-----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, IPrBu+kTVKNvDSMwJW8w5fUyTA3dqO6gjkJqEk2kFbuZgzUMUOFvtyXLKte7RiTs 9GK3JmkVish2biU0gMUBRw== 0001116502-04-002711.txt : 20041115 0001116502-04-002711.hdr.sgml : 20041115 20041115172856 ACCESSION NUMBER: 0001116502-04-002711 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 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: 041147084 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: HOLLYWOOD COM INC DATE OF NAME CHANGE: 20000511 FORMER COMPANY: FORMER CONFORMED NAME: BIG ENTERTAINMENT INC DATE OF NAME CHANGE: 19930924 10-Q 1 hollywood10q.txt QUARTERLY REPORT UNITED STATES 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, 2004 [ ] 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 221A BOCA RATON, FLORIDA 33431 ------------------- ----- (Address of principal executive offices) (zip code) (561) 998-8000 -------------- (Registrant's telephone number) Indicate 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of November 10, 2004, the number of shares outstanding of the issuer's common stock, $.01 par value, was 30,853,707. HOLLYWOOD MEDIA CORP. TABLE OF CONTENTS
PAGE(S) PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003 .................................. 3 Condensed Consolidated Statements of Operations (unaudited) for the Nine and Three Months ended September 30, 2004 and 2003 (restated) . 4 Condensed Consolidated Statement of Shareholders' Equity (unaudited) for the Nine Months ended September 30, 2004 ....................... 5 Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 2004 and 2003 (restated) ........... 6 Notes to Condensed Consolidated Financial Statements (unaudited) ... 7-29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...................... 30-46 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................................................. 47 ITEM 4. CONTROLS AND PROCEDURES ............................................ 47-48 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS .................................................. 49 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .......................... 49 ITEM 5. OTHER INFORMATION .................................................. 49 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................... 50-51 Signatures .................................................................. 52
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2004 2003 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,796,668 $ 1,867,999 Receivables, net 1,313,950 1,496,934 Inventories, net 7,822,598 5,770,289 Prepaid expenses 1,279,282 941,966 Other receivables 1,114,564 654,141 Other current assets 152,854 10,296 Deferred advertising - CBS -- 38,807 ------------- ------------- Total current assets 15,479,916 10,780,432 RESTRICTED CASH 782,500 850,000 ACQUISITION ESCROW 920,000 -- PROPERTY AND EQUIPMENT, net 2,348,095 2,236,906 INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES 423,249 164,205 IDENTIFIABLE INTANGIBLE ASSETS, net 1,379,798 1,603,985 GOODWILL 45,081,539 40,813,682 OTHER ASSETS 284,851 431,811 ------------- ------------- TOTAL ASSETS $ 66,699,948 $ 56,881,021 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,988,600 $ 2,201,431 Accrued expenses and other 3,868,554 5,178,467 Loan from shareholder/officer 200,000 600,000 Deferred revenue 9,436,149 9,063,317 Current portion of capital lease obligations 198,971 227,538 ------------- ------------- Total current liabilities 15,692,274 17,270,753 CAPITAL LEASE OBLIGATIONS, less current portion 147,043 178,790 DEFERRED REVENUE, less current portion 251,687 193,063 MINORITY INTEREST 40,131 21,895 OTHER DEFERRED LIABILITY 103,694 903,192 CONVERTIBLE DEBENTURES, NET 763,708 4,027,629 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- -- Common stock, $.01 par value, 100,000,000 shares authorized; 30,698,762 and 21,810,266 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively 306,988 218,103 Additional paid-in capital 304,534,594 279,087,772 Deferred compensation (2,600,000) (162,500) Accumulated deficit (252,540,171) (244,857,676) ------------- ------------- Total shareholders' equity 49,701,411 34,285,699 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 66,699,948 $ 56,881,021 ============= =============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 3 HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30, Three Months Ended September 30, ------------------------------- -------------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (As Restated, (As Restated, See Note 2) See Note 2) NET REVENUES: Ticketing $ 39,604,332 $ 36,525,556 $ 11,654,166 $ 11,002,268 Other 9,667,525 9,084,221 3,448,661 2,923,642 ------------ ------------ ------------ ------------ Total revenues 49,271,857 45,609,777 15,102,827 13,925,910 OPERATING EXPENSES: Cost of revenues - ticketing 34,350,187 31,629,607 10,197,864 9,133,834 Editorial, production, development and technology (exclusive of depreciation and amortization shown separately below) 3,868,219 3,758,000 1,363,292 1,320,286 Selling, general and administrative 15,593,379 13,861,932 5,977,937 4,794,737 Amortization of CBS advertising 38,807 609,193 -- 102,464 Depreciation and amortization 1,604,614 1,839,801 562,263 585,408 ------------ ------------ ------------ ------------ Total operating expenses 55,455,206 51,698,533 18,101,356 15,936,729 Operating loss (6,183,349) (6,088,756) (2,998,529) (2,010,819) EQUITY IN EARNINGS (LOSSES) OF INVESTEES 557,713 1,035,605 (30,373) 229,479 OTHER INCOME (EXPENSE): Interest, net (2,548,460) (1,037,003) (1,762,959) (372,963) Other, net 786,851 (108,165) 59,178 (117,059) ------------ ------------ ------------ ------------ Loss before minority interest (7,387,245) (6,198,319) (4,732,683) (2,271,362) MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (295,250) (449,689) (59,258) (50,101) ------------ ------------ ------------ ------------ Net loss $ (7,682,495) $ (6,648,008) $ (4,791,941) $ (2,321,463) ============ ============ ============ ============ Basic and diluted loss per common share $ (0.28) $ (0.32) $ (0.17) $ (0.11) ============ ============ ============ ============ Weighted average common and common equivalent shares outstanding - basic and diluted 26,989,284 20,607,249 28,336,820 20,798,722 ============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 4 HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (Unaudited)
Common Stock Additional ---------------------------- Paid-in Deferred Accumulated Shares Amount Capital Compensation Deficit Total ------------- ------------- ------------- ------------- ------------- ------------- Balance - December 31, 2003 21,810,266 $ 218,103 $ 279,087,772 $ (162,500) $(244,857,676) $ 34,285,699 Compensation expense on stock or stock options -- -- 223,940 -- -- 223,940 Acquisition costs paid with stock -- -- 158,000 -- -- 158,000 Proceeds from issuance of shares to consultants 285,211 2,852 667,148 -- -- 670,000 Amortization of deferred compensation -- -- -- 162,500 -- 162,500 Stock options exercised 25,750 258 67,195 -- -- 67,453 Warrants exercised 14,708 147 35,353 -- -- 35,500 Issuance of shares to employees 10,383 104 34,896 -- -- 35,000 Issuance of restricted shares to officers 800,000 8,000 2,592,000 (2,600,000) -- -- Issuance of stock for acquisitions 164,712 1,647 572,132 -- -- 573,779 Issuance of stock for acquisition of intangible asset 68,104 681 224,062 -- -- 224,743 Beneficial conversion feature on convertible debentures -- -- 707,070 -- -- 707,070 401(k) employer match 52,627 526 139,461 -- -- 139,987 Issuance of shares for interest on convertible debentures 152,661 1,526 341,209 -- -- 342,735 Shares issued upon conversion of convertible debentures 1,540,985 15,410 4,684,590 -- -- 4,700,000 Private placement 5,773,355 57,734 14,999,766 -- -- 15,057,500 Net loss -- -- -- -- (7,682,495) (7,682,495) ------------- ------------- ------------- ------------- ------------- ------------- Balance - September 30, 2004 30,698,762 $ 306,988 $ 304,534,594 $ (2,600,000) $(252,540,171) $ 49,701,411 ============= ============= ============= ============= ============= =============
