or representatives) concerning the Investor or the Investor's authority to invest or financial position in connection with the Offering, including, without limitation, any such misrepresentation, misstatement or omission contained in this Investment Agreement or any other document submitted by the Investor, against losses, liabilities and expenses actually and reasonably incurred by the Company, or any of its officers, directors, control persons, employees, shareholders and affiliates, and any person acting on behalf of the Company in connection with such action, suit or proceeding for which the Company, or such officer, directors, control persons, employees, shareholders and affiliates, and any person acting on behalf of the Company has not otherwise been reimbursed (including, but not limited to, attorneys' fees, judgments, fines and amounts paid in settlement). All representations, warranties and covenants in this paragraph shall survive the execution of the Investment Agreement indefinitely. Section 3.3 Legends on Stock Certificates. ------------------------------ (a) The Investor acknowledges and understands that the certificates representing the Shares to be purchased by the Investor will bear, by imprint or endorsement, appropriate legends reflecting the status of the Shares under the Securities Act and applicable state securities laws. The Investor understands that the Shares shall bear a restrictive legend in, or substantially in, the form set forth below and any other legend, if such legend or legends are reasonably required by the Company to comply with state and federal law: THE SHARES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR UNDER APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, CONVEYED, PLEDGED, GIFTED, ASSIGNED, ENCUMBERED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AVAILABLE EXEMPTIONS FROM REGISTRATION FROM THE SECURITIES ACT AND THE RULES PROMULGATED THEREUNDER AND UNDER APPLICABLE STATE SECURITIES LAWS, PROVIDED THAT THE INVESTOR DELIVERS TO THE COMPANY AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY CONFIRMING THE AVAILABILITY OF SUCH EXEMPTION. INVESTOR SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. (b) The Investor agrees, that so long as the restrictive legends described herein in this Agreement remain on the certificates representing the Shares, the Company may maintain appropriate "stop transfer" orders with respect to the Shares, or any portion thereof, on its stock books and ledger and with its registrar and transfer agent, if any. Section 3.4 Regulatory Status. The Investor is not itself a registered broker-dealer. Section 3.5 Residency. The Investor is a resident of the Commonwealth of Pennsylvania. 5 ARTICLE IV COVENANTS --------- Section 4.1 Securities Compliance. The Company shall notify the SEC, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required by applicable law, rule and regulation, for the legal and valid issuance of the Shares. Section 4.2 Use of Proceeds. The Company agrees that the net proceeds received by the Company from the sale of the Shares hereunder shall be used for legally permitted purposes. Section 4.3 Reservation of Common Stock. The Company shall reserve a sufficient number of authorized but unissued shares of Common Stock for issuance to the Investor pursuant to the terms of this Agreement. Section 4.4 Registration Requirements. -------------------------- (a) Registration Requirement. After the Closing Date, the Company will use its commercially reasonable efforts to effect the registration of the Initial Shares on a registration statement (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act of 1933, as amended (the "Securities Act")) as would permit or facilitate the sale or distribution of all the Shares in the manner (including manner of sale) and in all states reasonably requested by the Investor. (b) Registration Procedures; Penalties. Such commercially reasonable efforts set forth in subsection (a) above by the Company shall include the following: (i) The Company will as expeditiously as possible, prepare and file with the SEC a registration statement (the "Registration Statement") on Form S-3 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and that counsel for the Company shall deem appropriate and which form shall be available for the resale of the Initial Shares to be registered thereunder in accordance with the provisions of this Investment Agreement and in accordance with the intended method of distribution of such Initial Shares), and use its commercially reasonable efforts to cause such filed Registration Statement to become effective by no later than the Effectiveness Deadline Date. The "Effectiveness Deadline Date" shall mean the first business day following the sixtieth (60th) day from the Closing Date. (ii) The Company shall prepare and file as expeditiously as reasonably practicable with the SEC such amendments and supplements to such Registration Statement, and the prospectus used in connection therewith, as may be necessary to keep such registration statement effective for the period contemplated thereby and comply with the provisions of the Securities Act with respect to the disposition of all Initial Shares of the Investor covered by such registration statement in accordance with the method of disposition described or provided in such registration statement for such period. (iii) The Company shall furnish to the Investor such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such person reasonably may request in order to facilitate the public sale or other disposition of the Initial Shares of the Investor covered by such registration statement; (iv) The Company will use its commercially reasonable efforts to (a) register or qualify such Initial Shares under such other securities or blue sky laws of such jurisdictions in the United States as the Investor may 6 reasonably (in light of its intended plan of distribution) request and (b) if applicable, cause such Initial Shares to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable the Investor to consummate the disposition of the Initial Shares; provided that the Company will not be required to (1) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for the fulfillment of its obligation under this paragraph, (2) subject itself to taxation in any such jurisdiction or (3) consent or subject itself to general service of process in any such jurisdiction. (v) The Company will promptly notify the Investor upon the occurrence of any of the following events in respect of the Registration Statement or related prospectus in respect of an offering of the Initial Shares: (i) receipt of any request for additional information by the Commission or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Initial Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that (or the Company otherwise becomes aware of any statement included in the Registration Statement, related prospectus or documents that is untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that), in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate (in which event the Company will promptly make available to the Investor any such supplement or amendment to the Registration Statement and, as applicable, the related prospectus). (vi) In connection with and as a condition to the registration provided under this Section 4.4, the Investor shall (a) provide such information and execute such documents as may reasonably be requested or required in connection with such registration, (b) agrees to sell those Initial Shares included in such registration solely on the basis provided in any mutually agreed upon underwriting or similar agreement or arrangement (which shall be in substantially customary form applicable to such offering), and (c) complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably requested or required under the terms of such underwriting agreement or arrangement. (vii) In the event that the Registration Statement is not declared effective by the first business day following the thirtieth (30th) day from the Closing Date, then as liquidated damages for such delay, (1) the Investor shall have the right to receive an aggregate of 11,544 additional shares (the "Additional Shares") of Common Stock of the Company for no additional consideration, and the Company shall issue the Additional Shares to the Investor within forty (40) days after the Closing Date, and (2) the Company shall use commercially reasonable efforts to amend the Registration Statement to include the Additional Shares. (viii) In the event that the Registration Statement is not declared effective by the Effectiveness Deadline Date, at any time following the Effectiveness Deadline Date and prior to the date on which the Registration Statement is declared effective, the Investor may elect, at its sole option, upon written notice to the Company (the "Put Notice"), which Put Notice shall be effective the date such Put Notice is sent to the Company, to require the Company to purchase, all but not less than all of the Shares held of record by 7 the Investor as of the Effectiveness Deadline Date and issued pursuant to the terms hereof by the Investor at the aggregate price of one million dollars ($1,000,000) (the "Put Price"). The Put Price shall be paid in immediately available funds from the Company to the Investor within fifteen (15) business days from the date of the Put Notice. If the Investor does not provide the Put Notice as and when provided by this paragraph, its rights under this paragraph shall automatically and permanently expire and terminate. (c) Expenses. All expenses incurred by the Company in complying with its registration obligations provided under this Section 4.4, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred by the Company in connection with complying with state securities or "blue sky" laws, fees of transfer agents and registrars, but excluding any Selling Expenses (as defined in the next succeeding sentence), are referred to herein as "Registration Expenses." All selling commissions and concessions applicable to the sale of the Shares, and all fees, expenses and disbursements of counsel engaged by the Investor, are referred to herein as "Selling Expenses." In connection with any registration of shares of Common Stock required pursuant to this Section 4.4, the Company will pay all Registration Expenses and the Investor will pay all Selling