The accompanying notes to condensed consolidated financial statements are an integral part of this condensed consolidated financial statement. 5 HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ----------------------------- 2004 2003 ------------ ------------ (As Restated, see Note 2) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (7,682,495) $ (6,648,008) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,604,614 1,839,801 Interest paid in stock 342,735 233,360 Amortization of discount on convertible debentures 2,096,081 579,290 Amortization of deferred financing costs 165,599 97,272 Equity in earnings of investee, net of return of invested capital (259,044) (162,062) Compensation expense on stock options and warrants 223,940 304,649 Compensation expense on employee stock issuances 35,000 -- Amortization of deferred compensation 162,500 121,429 Provision for bad debts 184,408 178,950 Amortization of CBS advertising 38,807 609,193 Minority interest in earnings of subsidiary, net of distribution to minority owners 18,236 (130,119) Amortization of put/call option (719,250) (137,000) Changes in assets and liabilities: Receivables 567,056 346,366 Inventories (2,052,309) 273,758 Prepaid expenses (119,592) (409,365) Other receivables (427,479) (420,402) Other current assets (142,558) 197,384 Restricted cash 450,000 (550,000) Other assets (18,639) 174,318 Accounts payable (244,553) 746,815 Accrued expenses and other (1,433,111) 700,321 Deferred revenue (287,967) 71,354 Other deferred liability (80,248) 47,159 ------------ ------------ Net cash used in operating activities (7,578,269) (1,935,537) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (937,650) (337,241) Acquisition of Studio Systems, net of cash acquired (3,578,426) -- Acquisition escrow (920,000) -- Intangible asset acquisition (100,000) -- ------------ ------------ Net cash used in investing activities (5,536,076) (337,241) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceed from (repayment of) shareholder/officer loan (400,000) 700,000 Proceeds from issuance of shares to consultants 670,000 -- Net advances to third party (196,057) (119,248) Employee stock option exercises 67,453 -- Proceeds from private placement warrant exercise 35,500 -- Proceeds from issuance of common stock in private placement, net of issuance costs 15,057,500 -- Payments under capital lease obligations (191,382) (276,123) Payments under note payable -- 60,041 ------------ ------------ Net cash provided by financing activities 15,043,014 364,670 ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,928,669 (1,908,108) CASH AND CASH EQUIVALENTS, beginning of period 1,867,999 2,342,238 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 3,796,668 $ 434,130 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES: Interest paid $ 39,538 $ 93,912 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial 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 unaudited condensed consolidated financial statements have been prepared by Hollywood Media Corp. ("Hollywood Media") in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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, management believes that the disclosures contained herein are adequate to make the information presented not misleading. The financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to present fairly Hollywood Media's financial position and results of operations. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results of operations or cash flows that may result for the remainder of 2004. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Hollywood Media's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission. (2) RESTATEMENT: Following the recommendation of management and the concurrence of the Audit Committee of the Board of Directors, Hollywood Media made a determination to restate the previously filed unaudited condensed consolidated financial statements as of and for the nine and three months ended September 30, 2003, originally included in Form 10-Q. The restatement was made primarily to correct errors in the way Hollywood Media had previously accounted for Ticketing Business gift certificates and ticketing purchases and to make other adjustments set forth below which were identified by Hollywood Media's current auditors during the course of their audit of Hollywood Media's 2003 financial statements. The restated transactions are described in detail below and have been grouped under headings for convenience only. Revenue o Ticketing revenue has been increased by $94,434 or 0.3% in the restated condensed consolidated financial statements for the nine months ended September 30, 2003 as a result of an overstatement of the Broadway Ticketing gift certificate liability. o Ticketing revenue has been decreased by $49,503 or 0.4% in the restated condensed consolidated financial statements for the three months ended September 30, 2003 as a result of an understatement of the Broadway Ticketing gift certificate liability. 7 Cost of Revenues - Ticketing o Cost of Revenues - Ticketing has been decreased by $82,708 or 0.3% in the restated condensed consolidated financial statements for the nine months ended September 30, 2003 as a result of an overstatement of Broadway Ticketing accounts payable. o Cost of Revenues - Ticketing has been increased by $189,671 or 2.1%, in the restated condensed consolidated financial statements for the three months ended September 30, 2003 as a result of an understatement of Broadway ticketing accounts payable. Equity in Earnings - Investments o Equity in Earnings - Investments has been increased by $237,875 or 29.8% for the nine months ended September 30, 2003 as a result of equity income improperly recognized. o Equity in Earnings - Investments has been increased by $237,875 or 2,833.1% for the three months ended September 30, 2003 as a result of equity income improperly recognized Weighted Average Shares Outstanding o The number of weighted average shares outstanding was decreased by 82,498 shares for the nine months ended September 30, 2003 to exclude unvested restricted shares. o The number of weighted average shares outstanding was decreased by 246,321 shares for the three months ended September 30, 2003 to exclude unvested restricted shares. The total effect of the errors was a decrease in the net loss for the nine months ended September 30, 2003 of $415,017, or $0.02 per share, and an increase in the net loss for the three months ended September 30, 2003 of $1,299, which did not affect loss per common share. The following unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2003 reconcile the restated amounts to the corresponding amounts, as previously reported. Additionally, the following statement of cash flows for the nine months ended September 30, 2003 reconciles the restated amounts to the previously reported amounts. 8
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Nine Months Ended September 30, 2003 (Unaudited) - ----------------------------------------------------------------------------------------------------------- As previously Restatement reported adjustments Restated ------------ ------------ ------------ NET REVENUES Ticketing $ 36,431,122 $ 94,434 $ 36,525,556 Other 9,084,221 -- 9,084,221 ------------ ------------ ------------ $ 45,515,343 $ 94,434 $ 45,609,777 OPERATING EXPENSES Cost of revenues - ticketing 31,712,315 (82,708) 31,629,607 Editorial, production, development and technology (exclusive of depreciation and amortization shown separately below) 3,758,000 -- 3,758,000 Selling, general and administrative 13,861,932 -- 13,861,932 Amortization of CBS advertising 609,193 -- 609,193 Depreciation and amortization 1,839,801 -- 1,839,801 ------------ ------------ ------------ Total operating expenses 51,781,241 (82,708) 51,698,533 Operating loss (6,265,898) 177,142 (6,088,756) EQUITY IN EARNINGS OF INVESTEE 797,730 237,875 1,035,605 OTHER INCOME (EXPENSE): Interest, net (1,037,003) -- (1,037,003) Other, net (108,165) -- (108,165) ------------ ------------ ------------ Loss before minority interest (6,613,336) 415,017 (6,198,319) MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (449,689) -- (449,689) ------------ ------------ ------------ Net loss $ (7,063,025) $ 415,017 $ (6,648,008) ============ ============ ============ Basic and diluted loss per common share $ (0.34) $ 0.02 $ (0.32) ============ ============ ============ Weighted average common and common equivalent shares outstanding - basic and diluted 20,689,747 (82,498) 20,607,249 ============ ============ ============
9
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended September 30, 2003 (Unaudited) - ----------------------------------------------------------------------------------------------------------- As previously Restatement reported adjustments Restated ------------ ------------ ------------ NET REVENUES Ticketing $ 11,051,771 $ (49,503) $ 11,002,268 Other 2,923,642 -- 2,923,642 ------------ ------------ ------------ Total revenues 13,975,413 (49,503) 13,925,910 ------------ ------------ ------------ OPERATING EXPENSES Cost of revenues - ticketing 8,944,163 189,671 9,133,834 Editorial, production, development and technology (exclusive of depreciation and amortization shown separately below) 1,320,286 -- 1,320,286 Selling, general and administrative 4,794,737 -- 4,794,737 Amortization of CBS advertising 102,464 -- 102,464 Depreciation and amortization 585,408 -- 585,408 ------------ ------------ ------------ Total operating expenses 15,747,058 189,671 15,936,729 ------------ ------------ ------------ Operating loss (1,771,645) (239,174) (2,010,819) EQUITY IN EARNINGS OF INVESTEE (8,396) 237,875 229,479 OTHER INCOME (EXPENSE): Interest, net (372,963) -- (372,963) Other, net (117,059) -- (117,059) ------------ ------------ ------------ Loss before minority interest (2,270,063) (1,299) (2,271,362) MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (50,101) -- (50,101) ------------ ------------ ------------ Net loss $ (2,320,164) $ (1,299) $ (2,321,463) ============ ============ ============ Basic and diluted loss per common share $ (0.11) $ -- $ (0.11) ============ ============ ============ Weighted average common and common equivalent shares outstanding - basic and diluted 21,045,043 (246,321) 20,798,722 ============ ============ ============
10