Expenses. (d) Information by Holder. The Investor to be included in any registration of securities pursuant to this Section 4.4 shall furnish to the Company such information regarding the Investor, any shares of Common Stock held by him or it and the distribution proposed by the Investor of the Shares as the Company may reasonably request and as shall be required or reasonably requested in connection with any registration (including any amendment to a registration statement or prospectus), qualification or compliance referred to in this Section 4.4 (or otherwise reasonably required to effect such registration on a proper and lawful basis). (e) Indemnification. (i) In the event of a registration of any of the Shares under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Investor, and each other person, if any, who controls the Investor within the meaning of Section 15 of the Securities Act, from and against any losses, claims, damages or liabilities, joint or several, to which such Investor or controlling person may become subject under the Securities Act or under any other statute or at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violations by the Company of applicable federal or state securities laws relating to such registration, provided, however, that the Company will not be liable to the Investor or controlling person in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or an omission or alleged omission so made in reliance upon and in conformity with information furnished in writing by such Investor or controlling person specifically for use in such registration statement or prospectus, and, provided further, however, that the Company will not be liable to any such Investor or other such party in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue or alleged untrue statement or omission or an alleged omission made in any preliminary prospectus or final prospectus if (1) such Investor failed to send or deliver a copy of the final prospectus or prospectus supplement or amended prospectus with or prior to the delivery of written confirmation of the sale of the Shares, and (2) the final prospectus or prospectus supplement or amended prospectus would have corrected such untrue statement or omission. (ii) In the event of a registration of any of the Shares under the Securities Act pursuant to this Agreement, the Investor, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer and director of the Company, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director or controlling person may become subject under 8 the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Shares was registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided, however, that such Investor will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished in writing to the Company by such Investor specifically for use in such registration statement or prospectus, and provided, further, however, that the liability of the Investor hereunder shall be limited to the amount of gross proceeds received by such Investor from sales of the Shares in connection with such registration. (iii) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability that it may have to such indemnified party under this Section 4.4(e) except and only to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 4.4 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof; provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded (based on the advice of counsel) that there may be reasonable defenses available to it which are materially different from those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to materially conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of one attorney constituting such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one attorney at any time for all such indemnified parties. (iv) No indemnifying party shall, without the prior written consent of the indemnified party (which shall not be unreasonably withheld), effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. An indemnified party will not consent to the entry of any judgment or enter into any settlement with respect to any claim for which it is indemnified hereunder without the prior written consent of indemnitor (not to be withheld unreasonably), and, except as permitted otherwise in the first sentence of this paragraph, the indemnitor will not consent to the entry of any judgment or enter into any settlement with respect to any claim indemnified by it hereunder without the prior written consent of indemnified party (not be withheld unreasonably). Section 4.5 Reports Under The 1934 Act. With a view to making available to the Investor the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investor to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: 9 (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and (c) furnish to the Investor so long as the Investor owns Shares, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration. ARTICLE V CONDITIONS TO OBLIGATIONS ------------------------- Section 5.1 Conditions to Obligations of the Company. The obligation of the Company to close and consummate the Closing is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any of which conditions