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended September 30, 2003 (Unaudited) - ----------------------------------------------------------------------------------------------------------------- As previously Restatement reported adjustments Restated ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(7,063,025) $ 415,017 $(6,648,008) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,839,801 -- 1,839,801 Interest paid in stock 233,360 -- 233,360 Amortization of discount on convertible Debentures 579,290 -- 579,290 Amortization of deferred financing costs 97,272 -- 97,272 Equity in earnings of investee, net of return of invested capital (162,062) -- (162,062) Issuance of compensatory stock, stock options and warrants for services rendered 304,649 -- 304,649 Amortization of deferred compensation costs 121,429 -- 121,429 Provision for bad debts 178,950 -- 178,950 Amortization of CBS advertising 609,193 -- 609,193 Minority interest in earnings of subsidiary, net of distribution to minority owners 107,756 (237,875) (130,119) Amortization of put/call option (137,000) -- (137,000) Changes in assets and liabilities: Receivables 346,366 -- 346,366 Inventories 273,758 -- 273,758 Prepaid expenses (409,365) -- (409,365) Other receivables (420,402) -- (420,402) Other current assets 197,384 -- 197,384 Restricted cash (550,000) -- (550,000) Other assets 174,318 -- 174,318 Accounts payable 746,815 -- 746,815 Accrued expenses and other 783,029 (82,708) 700,321 Deferred revenue 165,788 (94,434) 71,354 Other deferred liability 47,159 -- 47,159 ----------- ----------- ----------- Net cash used in operating activities (1,935,537) -- (1,935,537) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (337,241) -- (337,241) ----------- ----------- ----------- Net cash used in investing activities (337,241) -- (337,241) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from shareholder/officer loan 700,000 -- 700,000 Net advances to third party (119,248) -- (119,248) Payments under capital lease obligations (276,123) -- (276,123) Payments under note payable 60,041 -- 60,041 ----------- ----------- ----------- Net cash provided (used in) by financing activities 364,670 -- 364,670 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,908,108) -- (1,908,108) CASH AND CASH EQUIVALENTS, beginning of period 2,342,238 -- 2,342,238 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 434,130 $ -- $ 434,130 =========== =========== =========== SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES: Interest paid $ 93,912 $ -- $ 93,912 =========== =========== ===========
11 (3) STOCK-BASED COMPENSATION: As permitted under Statement of Financial Accounting Standard (SFAS) No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS NO. 123" ("SFAS No. 148"), which amended SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS No. 123"), Hollywood Media has elected to account for grants to employees under its Stock Plan under the intrinsic value method as allowed by Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB No. 25") and related interpretations. Under APB No. 25, because the exercise price of Hollywood Media's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recorded. SFAS No. 148 requires disclosure of the estimated fair value of employee stock options granted and pro forma financial information assuming compensation expense was recorded using these fair values. In accordance with SFAS 123 and SFAS 148, the following table presents reported and adjusted information for the three and nine months ended September 30, 2004 and 2003 regarding net loss and net loss per share as if the Company had accounted for all of its employee stock options under the fair value method of SFAS 123:
Nine months ended Three months ended September 30, (unaudited) September 30, (unaudited) ---------------------------- ---------------------------- Restated Restated 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Reported net loss $ (7,682,495) $ (6,648,008) $ (4,791,941) $ (2,321,463) Stock-based employee compensation expense under the fair value method (1,180,639) (1,845,609) (270,226) (700,430) ------------ ------------ ------------ ------------ Adjusted net loss $ (8,863,134) $ (8,493,617) $ (5,062,167) $ (3,021,893) ============ ============ ============ ============ Reported net loss basic and diluted per share $ (0.28) $ (0.32) $ (0.17) $ (0.11) ============ ============ ============ ============ Adjusted net loss basic and diluted per share $ (0.33) $ (0.41) $ (0.18) $ (0.15) ============ ============ ============ ============ Number of ordinary shares used in computation basic and diluted 26,989,284 20,607,249 28,336,820 20,798,722 ============ ============ ============ ============
The fair value of each option grant was determined using the Black-Scholes option-pricing model. The Black-Scholes model was not developed for use in valuing employee stock options, but was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation. Because changes in the subjective assumptions can materially affect the fair value estimate and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option-pricing model may not provide a reliable estimate of the fair value of employee stock options. 12 (4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Per Share Amounts Basic loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Restricted shares are not included in the basic calculation until vesting occurs. As of September 30, 2004, there were 800,000 unvested restricted shares, and as of September 30, 2003, there were 187,500 unvested restricted shares. There were 5,913,997 and 5,200,133 options and warrants to purchase common shares outstanding at September 30, 2004 and 2003, respectively, that could potentially dilute earnings per share in the future. In addition, the convertible Debentures (Note 6) are convertible into 312,500 shares of common stock at a conversion price of $3.20 per share as of September 30, 2004, and into 1,647,399 shares of common stock at a conversion price of $3.46 as of September 30, 2003. The potential shares underlying the unvested, restricted shares, options, warrants and convertible Debentures have been excluded from the weighted average number of common shares outstanding for the three and nine months ended September 30, 2004 and 2003 because they are antidilutive for all periods presented. Accounting Estimates The preparation of the condensed 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 consolidated financial statements include the adequacy of allowances relating to accounts receivables and litigation matters and Hollywood Media's ability to realize the carrying value of goodwill, intangible assets, investments in less than majority owned companies, other long-lived assets and calculation of Hollywood Media's self-insurance group medical liability. Receivables Receivables consist of amounts due from customers who (i) have advertised on Hollywood Media's web sites, (ii) have licensed data from Hollywood Media's syndication businesses, (iii) have purchased live theater tickets, and (iv) are publishers relating to signed contracts, to the extent that the earnings process is complete and amounts are realizable. Receivables are net of an allowance for doubtful accounts of $440,839 and $259,109 at September 30, 2004 and December 31, 2003, respectively. During 2001, Hollywood Media entered into an agreement with a third party whereby a certain portion of its accounts receivable was monetized. Hollywood Media received an initial advance of 85% of the invoice amount, with the remaining 15%, less fees, transferred to Hollywood Media upon payment by the customer to the third party. At September 30, 2004 and December 31, 2003, included in "accrued expenses and other" in the accompanying condensed consolidated balance sheets is a liability of $0 and $196,057, respectively, which was recorded 13 for advances that had been paid to Hollywood Media but remain payable by Hollywood Media's customers to the third party. In April 2004, Hollywood Media terminated the agreement. Recent Accounting Pronouncements In March 2004, the FASB issued its Exposure Draft, SHARE BASED PAYMENT, which is a proposed amendment to FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The exposure draft covers a wide range of equity-based compensation arrangements. Under the FASB's proposal, all forms of share-based payments to employees, including employee stock options, would be recognized as compensation expense. The expense of the award would generally be measured at the fair value at the grant date. Currently, the final standard is expected to be issued in late 2004 and adoption will be required in 2005. If the provisions of this exposure draft become required, it may have an impact on the Company's condensed consolidated financial statements. In December 2003, the FASB issued a revised Interpretation No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN NO. 51", ("FIN 46R"). FIN 46R requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, or receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. The provisions of FIN 46R are generally effective for existing (prior to February 1, 2003) variable interest relationships of a public entity no later than the end of the first reporting period that ends after March 15, 2004. However, prior to the required application of this interpretation a public entity that is not a small business issuer shall apply FIN 46R to those entities that are considered to be special-purpose entities no later than the end of the first reporting period that ends after December 15, 2003. The Company currently has no contractual relationship or other business relationships with a variable interest entity and therefore the adoption of FIN 46R as of March 31, 2004 did not have a material effect on its unaudited condensed consolidated financial position, results of operations or cash flows. In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which revises the existing revenue recognition SAB in Topic 13, "Revenue Recognition" in order for the interpretive guidance to be consistent