may be waived, in whole or part, by the Company): (a) each of the representations and warranties of the Investor contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date as if made by the Investor on and as of such date, and each of the covenants and agreements of the Investor contained in this Agreement to be performed on or before the Closing Date shall have been duly and fully performed on or before such date, and, if requested by the Company, the Investor shall have delivered a certificate to the Company as to the truth and accuracy of the statements in this paragraph; (b) no order shall have been entered (or be in effect) by a court of competent jurisdiction which enjoins, prohibits or materially restrains the transactions contemplated by this Agreement; and (c) the Investor shall have delivered to the Company (federal funds) wire transfer (as directed and requested by the Company prior to the Closing Date), in the amount of and in payment in full of the Aggregate Purchase Price for the Shares to be purchased by the Investor as provided hereunder. Section 5.2 Conditions to Obligations of the Investor. The obligation of the Investor to close and consummate the Closing is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any of which conditions may be waived, in whole or part, by the Investor): (a) each of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date as if made by the Company on and as of such date, and each of the covenants and agreements of the Company contained in this Agreement to be performed on or before the Closing Date shall have been duly and fully performed on or before such date, and, if requested by the Investor, the Company shall have delivered a certificate to the Investor as to the truth and accuracy of the statements in this paragraph; (b) no order shall have been entered (or be in effect) by a court of competent jurisdiction which enjoins, prohibits or materially restrains the transactions contemplated by this Agreement; and (c) the Company shall have delivered to the Investor a certificate or certificates evidencing all of the Shares subscribed for and to be purchased by the Investor hereunder, registered in the name 10 of Investor, in accordance with the information set forth herein, and bearing the appropriate legends required under this Agreement. ARTICLE VI ADDITIONAL AGREEMENTS AND PROVISIONS ------------------------------------ Section 6.1 Survival of Representations. All representations and warranties made herein or in any agreement, certificate or instrument delivered pursuant to or in connection with this Agreement shall survive the execution and delivery of this Agreement and the issuance, sale and delivery of the Shares, and shall terminate, and cease to be of any effect, on the two (2) year anniversary of the Closing Date. Section 6.2 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other party. Section 6.3 Expenses. Any legal or other fees, costs or expenses incurred in connection with the consideration, preparation, negotiation, drafting or consummation of this Agreement and the transactions contemplated hereby shall be borne and paid solely by the party incurring such fees, costs or expenses. Section 6.4 Pronouns and Plurals; "Person". Whenever the context may require, any pronouns and any variations thereof used herein shall be deemed to refer to the masculine, feminine, impersonal, singular or plural, as the identity of the person or persons may require. As used in this Investment Agreement, the term "person" shall mean and include an individual, entity, corporation, trust, partnership, limited liability company or partnership, joint venture, unincorporated organization, association, governmental authority or any agency or political subdivision thereof. Section 6.5 Headings. The article, section, subsection, captions, headings and other titles preceding the text of each section, subsection or paragraph hereof are for convenience of reference only and shall not effect the construction, meaning or interpretation of this Investment Agreement (or of any provision hereof). Section 6.6 Construction. The parties acknowledge that each party has reviewed and negotiated this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Investment Agreement (or of any provision hereof). Section 6.7 Waiver of Compliance; Consents. Any failure of any party hereto to comply with any obligation, covenant, agreement or condition herein may be waived by the other parties hereto solely by a written instrument executed by such other parties; any such written and signed waiver, and any failure by any party to insist upon strict compliance with any obligation, covenant, agreement or condition herein, shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly so provided. Section 6.8 Amendment and Modification. Except as set forth elsewhere in this Investment Agreement, neither this Investment Agreement nor any provision hereof shall be amended waived, modified, supplements changed, discharged, terminated, revoked or canceled, except by a written instrument mutually agreed upon and executed by all parties hereto. Section 6.9 Notices. All notices, requests, demands, and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by facsimile or electronic transmission (with receipt confirmed). If sent by established and reputable overnight delivery service and sent to the address set forth below, or 11 to such other addresses as the parties hereto may from time to time designate in writing, such notices, requests, demands and other communications shall be deemed delivered the next business day after being so sent; if sent by registered or certified U.S. Mail (with receipt confirmed), and sent to the address set forth below, or to such other addresses as the parties hereto may from time to time designate in writing, such notices, requests, demands and other communications shall be deemed delivered the third business day after being so mailed: (a) If to the Company to: Hollywood Media Corp. 2255 Glades Road, Suite 237W Boca Raton, Florida 33431 Attention: Chief Executive Officer Facsimile: (561) 998-2974 With a copy to: Hollywood Media Corp. 2255 Glades Road, Suite 237W Boca Raton, Florida 33431 Attention: General Counsel Facsimile: (561) 998-2974 (b) If to the Investor, to the address (and to the attention of the person) indicated on the first page of this Investment Agreement. Section 6.10 Binding Effect. This Investment Agreement and all the terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, estate, legal representatives, successors and permitted assigns and are not intended and shall not be construed so as to confer any rights or benefits upon any other person or party. Section 6.11 Dealings in Good Faith; Best Efforts. Each party hereto agrees to act in good faith with respect to the other party or parties hereto in exercising its rights and discharging its obligations under this Investment Agreement. Each party further agrees to use its reasonable best efforts to ensure that the purposes of this Investment Agreement (and the related documents and agreements referred to herein) are realized and to take such further actions or steps, and execute and deliver (and, as appropriate, file) such further documents, certificates, instruments and agreements, as are reasonably necessary to implement the provisions of this Investment Agreement and to consummate the Closing, upon the terms and as contemplated by this Investment Agreement. Section 6.12 Governing Law; Jurisdiction. The validity and effect of this Investment Agreement, and the rights and obligations of the parties hereto, shall be enforced, governed by, and construed in all respect in accordance with the internal laws of the State of Florida (without reference to conflict of laws provisions), as such laws are applied by Florida courts to agreements entered into and to be performed in Florida, and any suit, action or proceeding arising out of or relating to this Agreement shall be commenced and maintained in any court of competent jurisdiction in the State of Florida, with exclusive venue in Palm Beach County. Section 6.13 Severability. It is the desire and intention of the parties hereto that, whenever possible, each provision of this Investment Agreement be interpreted in such a manner as to be effective and valid under applicable law; if, however, any provision of this Investment Agreement is found or held to be invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed to be modified to conform with such statute or rule of law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. 12 Section 6.14 Entire Agreement. This Investment Agreement, including the documents, agreements, exhibits and certificates referred to herein and therein, constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supercedes all prior discussions, understandings, negotiations, agreements, representations, warranties, promises, assurances, covenants, arrangements and communications, both written and oral, express or implied, of any and every nature between the Investor and the Company. Section 6.15 Attorneys' Fees. If any party to this Agreement seeks to enforce the terms and provisions of this Agreement, then the prevailing party or parties in such action shall be entitled to recover from the non-prevailing party or parties all costs in connection with such action, including without limitation reasonable attorneys' fees, expenses and costs incurred at the trial court and all appellate levels. Section 6.16 Counterparts. This Investment Agreement may be executed through the use of one or more counterparts, all of which together shall be considered one and the same agreement, binding on all parties hereto, notwithstanding that all parties are not signatories to the same counterpart. Upon delivery of a signed counterpart by the Investor to the Company, this Agreement shall be binding as one original agreement. IN WITNESS WHEREOF, the undersigned parties have executed this Investment Agreement as of the date first written hereinabove. THE COMPANY: HOLLYWOOD MEDIA CORP. By: /s/ Mitchell Rubenstein ---------------------------------- Name: Mitchell Rubenstein Title: Chief Executive Officer INVESTOR: /s/ Edward N. Antoian ---------------------------------- Print Name: Edward N. Antoian EX-10.2 4 ex10-2.txt PURCHASE AGREEMENT EXHIBIT 10.2 PURCHASE AGREEMENT ------------------ Agreement made as of this 12th day of October 2001 by and