with current accounting guidance, primarily EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." The impact of adoption was not material. (5) ACQUISITIONS AND OTHER CAPITAL TRANSACTIONS: FOUNTAINHEAD MEDIA SERVICES On January 14, 2002, Fountainhead Media Services ("FMS") acquired a 20% equity interest in a subsidiary that owns Baseline, Inc., a wholly owned subsidiary of Hollywood Media. Consideration consisted of a $2 million promissory note payable to Hollywood Media and the contribution by Fountainhead Media Services of its FilmTracker database, intellectual property rights, all existing contracts and content management system with a stated value of $2 million. The Baseline service was integrated with FilmTracker's content management system and interface. On January 7, 2004, Hollywood Media exchanged the promissory note for the 20% equity interest owned by Fountainhead, and Hollywood Media now owns 100% of the subsidiary that 14 owns Baseline. In conjunction with the exchange of the promissory note, the negative fair value of $719,250 on a put and call option obtained by FMS was relieved through earnings during the first quarter of 2004, and is included in other, net in the accompanying unaudited condensed consolidated statement of operations for the nine months ended September 30, 2004. FRONT ROW MARKETING On June 18, 2004, Hollywood Media acquired the assets of Front Row Marketing ("FRM"), a provider of opt-in emails of movie showtimes services for certain movie theater exhibitors in the United States. In exchange for the assets of Front Row Marketing, which consisted primarily of customer contracts, Hollywood Media issued 91,463 shares in Hollywood Media common stock valued at $323,779. Front Row Marketing was integrated into Hollywood Media's ExhibitorAds business unit which is part of Hollywood Media's Data Business. The entire purchase price has been allocated to goodwill pending valuation by a third party expert, which has not been performed as of the filing of this Form 10-Q. STUDIO SYSTEMS, INC. ("SSI") On July 1, 2004, Hollywood Media consummated its acquisition by merger of 100% of the outstanding common stock of Studio Systems, Inc., one of the leading entertainment industry database and information service providers, pursuant to a definitive purchase agreement. As a result of the acquisition, Studio Systems, Inc. became a subsidiary of Hollywood Media and its business was integrated with Hollywood Media's Baseline/FilmTracker subsidiary now known as Baseline/StudioSystems. The aggregate purchase consideration was $5,014,027, including $153,625 of acquisition costs, of which $920,000 is being held in an escrow account pending the final working capital adjustment. The $920,000 is not included in the allocation of the cost of the assets acquired and liabilities assumed as it represents contingent consideration for which the contingency has not been resolved beyond a reasonable doubt. As part of the consideration paid to the former owners of Studio Systems, Inc., Hollywood Media issued 73,249 shares of its common stock valued at $250,000, and agreed to make 12 monthly payments of $42,500 each. Hollywood Media funded the closing payments with cash on hand. In addition, as part of the consideration paid for the acquisition, Hollywood Media paid $150,000 to satisfy certain employment agreements for former SSI senior management. The results of operations of Studio Systems, Inc. have been included in Hollywood Media's third quarter 2004 results from the date of acquisition. In addition, pro forma disclosures are provided below. 15 The following are the amounts assigned to the acquired assets and assumed liabilities at the acquisition date: Purchase consideration $ 5,014,027 Less cash in escrow (920,000) ----------- Adjusted purchase consideration $ 4,094,027 =========== Cash acquired $ 265,601 Accounts receivable 568,480 Other current assets 45,601 Property, plant and equipment, net 177,363 ----------- Total assets $ 1,057,045 =========== Current liabilities $ (142,653) Other long-term liabilities (764,442) ----------- Total liabilities $ (907,095) =========== Net assets $ 149,950 ----------- Excess of the purchase consideration over fair value of net assets acquired $ 3,944,077 =========== The excess of the purchase price over the fair value of net assets acquired has been classified preliminarily in goodwill in the accompanying condensed consolidated balance sheet as of September 30, 2004. The allocation of purchase price is preliminary pending valuations and other determinations that are expected to be completed during 2004. The Company is obtaining valuations from third party experts and finalizing estimates related to taxes and certain restructuring liabilities. 16 The results of operations of Studio Systems, Inc. have been included in the Company's results of operations since the date of acquisition (July 1, 2004). The following are the pro forma results for each applicable period assuming that the acquisition had occurred on the first day of each period presented:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ------------ 2004 2003 2003 ------------ ------------ ------------ Net sales $ 50,627,984 $ 47,571,046 $ 14,566,206 Net loss $ (7,394,790) $ (7,575,131) $ (2,416,716) Loss per share $ (0.27) $ (0.37) $ (0.12) Weighted average common and common equivalent shares outstanding - basic and diluted 27,037,938 20,680,998 20,871,971
(6) DEBT: PROMISSORY NOTES In connection with the Theatre Direct NY, Inc. ("TDI") acquisition on September 15, 2000, Hollywood Media signed two promissory notes payable to the former owner. The first was 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. The second promissory note was a one-year non-interest bearing note with a face value of $250,000. An agreement was reached effective March 31, 2002 between Hollywood Media and the former owner of TDI that the remaining notes payable balance, plus interest, would be paid either in cash or in restricted common stock of Hollywood Media. A guaranty was granted to the former owner in connection with the sale of the former owner's shares obtained at acquisition. During the year ended December 31, 2003, the Company issued 262,000 shares valued at $353,700 to the former owner as payment for the outstanding principal and interest balance. In addition, 57,835 shares valued at $76,342 were issued to a third party as payment under the guaranty granted to the former owner. These obligations were satisfied in full during the first quarter of 2004, and there was no outstanding balance due, or contingent obligation at September 30, 2004. CEO COMMITMENT Under a commitment that expired on January 1, 2004, in the event that Hollywood Media required additional funding, Hollywood Media's Chairman of the Board and Chief Executive Officer and Hollywood Media's Vice Chairman and President committed to provide Hollywood Media, if required, with an amount not to exceed $3.5 million through January 1, 2004, if needed to enable Hollywood Media to meet its working capital requirements; provided, however, that the commitment would be reduced dollar for dollar to the extent Hollywood Media generated cash from financings, operational cash flow or proceeds from a sale of a division or subsidiary of Hollywood Media. Advances bore interest at the prime rate plus one percent. There was $600,000 principal amount outstanding under this commitment at December 31, 2003, of which $400,000 (which was loaned by a wholly-owned limited liability corporation of Hollywood Media's Chairman and President) was collateralized by Broadway Ticketing inventory, and $200,000 was unsecured. As of September 30, 2004, the balance of $200,000 under this 17 commitment was unsecured. As of September 30, 2004 and December 31, 2003, Hollywood Media has accrued interest on this commitment of $3,052 and $16,682, respectively. In addition, interest expense for the three and nine months ended September 30, 2004 was $2,445 and $4,688, respectively, and $7,270 and $7,270 for the three and nine months ended September 30, 2003, respectively. MAY 2002 CONVERTIBLE DEBENTURES On May 22, 2002, Hollywood Media issued an aggregate of $5.7 million in principal amount of 6% Senior Convertible Debentures due May 22, 2005 (the "Debentures") to a group of investors, upon payment of an aggregate $5.7 million cash investment from such investors. The Debentures are convertible at the option of the investors at any time through the maturity date into shares of common stock of Hollywood Media. Prior to conversion, the Debentures bore interest at 6% per annum, payable quarterly in cash or common stock. Mitchell Rubenstein, the Chairman of the Board and Chief Executive Officer, and Laurie S. Silvers, the Vice Chairman and President of Hollywood Media, participated in the financing with a $500,000 cash investment upon the same terms as the other investors. The Debentures are convertible at the option of the investors at any time through May 22, 2005 into shares of Hollywood Media common stock, par value $0.01 per share. The original conversion price of $3.46 per share has been adjusted and amended as described below. In addition, Hollywood Media can elect at its option to convert up to 50% of the convertible Debentures if the Debentures are still outstanding at maturity, subject to certain conditions. The investors also received fully vested detachable warrants (the "Warrants") to acquire at any time through May 22, 2007 an aggregate of 576,590 shares of common stock at an exercise price of $3.78 per share. On May 22, 2003, an investor holding at least seventy-five percent of such investor's shares of common stock issued or issuable to such investor under the Debentures, had the exercise price of the warrants held by such investor decreased to $3.46 per share, which equals the pre-adjustment conversion price of the Debentures. The Debentures and Warrants contain customary anti-dilution provisions as more fully described in the agreements. As a result of the private placement discussed in Note 8, the conversion price of the Debentures upon issuance of $3.46 per share was reduced to $3.30 per share, and the exercise price of the warrants was reduced to $3.34 per share, after giving effect to a weighted average anti-dilution provision per the agreements. As a result of the reduction of the conversion price, additional beneficial conversion of $294,360 was recorded. The investors had the right to purchase an aggregate of $1 million in principal amount of additional Debentures on the same terms at any time through May 22, 2003. No investor exercised its right to purchase. During August and September of 2004, $4.7 million principal amount of the Debentures was converted into shares of Hollywood Media's common stock at a conversion price of $3.05 per share, including the $500,000 Debenture held by Mr. Rubenstein and Ms. Silvers. Prior to such conversions, the prevailing conversion price of the converted Debentures was reduced from $3.30 per share to $3.05 per share pursuant to Hollywood Media's negotiations and agreements with the converting investors for the purpose of facilitating such conversions. Following such conversions, the remaining $1.0 million Debenture still outstanding was amended to extend the maturity date to May 22, 2006 and to remove restrictive covenants, and the conversion price of this Debenture was reduced from $3.30 per share to $3.20 per share. As a result of the reduction in conversion price, additional beneficial conversion of $412,710 was recorded. As of September 30, 2004 and December 31, 2003, $236,292 and $1,672,371, respectively, of unamortized discount on the Debentures was reducing the face amount of 18 Debentures, and will be amortized to interest expense over the remaining term of the outstanding Debentures, which were not converted during the quarter. A total of $389,095 in deferred finance costs were incurred for the Debentures, including $161,695 in fees paid to a placement agent (including $130,000 in cash and a warrant valued at $31,695, with substantially the same terms as the Warrants issued to the Debenture holders). During the three and nine months ended September 30, 2004, $100,749 and $165,599, respectively, were recognized as interest expense from the amortization of the debt issuance costs. For the three and nine months ended September 30, 2003, $32,424 and $97,272, respectively, were recorded as interest expense for the deferred financing costs. Interest expense of $1,546,404 and $2,096,081 was recorded for the three and nine months ended September 30, 2004, respectively, consisting of stated interest, discount amortization for the beneficial conversion feature for the reduction in conversion prices on the Debentures, and the original discounts. For the three and nine months ended September 20, 2003, $207,270 and $579,290, respectively, was recorded as interest expense for the accretion of the discount. The Warrants granted to these investors in May 2002 were recorded at a relative fair value of $1,608,422 using the Black Scholes option valuation model. The assumptions used to calculate the value of the warrants using Black Scholes were as follows: volatility of 83.7%, 5 year expected life, exercise priced $3.78 per share, a stock price of $3.27 per share and a risk free interest rate of 4%. The original beneficial conversion feature of the Debentures was valued at $1,295,416. The recorded values of the Warrants and the beneficial conversion feature are being amortized to interest expense over 3 years, using the effective interest method or sooner if converted prior to maturity. The value of the Warrants and the beneficial conversion feature of the Debentures were recorded as a discount to the convertible Debenture and included in additional paid-in capital. CINEMASOURCE GUARANTY In 1999, Hollywood Media loaned approximately $1.7 million to the former owner ("borrower") of CinemaSource (currently an employee of CinemaSource) so that he could pay a portion of the taxes due resulting from the sale of CinemaSource to Hollywood Media. Hollywood Media was obligated to make this loan as part of the original purchase agreement to acquire CinemaSource. Hollywood Media sold the note to an independent third party in 2000 and guaranteed payment of the note. In April 2003, Hollywood Media entered into an agreement with the holder of the note to satisfy Hollywood Media's obligations under its guaranty of the note. Pursuant to such agreement, Hollywood Media agreed to pay the holder an aggregate of $462,269 in nine monthly installments commencing April 2003. In July 2003, pursuant to an agreement with the holder, the Company had the right, at its election, to pay the holder half of any monthly payment in restricted stock and during 2003, the Company issued 107,836 shares of common stock valued at $149,136 pursuant to such agreement. As a result, the Company recorded an additional expense of $89,215 for the market premium of the common stock payments, which expense charge was reversed in the fourth quarter of 2003 as the Company determined to instead pay the holder in cash. The loan was repaid in full in the first quarter of 2004, and the outstanding balance of such loan at December 31, 2003 was $138,152, and is included in accrued expenses and other in the accompanying unaudited condensed consolidated balance sheet. Subsequent to this guaranty being paid in full, 19 amounts were fully recovered from the borrower, and Hollywood Media recorded a credit to selling, general and administrative expenses of $302,859 during the quarter ended June 30, 2004. (7) GOODWILL AND OTHER INTANGIBLE ASSETS: Effective January 1, 2002, Hollywood Media adopted SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS." As prescribed by SFAS No. 142, the Company completed the transitional goodwill impairment test by the second quarter of 2002, which did not result in an impairment charge. Additionally Hollywood Media established October 1 of each year as its annual impairment test date and conducted required testing on that date in 2002 and 2003. As of September 30, 2004, Hollywood Media was not aware of any events or changes in circumstance that would require it to evaluate goodwill for impairment prior to October 1, 2004. As of November 15, 2004, Hollywood Media has begun its evaluation as of October 1, 2004, which will be completed during the quarter ending December 31, 2004. (8) COMMON STOCK: On January 20, 2004, Hollywood Media issued 32,697 shares of common stock valued at $78,641 to the holders of the Debentures for interest due for the period October 1, 2003 through December 31, 2003. On February 26, 2004, Hollywood Media issued 750 shares of common stock valued at $953, pursuant to an agreement with an employee for an exercise of an incentive stock option. On February 4, 2004, Hollywood Media issued 52,627 shares of common stock valued at $139,987 for payment of Hollywood Media's 401(k) employer match for calendar year 2003. On February 13, 2004, Hollywood Media sold 5,773,355 shares of common stock in a private placement valued at $16,396,327 to investors and warrants to purchase 1,443,339 shares of its common stock. Hollywood Media received proceeds of $15,278,501 after deducting the placement agent's fee and expenses. In addition, Hollywood Media incurred $151,284 for legal, accounting and travel expenses associated with the offering. The warrants issued in the private placement have an exercise price of $2.84 per share of common stock and expire in February 2009. The warrants are callable by Hollywood Media after one year if the common stock of Hollywood Media trades at twice the exercise price for 20 trading days. In addition to the warrants issued to the investors, Hollywood Media issued warrants to the placement agent having the same exercise price, which are exercisable to purchase up to 288,667 shares of common stock. In exchange for services related to the private placement, on May 28, 2004, Hollywood Media issued an option to purchase 35,211 shares of common stock for $50,000 to a third party consultant with a net value of $69,717. On April 16, 2004, Hollywood Media issued 12,500 shares of common stock valued at $35,500 for an exercise of a warrant by an investor in the February 13, 2004 private placement. On April 26, 2004, Hollywood Media issued 50,000 shares of common stock to an independent third party, pursuant to a consulting agreement providing an option to purchase the shares for $120,000, for services rendered in the 1st quarter of 2004 and recorded stock-based compensation expense of $70,500. 