between Robert DeVivio, an individual whose address is 205 Johnson Street, Centerport, NY 11721 ("DeVivio"), Peter Falconello, an individual whose address is 389 Annadale Road, Staten Island, NY 10312 ("Falconello and, together with DeVivio, the "Seller") and Broadway.com, Inc., a Delaware corporation, 2255 Glades Road, Suite 237W, Boca Raton, Florida 33431 ("Purchaser"). WHEREAS, Seller is the registered owner of the phone number 800-276-2392 (800-Broadway) (the "800 Number") and the Internet domain names www.1800BROADWAY.com and www.800BROADWAY.com, (the "Domain Names"); WHEREAS, Seller wishes to sell, and Purchaser wishes to purchase, on the terms and conditions set forth in this Agreement, the 800 Number, the Domain Names and certain "Related Assets" (as hereinafter defined); NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Assets to be Purchased. ----------------------- Seller hereby agrees to sell and assign to Purchaser all right, title, and interest in and to the 800 Number, the Domain Names and the Related Assets. The "Related Assets" as used in this Agreement shall mean the following: (a) all trademarks, logos, and trade names, including any and all registrations and applications for registration of such trademarks, logos, and trade names, that have been created for or used in connection with the 800 Number or the Domain Names at any time (such trademarks, logos, and trade names are hereinafter collectively referred to as the "Related Names"); (b) all of the businesses and other activities carried on in any place or manner using the 800 Number, the Domain Names or the Related Names, at any time from the beginning of time to the effective date of the transfer to Purchaser pursuant to this Agreement (such businesses and other activities are hereinafter collectively referred to as the "Related Businesses"); (c) all of the copyrights, patents, other intellectual property, and other rights, including any and all registrations and applications for registration of such rights, to any materials created for or otherwise used in operating or promoting the Related Businesses; (d) all records and data generated in the operation of, or otherwise relating to, the Related Businesses; (e) all goodwill associated with or relating to the 800 Number, the Domain Names, the Related Names, and the Related Businesses; and (f) all of Sellers' rights under or relating to its existing Domain Name registrations with Network Solutions. 2. Representations, Warranties and Indemnities. ------------------------------------------- Seller represents and warrants that: (a) Seller is fully empowered to enter into and perform this Agreement; (b) Seller registered the Domain Names with Network Solutions on or about March 1, 2000 and, at all times since then, said registrations have been in effect and all registration fees duly paid; 2 (c) at all times since the Domain Names were registered, Seller has been the sole owner of the Domain Names and no other party has had, or claimed to have, any right, claim, lien or other interest in or to the Domain Names; (d) Seller obtained the right and license to use the 800 Number on or about April 1995 and since that time, no other party has had, or claimed to have, any right, claim, lien or other interest in or to the 800 Number; (e) Seller has been the sole owner of each of the Related Assets at all times since each such asset was created or otherwise came into being and no other party has had, or claimed to have, any right, claim, lien or other interest in any of the Related Assets; (f) the execution and performance of this Agreement and the consummation of the transactions contemplated by this Agreement, including without limitation the transfer to Purchaser of all right, title, and interest in and to the 800 Number, the Domain Names and the Related Assets, will not violate any financing or other agreement or otherwise violate any right of any party or any law, regulation, or order of any government body; (g) there has been no claim, action or proceeding of any kind at any time (including, without limitation, any claim letter to Seller or any affiliate of Seller or any complaint or objection to Network Solutions or any long distance carrier) asserting that the 800 Number, the Domain Names or any of the Related Assets violate any law, regulation, or order of any government body or any rights of any third party, including without limitation any copyright, patent, trademark, or other intellectual property rights; and 3 (h) the foregoing representations and warranties shall remain accurate at all times through the effective transfer of the 800 Number, the Domain Names and the Related Assets to Purchaser pursuant to this Agreement and the satisfaction of all the other "Conditions" set forth in Section 4 below. Seller further represents, warrants and agrees that, once all of such "Conditions" have been satisfied, they will not make any further use of any kind of the 800 Number, the Domain Names or the Related Assets. Seller shall immediately notify Purchaser in writing of any claim, action or proceeding involving the actual or alleged breach of any of the foregoing representations and warranties and provide whatever information, documents and other cooperation may be reasonably requested by Purchaser. Seller agrees to indemnify Purchaser and its employees, agents, licensees and assigns and hold them harmless against any damage, loss, cost or expense (including Purchaser's reasonable counsel fees) arising from or relating to any actual or alleged breach of any of the foregoing warranties or of the other undertakings by Seller under this Agreement. These representations, warranties and indemnities shall survive the consummation of the transactions contemplated by this Agreement or the termination of this Agreement for any reason. 