20 On April 26, 2004, Hollywood Media issued 24,398 shares of common stock valued at $77,786 to the holders of the Debentures for interest due for the period January 1, 2004 through March 31, 2004. On May 13, 2004, Hollywood Media issued 2,208 shares of common stock for an exercise of a warrant by an investor, which was charged to consulting expense in prior periods. On June 18, 2004 Hollywood Media issued 91,463 shares of common stock, valued at $323,779, for the assets of Front Row Marketing. On July 1, 2004 Hollywood Media issued 73,249 shares of common stock, valued at $250,000, as partial consideration for the acquisition of Studio Systems, Inc., pursuant to a definitive purchase agreement (see Note 5). On July 7, 2004, Hollywood Media issued 23,597 shares of common stock valued at $77,786 to the holders of the Debentures for interest due for the period April 30, 2004 through June 30, 2004. On July 22, 2004, Hollywood Media issued 68,104 shares of common stock valued at $224,743, in connection with utilization of a third party's services to obtain certain intangible assets for the Broadway Ticketing division. On August 13, 2004, Hollywood Media issued 2,857 shares of common stock valued at $10,000, to an employee as additional compensation. On September 8, 2004, Hollywood Media issued 25,000 shares of common stock valued at $66,500, pursuant to an agreement with an employee for an exercise of an incentive stock option. On September 23, 2004, Hollywood Media issued 200,000 shares of common stock to an independent third party, pursuant to a consulting agreement providing an option to purchase the shares for $500,000, for services rendered in connection with a proposed accretive acquisition. This agreement included $158,000 of stock-based compensation, which is recorded as prepaid acquisition costs. On September 8, 2004, Hollywood Media issued 7,526 shares of common stock valued at $25,000, to an employee as additional compensation pursuant to an employment agreement. During the quarter, $4.7 million principal amount of the Debentures, was converted into shares of Hollywood Media's common stock at a conversion price of $3.05 per share, including the $500,000 Debenture held by Mr. Rubenstein and Ms. Silvers. In connection with these conversions, Hollywood Media issued 1,540,985 shares of common stock valued at $4,700,000. In addition, Hollywood Media issued 71,969 shares of common stock valued at $108,522 for accrued interest due on the Debentures for the period from July 1, 2004 through the conversion dates. In August 2004, pursuant to the extensions and amendments to employment agreements for each of Hollywood Media's Chairman of the Board and Chief Executive Officer and Hollywood Media's Vice Chairman and President, Hollywood Media issued 400,000 shares, or a total of 800,000 shares, of restricted common stock valued at $2,600,000 which is recognized 21 quarterly as shares vest over a 4 year period beginning in October 2004. During the quarter ended September 30, 2004, Hollywood Media amortized $0. As of September 30, 2004 there was $2,600,000 of unamortized deferred compensation remaining. (9) INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES: Investments in and advances to equity method investees consist of the following: SEPTEMBER 30, DECEMBER 31, 2004 2003 ---------- --------- (UNAUDITED) NetCo Partners (a) $ 428,224 $ 169,180 MovieTickets.com (b) (4,975) (4,975) --------- --------- $ 423,249 $ 164,205 ========= ========= (a) NETCO PARTNERS Hollywood Media owns a 50% interest in a joint venture called NetCo Partners. NetCo Partners is engaged in the development and licensing of TOM CLANCY'S NET FORCE. This investment is recorded under the equity method of accounting, recognizing 50% of NetCo Partners' income or loss as Equity in Earnings of Investees. The revenues, gross profit and net income of NetCo Partners for the nine and three months ended September 30, 2004 and 2003 are presented below: NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) (UNAUDITED) (RESTATED) (RESTATED) 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Revenues $1,437,631 $2,544,941 $ -- $ 514,016 Gross Profit 1,230,574 2,197,268 -- 459,311 Net Income (loss) 1,115,426 2,071,210 (60,746) 458,959 Hollywood Media's share of net income (loss) $ 557,713 $1,035,605 $ (30,373) $ 229,479 Hollywood Media and C.P. Group are each 50% partners in NetCo Partners. Pursuant to the terms of the NetCo Partners Joint Venture Agreement, Hollywood Media is responsible for developing, producing, manufacturing, advertising, promoting, marketing and distributing NetCo Partners' illustrated novels and related products and for advancing all costs incurred in connection therewith. All amounts advanced by Hollywood Media to fund NetCo Partners' operations are treated as capital contributions of Hollywood Media and Hollywood Media is entitled to a return of such capital contributions before distributions of profits are split equally between Hollywood Media and C.P. Group. NetCo Partners has signed several significant licensing agreements for TOM CLANCY'S NETFORCE. These agreements include book licensing agreements for North American rights to a 22 series of adult and young adult books, audio book agreements and licensing agreements with various foreign publishers for rights to publish TOM CLANCY'S NETFORCE books in different languages. These contracts typically provide for payment of non-refundable advances to NetCo Partners upon achievement of specific milestones, and for additional royalties based on sales of the various products at levels in excess of the levels implicit in the non-refundable advances. NetCo Partners recognizes revenue pursuant to these contracts when the earnings process has been completed based on performance of all services and delivery of completed manuscripts. Summary balance sheet data for NetCo Partners is provided below:
SEPTEMBER 30, DECEMBER 31, 2004 2003 --------------- --------------- (UNAUDITED) Accounts receivable (net of allowance) $ 755,558 $ 512,871 Total assets 907,401 729,279 Deferred revenues 203,765 569,333 Total liabilities 663,507 1,003,471 Partners' capital $ 243,894 $ (274,192)
Through September 30, 2004, Hollywood Media has received cumulative profit distributions from NetCo Partners since its formation totaling $9.8 million, in addition to reimbursement of substantially all amounts advanced by Hollywood Media to fund the operations of NetCo Partners. (b) MOVIETICKETS.COM Hollywood Media entered into a joint venture agreement on February 29, 2000 with the movie theater chains AMC Entertainment Inc. ("AMC") and National Amusements, Inc. to form MovieTickets.com. In August 2000, MovieTickets.com entered into an agreement in which the joint venture sold a five percent interest in MovieTickets.com for $25 million of advertising over 5 years to Viacom Inc. In addition to the Viacom advertising and promotion, MovieTickets.com is promoted through on-screen advertising on each participating exhibitor's movie screens. In March 2001, America Online Inc. ("AOL") purchased a non-interest bearing convertible preferred voting equity interest in MovieTickets.com for $8.5 million in cash, which was converted into approximately 3% of the common stock of MovieTickets.com during 2004. Hollywood Media owns 26.2% of the equity in MovieTickets.com at September 30, 2004, and shares in 26.2% of the income or losses generated by the joint venture. This investment is recorded under the equity method of accounting, recognizing 26.2% of MovieTickets.com income or loss as Equity in Earnings of Investees. Since the investment has been reduced to approximately zero, Hollywood Media is currently not providing for additional losses, if any, generated by MovieTickets.com as Hollywood Media has not committed to fund future losses, if any, generated by MovieTickets.com. Hollywood Media has recorded no income (losses) on its investment in MovieTickets.com for the nine and three months ended September 30, 2004, and 2003, has received no distributions, and has not made any capital contributions or advances. 23 (10) SEGMENT REPORTING: Hollywood Media's reportable segments are Broadway Ticketing, Data Business, Internet Ad Sales, Intellectual Properties, Cable TV, and Other. The Broadway 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 consumers. The Data Business segment licenses entertainment content and data and includes CinemaSource (which licenses movie showtimes and other movie content), EventSource (which licenses local listings of events around the country to media, wireless and Internet companies), ExhibitorAds (which creates exhibitor paid directory ads for insertion in newspapers around the country) and Baseline/StudioSystems (a data licensing, and flat fee and pay-per-use subscription web site geared toward businesses and professionals in the feature film and television industries). The Internet Ad Sales segment sells advertising on Hollywood.com and Broadway.com and offers independent 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 Cable TV segment owns and operates two interactive cable TV networks, Hollywood.com Television and Broadway.com Television, that provide on-demand content and are distributed on certain cable TV systems. The Cable TV division is in the development stage and, as a result, revenues since inception are minimal. The Other segment is comprised of Company-wide expenses such as insurance, accounting, centralized information technology, and consulting fees relating to compliance for Sarbanes-Oxley. Management evaluates performance based on a comparison of actual profit or loss from operations before income taxes, depreciation, interest, and nonrecurring gains and losses to budgeted amounts. There are no material intersegment sales or transfers. 24 The following table illustrates financial information regarding Hollywood Media's reportable segments. Hollywood Media has included an additional segment "Cable TV", below, which was previously reported in "Other" in 2003.
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- (UNAUDITED) (UNAUDITED) RESTATED RESTATED 2004 2003 2004 2003 ------------ ------------ ------------ ------------ NET REVENUES: Broadway Ticketing $ 39,604,332 $ 36,525,556 $ 11,654,166 $ 11,002,268 Data Business 5,669,060 5,227,476 2,379,532 1,731,244 Internet Ad Sales 2,046,835 1,923,737 514,859 694,599 Intellectual Properties 1,951,630 1,930,008 554,270 496,119 Cable TV -- 3,000 -- 1,680 ------------ ------------ ------------ ------------ $ 49,271,857 $ 45,609,777 $ 15,102,827 $ 13,925,910 ============ ============ ============ ============ OPERATING INCOME (LOSS): Broadway Ticketing $ 1,054,541 $ 558,005 $ 112,487 $ 485,202 Data Business 835,648 501,510 257,609 166,196 Internet Ad Sales (a) (1,834,439) (2,186,869) (755,606) (683,591) Intellectual Properties 586,094 881,625 116,023 111,364 Cable TV (665,819) (675,650) (228,205) (242,820) Other (6,159,374) (5,167,377) (2,500,837) (1,847,170) ------------ ------------ ------------ ------------ $ (6,183,349) $ (6,088,756) $ (2,998,529) $ (2,010,819) ============ ============ ============ ============
SEGMENT ASSETS: (b) SEPTEMBER 30, 2004 DECEMBER 31, 2003 ------------------ ----------------- (UNAUDITED) Broadway Ticketing $14,503,265 $11,802,394 Data Business 22,782,366 18,042,947 Internet Ad Sales 23,384,804 23,713,984 Intellectual Properties 659,100 863,644 Cable TV 203,311 362,149 Other 5,167,102 2,095,903 ----------- ----------- $66,699,948 $56,881,021 =========== ===========
(a) Includes $0 and $38,807, in amortization of CBS advertising for the three and nine months ended September 30, 2004 respectively and, $102,464 and $609,193 the three and nine months ended September 30, 2003, respectively, used to promote Hollywood.com and Broadway.com. (b) Goodwill was originally reported in the "Other" segment through March 31, 2004. It has been allocated as follows: $3,523,856 to Broadway Ticketing, $20,120,833 to Data Business, $21,188,793 to Internet Ad Sales and $248,057 to Intellectual Properties, as of September 30, 2004. The allocation as of December 31, 2003 was the same, except for Data Business, which had a goodwill allocation of $15,852,976. The September 30, 2004 increase in the Data Business goodwill allocation was due to the July 1, 2004 acquisition of SSI 25 ($4,864,078) and the July acquisition of Front Row Marketing ($323,779), as described in Note 5. (11) COMMITMENTS AND CONTINGENCIES: Litigation - WATER GARDEN COMPANY LLC, AS PLAINTIFF, V. HOLLYWOOD MEDIA CORP., A FLORIDA CORPORATION; HOLLYWOOD.COM, INC., A CALIFORNIA CORPORATION (AND SUBSIDIARY OF HOLLYWOOD MEDIA CORP.); AND THE TRIBUNE COMPANY (AS SUCCESSOR IN INTEREST TO THE TIMES MIRROR COMPANY), AS DEFENDANTS; filed July 16, 2001 in the Superior Court of the State of California for the County of Los Angeles. Water Garden Company LLC filed suit against Hollywood Media, its subsidiary, hollywood.com, Inc., and The Tribune Company ("Tribune"), among others, claiming damages as a result of alleged defaults by hollywood.com, Inc. under a lease for office space entered into by hollywood.com, Inc., as lessee, and Water Garden Company LLC ("Water Garden"), as lessor. The stated lease term was from January 1999 through December 2003. Tribune guaranteed hollywood.com, Inc.'s lease obligations. Hollywood Media has certain contractual indemnification obligations to Tribune relating to Tribune's guaranty of the lease. The claims against Hollywood Media, but not hollywood.com, Inc., were dismissed. As indicated below, this litigation was settled in November 2004 and upon payment as agreed, all claims against hollywood.com, Inc. have been satisfied and there are no remaining obligations of Hollywood Media or hollywood.com, Inc. As previously reported, on April 29, 2003, the court in this action (the "Water Garden Lawsuit") entered a money judgment against hollywood.com, Inc. and Tribune, jointly and severally, in the amount of $998,549 plus certain costs, fees and interest. The California Court of Appeal for the Second District affirmed the judgment in May 2004, and the California Supreme Court denied hollywood.com's and Tribune's petition for review on July 28, 2004. On or about August 30, 2004, hollywood.com, Inc. and Tribune satisfied the judgment as entered by payment of $1,244,832 to Water Garden, of which $750,000 was paid out of funds that Hollywood Media had previously deposited with Tribune pursuant to the appeal bond arrangements described below, and $494,832 was paid by Hollywood Media directly to Water Garden. Hollywood Media directly paid an additional sum of $52,972 in September 2004 to Water Garden with respect to its outstanding claims for additional costs and attorneys' fees, and received written notice from Water Garden that the judgment was fully satisfied. Hollywood Media has recorded provisions within selling, general and administrative expenses related to this litigation of $330,805 and $805,805 during the three and nine months ended September 30, 2004, respectively, and $0 during the three and nine months ended September 30, 2003. In May 2003, hollywood.com Inc. and Tribune filed with the court, in connection with their Notice of Appeal, a Notice of Filing Undertaking for Stay of Enforcement of Judgment Pursuant to Appeal in order to stop enforcement of the judgment until resolution of the appeal (this filing included an appeal bond obtained by Tribune (the "Appeal Bond") issued by a surety company. In April 2003, Tribune and Hollywood Media agreed that Tribune would obtain the Appeal Bond in exchange for specified advance payments by Hollywood Media to Tribune as collateral to secure Hollywood Media's indemnification obligation to Tribune described above. The aggregate amount of the advance payments to Tribune through the date of this 10-Q Report 26 is $1,150,000, of which $750,000 has been paid to Water Garden to satisfy the judgment as described above. The balance of such advance payments held by Tribune is being used by Hollywood Media to pay the settlement in the Water Garden Lawsuit described below, and the balance that exceeds the settlement amount is to be returned to Hollywood Media. The judgment in the Water Garden Lawsuit covered rent accruing through February 13, 2003, under a lease the facial termination date of which was December 31, 2003. Pursuant to a written stipulation agreement between the parties to the Water Garden Lawsuit, as a result of the denial of hollywood.com, Inc.'s and Tribune's appeals, hollywood.com, Inc. and Tribune were also liable for rent accruing between February 13, 2003 and December 31, 2003, together with attorneys' fees and costs, subject to reduction for rent received by the landlord from subsequent tenants as provided in the stipulation agreement. The parties to the Water Garden Lawsuit have reached a settlement agreement to resolve Water Garden's outstanding claims under the written stipulation by payment of $358,000 to Water Garden from funds already deposited with Tribune, in return for full releases for hollywood.com, Inc., Hollywood Media and Tribune. Upon payment to Water Garden from the funds held by Tribune, which is expected to take place during November 2004, none of hollywood.com, Inc., Hollywood Media or Tribune has any outstanding liability with respect to this matter. Hollywood Media accrued $358,000 and $850,000 as of September 30, 2004 and December 31, 2003, respectively, as part of accrued expenses and other in the accompanying condensed consolidated balance sheets. In a separate matter, in November 2002 there was an arbitration action commenced by a third party against Hollywood Media regarding a contract dispute involving claims against Tribune Company and the hollywood.com, Inc. subsidiary of Hollywood Media, which dispute was settled in October 2003. Under the settlement, Hollywood Media made a $200,000 payment in October 2003, and agreed to purchase certain advertising to advertise Hollywood Media's exhibition-related businesses in a trade publication at a cost of $14,167 per month, at prevailing rates, over a six-month period which commenced in December 2003. As of September 30, 2004, all payments have been made and there is $60,750 of prepaid advertising remaining under this agreement. In a separate matter, a lawsuit pertaining to an advertising insertion order was filed against Hollywood Media in May 2003, seeking damages of $161,000 plus interest and costs. Hollywood Media and the plaintiff in this matter have reached an agreement in principle to settle this litigation whereby Hollywood Media will purchase $119,000 (at what the Company believes to be market rates) in advertising on plaintiff's various websites to promote Hollywood Media's various web properties over the period of December 1, 2004 through July 30, 2005, payable over 8 months. In addition to the legal proceedings described above, Hollywood Media is from time to time a party to various other legal proceedings including matters arising in the ordinary course of business. Hollywood Media does not expect such other legal proceedings to have a material adverse impact on Hollywood Media's financial condition or results of operations, however, there can be no assurance that such other matters, if determined adversely, will not have a material adverse effect. (12) RECLASSIFICATION: Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation. 