3. Delivery of Transfer Documents and Phone Company and Network Solutions ---------------------------------------------------------------------- Filings. ------- To effectuate the assignment of the 800 Number, the Domain Names and Related Assets to Purchaser, Seller shall deliver to Purchaser, simultaneously with the execution and delivery of this Agreement, the following documents: (a) the Assignment of Assets, executed by Seller, in the form attached hereto as Exhibit "A," (b) the Registrant Name Change Agreements, executed by Seller, in the form attached hereto as Exhibit "B," and (c) the Letter of Authorization, executed by Seller, in the form attached hereto as Exhibit "C" and any documents related thereto required by Seller or Purchaser's long distance carrier to transfer the 800 Number. Each such document shall be executed before a Notary Public in the jurisdiction where executed. 4 Immediately following the delivery of such documents, Purchaser shall (1) countersign the Registrant Name Change Agreements and forward it to Network Solutions and (2) complete all documents required by Seller or Purchaser's long distance carriers to transfer the 800 Number. If Network Solutions does not effect the transfer of the Domain Names to Purchaser upon the initial filing of the Registrant Name Change Agreements or the long distance carriers do not effect the transfer of the 800 Number upon the initial filing of the documents by both parties, then Purchaser and Seller shall use their best efforts to resolve as quickly as possible any problems affecting that transfer, including, without limitation, promptly executing and filing such additional or revised documents as may be requested by Network Solutions or the long distance carriers or as may otherwise be necessary or appropriate to effect that transfer (including, without limitation, any such documents required by any change in the procedures of Network Solutions or the long distance carriers). Immediately upon Purchaser's receipt of email or written confirmation from Network Solutions that it has transferred the Domain Names to Purchaser or from any long distance carrier that it has transferred the 800 Number to Purchaser, Purchaser shall so notify Seller in writing. Upon receipt of such notice, Seller shall immediately deliver to Purchaser an affidavit, in the form attached as Exhibit "D," confirming that all of the representations and warranties set forth in Section 2 above remain accurate as of that date. 4. Conditions for Completion of Purchase. -------------------------------------- The transfer of the 800 Number, the Domain Names and Related Assets shall be considered complete, and the Compensation set forth in Section 5 below shall be due to Seller, only if and when all of the following conditions (the "Conditions") have been satisfied: (a) this Agreement has been executed and delivered by Seller and Purchaser; (b) Purchaser has received copies of the Assignment, the Quitclaim Assignment, the Registrant Name Change Agreement, and 5 all documents required by the long distance carriers to transfer the 800 Number duly signed and notarized in accordance with Section 3 above; (c) Purchaser has received email or written notification from Network Solutions that it has transferred the Domain Names to Purchaser; (d) Purchaser and Purchaser's long distance carrier have control over the 800 Number; and (e) Purchaser has received the Affidavit under Section 3 above concerning the continuing accuracy of the representations and warranties set forth in Section 2 above and those representations and warranties do in fact remain accurate at the time that Affidavit is received. Notwithstanding the foregoing, Purchaser shall have the option, in its sole discretion, to waive in whole or in part the satisfaction of any of the foregoing Conditions for completing the purchase of the 800 Number, the Domain Names and the Related Assets, in which case the transactions contemplated by this Agreement shall proceed as though such waived Conditions had been satisfied. Any such waiver must be in writing and signed by Purchaser. Purchaser's waiver of the satisfaction of any of the Conditions shall not constitute a waiver of any of the representations and warranties under Section 2 above or of Purchaser's right to indemnification under that Section. 5. Compensation. ------------- If and when all of the aforesaid Conditions have been satisfied, Purchaser shall deliver to Seller shares of common stock, par value $.01 per share, of Hollywood Media Corp. (the "Shares") valued at $100,000, which Shares shall have a per share price equal to the average closing price of Hollywood Media Corp.'s common stock on the Nasdaq Stock Market for the thirty (30) trading days prior to the first date on which all of the Conditions have been satisfied or waived by Purchaser; provided that the per share price shall not exceed $4.00. Half of the Shares shall be issued in the name of DeVivio and half of the Shares shall be issued in the name of Falconello. Purchaser shall cause 6 the Shares to be registered under the Securities Act of 1933 on a shelf registration statement. If the Shares are not registered on an effective registration statement within 75 days after the date of this Agreement, then Purchaser shall within five (5) business days thereafter remit to Seller an amount in cash equal to $100,000 by wire transfer or corporate check as specified by Seller. In such event, Seller shall promptly return to Purchaser all certificates representing the Shares and shall have no further claim to or interest in the Shares. 6. Further Documents. ------------------ Each party shall, at such party's own expense, execute such other documents and do such other acts as may be necessary or appropriate to effect the transfer of the 800 Number, the Domain Names and the Related Assets to Purchaser or otherwise to give effect to the intent of this Agreement. Both before and after the transfer of the 800 Number, the Domain Names and the Related Assets to Purchaser, Seller shall provide whatever documents and information may reasonably be requested by Purchaser concerning the 800 Number, the Domain Names and the Related Assets and their exploitation and promotion prior to said transfer, and, upon Purchaser's request, Seller shall provide whatever affidavits, testimony, and other assistance may reasonably be requested by Purchaser to authenticate such documents and verify such information. 7. No Assumption of Liabilities. ---------------------------- Notwithstanding any other provision of this Agreement, Purchaser is not assuming any liabilities or obligations with respect to the 800 Number, the Domain Names or the Related Assets, including without limitation any such liabilities or obligations arising from any action or inaction of Seller prior to the effective date of transfer of the 800 Number, the Domain Names and the Related Assets to Purchaser and the satisfaction of the other Conditions set forth in Section 4 above. 7 8. Notices. -------- All notices which may be given by one party to the other shall be in writing and shall be sent by one of the following means: (a) fax (which notice shall be deemed given when sent, provided the sender's fax machine provides, and sender retains, written confirmation of the successful transmittal), (b) hand delivery (which notice shall be deemed given when delivered), or (c) any internationally recognized overnight delivery service (which notice shall be deemed given two business days after being delivered to such service for two business day delivery). Notices shall be sent to the following addresses: if to Seller or DeVivio: Peter Falconello 389 Annadale Road Staten Island, NY 10312 Fax: (631) 423-5977 Robert DeVivio 205 Johnson Street Centerport, NY 11721 Fax: (631) 423-5977 if to Purchaser: Broadway.com, Inc. 2255 Glades Road, Suite 237W Boca Raton, Florida 33431 Attn: General Counsel Fax: (561) 998-2974 9. Public Announcement, Confidentiality. ------------------------------------- Seller agrees that it will not, at any time, make any public announcement concerning this Agreement or the sale of the 800 Number, the Domain Names or the Related Assets. Seller further agrees that it will keep strictly confidential at all times, and will not reveal to any third party, the amount of the compensation paid under this Agreement and all matters relating to such compensation. 8 10. Entire Agreement, Governing Law. -------------------------------- This Agreement constitutes the entire understanding among the parties relating to the subject matter hereof and may not be modified or terminated except in a writing signed by the party to be charged. This Agreement shall be governed in all respects by the law of the State of Florida as applied to agreements executed and to be performed therein. Any dispute arising out of or relating to this Agreement shall be determined by arbitration before a single neutral arbitrator in Palm Beach County, Florida under the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award may be entered in any court of competent jurisdiction. In any such arbitration and any related court proceedings, including without limitation any proceeding to enforce or collect the award, the prevailing party shall be entitled to reimbursement for its reasonable counsel fees as well as all costs of the proceeding. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. /s/ Robert DeVivio - --------------------------------- Robert DeVivio, individually /s/ Peter Falconello - --------------------------------- Peter Falconello, individually Broadway.com, Inc. ("Purchaser") By_/s/ W. Robert Shearer ------------------------------ Name: W. Robert Shearer --------------------------- Title: Executive Vice President -------------------------- -----END PRIVACY-ENHANCED MESSAGE-----