27 (13) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004: o 12,500 shares of Hollywood Media common stock were issued, valued at $35,500 for an exercise of a warrant by an investor in the February 13, 2004 private placement. o 50,000 shares of Hollywood Media common stock were issued to an independent third party, pursuant to a consulting agreement providing an option to purchase the shares for $120,000, were issued for services rendered in the 1st quarter of 2004. In connection with this option $70,500 was recorded to expense as stock based compensation. o 2,208 shares of Hollywood Media common stock were issued pursuant to an exercise of a warrant by an investor, which had been previously valued under the Black-Scholes method and charged to consulting expense in previous periods. o 35,211 shares of common stock were issued to an independent third party for services rendered in conjunction with the handling of the private placement consummated in the 1st quarter of 2004 valued at $69,717. o 91,463 shares of Hollywood Media common stock were issued, valued at $323,779, for the assets of Front Row Marketing. o 52,627 shares of Hollywood Media common stock, valued at $139,987 were issued as payment of Hollywood Media's 401(k) employee match for calendar year 2003. o 152,661 shares of Hollywood Media common stock, valued at $342,735 were issued for interest due to the holders of the Debentures. o An adjustment of the beneficial conversion feature of the Debentures in the amount of $707,070 was made pursuant to certain anti-dilution provisions. o 73,249 shares of Hollywood Media common stock, valued at $250,000, were issued for the acquisition of Studio Systems, Inc., pursuant to a definitive purchase agreement. As a result of the acquisition, Studio Systems, Inc. became a subsidiary of Hollywood Media and its business will be integrated with Hollywood Media's Baseline/FilmTracker subsidiary now known as Baseline/StudioSystems. The aggregate purchase price was approximately $5,014,027 of which $920,000 is being held in an escrow account pending the final working capital adjustment. The $920,000 is not included in the allocation of the cost of the assets acquired and liabilities assumed as it represents contingent consideration for which the contingency has not been resolved. The consideration was applied to the purchase of all common stock and common stock equivalents. In addition, Hollywood Media agreed to make 12 monthly payments of $42,500 each. Hollywood 28 Media funded the closing payments with cash on hand. In addition, Hollywood Media paid $150,000 to satisfy certain employment agreements for former SSI senior management. o 68,104 shares of Hollywood Media common stock valued at $224,743, were issued in connection with utilization of a third parties services to obtain certain intangible assets for the Broadway Ticketing division. o 200,000 shares of Hollywood Media common stock to an independent third party, pursuant to a consulting agreement providing an option to purchase the shares for $500,000, for services rendered in connection with a proposed accretive acquisition for the Broadway Ticketing division. This agreement included $158,000 of stock based compensation, which was recorded to prepaid acquisition costs. o During the quarter, $4.7 million principal amount of the Debentures was converted into shares of Hollywood Media's common stock at a conversion price of $3.05 per share. Prior to such conversions, the prevailing conversion price of the converted Debentures was reduced from $3.30 per share to $3.05 per share pursuant to Hollywood Media's negotiations and agreements with the converting investors for the purpose of facilitating such conversions. In connection with these conversions Hollywood Media issued 1,540,985 shares of common stock valued at $4,700,000. In addition, Hollywood Media issued 71,969 shares of common stock valued at $108,522. 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Item 2, or elsewhere in this Form 10-Q, or that are otherwise made by us, or on our behalf, about our financial condition, results of operations and business constitute "forward-looking statements" within the meaning of federal securities laws. Hollywood Media Corp. ("Hollywood Media") cautions readers that certain important factors may affect Hollywood Media's actual results, levels of activity, performance or achievements and could cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements anticipated, expressed or implied by any forward-looking statements that may be deemed to have been made in this Form 10-Q or that are otherwise made by or on behalf of Hollywood Media. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, "forward-looking statements" are typically phrased using words such as "may," "will," "should," "expect," "plans," "believe," "anticipate," "intend," "could," "estimate," "pro forma" or "continue" or the negative variations thereof or similar expressions or comparable terminology. Factors that may affect Hollywood Media's results and the market price of our common stock include, but are not limited to: o our continuing operating losses, o negative cash flows from operations and accumulated deficit, o the need to manage our growth and integrate new businesses into Hollywood Media, o our ability to develop strategic relationships, o our ability to compete with other Internet companies and other competitors, o the need for additional capital to finance our growth or operations, o technology risks and the general risk of doing business over the Internet, o future government regulation, o dependence on our founders, and o the volatility of our stock price. Hollywood Media is also subject to other risks detailed herein or detailed in our Annual Report on Form 10-K for the year ended December 31, 2003 and in other filings made by Hollywood Media with the Securities and Exchange Commission. Because these forward-looking statements are subject to risks and uncertainties, we caution you not to place undue reliance on these statements, which speak only as of the date of this Form 10-Q. We do not undertake any responsibility to review or confirm analysts' expectations or estimates or to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this Form 10-Q. As a result of the foregoing and other factors, no assurance can be given as to the future results, levels of activity or achievements and neither us nor any other person assumes responsibility for the accuracy and completeness of such statements. 30 OVERVIEW Hollywood Media is a provider of information, data and other content, and ticketing to consumers and businesses covering the entertainment, Internet and media industries. We manage a number of business units focused on the entertainment and media industries. Hollywood Media derives a diverse stream of revenues from this array of business units, including revenue from individual and group Broadway ticket sales, data syndication, subscription fees, content licensing fees, advertising, and book development. DATA SYNDICATION DIVISIONS Hollywood Media's Data Business is a provider of integrated database information and complementary data services to the entertainment and media industries. The Data Business consists of two divisions, the Source Business and Baseline/StudioSystems (formerly known as Baseline/FilmTracker). The Source Business comprises three related lines of business: CinemaSource, EventSource and ExhibitorAds. CINEMASOURCE. CinemaSource is the largest supplier of movie showtimes as measured by market share. CinemaSource compiles movie showtimes data for approximately 40,000 movie screens throughout the United States, Canada, and the United Kingdom. Since its start in 1995, CinemaSource has substantially increased its operations and currently provides movie showtimes listings to more than 250 newspapers, wireless companies, Internet sites, and other media outlets, including: The New York Times; wireless companies including Sprint PCS, AT&T Wireless, Cingular Wireless, Verizon and Vindigo; Internet companies including AOL's Moviefone and Digital City, MSN, Yahoo! and Lycos; and other media outlets. CinemaSource also syndicates entertainment news, movie reviews, and celebrity biographies. CinemaSource's data is displayed by its customers in local newspapers, on websites and through cell phone services, to provide moviegoers with information for finding and choosing movies, theaters and showtimes. CinemaSource collects a majority of these movie listings through electronic mediums such as real-time direct connections to many exhibitor point-of-sale systems, email and FTP files, and collects additional listings through traditional mediums such as faxes and phone calls. Through annual and multi-year contracts, CinemaSource generates recurring revenue from licensing fees paid by its customers. EVENTSOURCE. Hollywood Media launched the EventSource business in 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 shows, touring companies, community playhouses and dinner theaters throughout North America. The EventSource database contains detailed information for thousands of venues, and the EventSource services are monitored by individual city editors specializing in their respective markets. Hollywood Media believes that EventSource is the largest (based on market share), and the only national, compiler and syndicator of detailed information on community and cultural events in North America. EventSource's information is a content source for AOL's Digital City. In addition, other EventSource customers include The New York Times, Vindigo, Earthlink, VoltDelta and Cox Communications. Through annual and multi-year contracts, EventSource generates recurring revenues from licensing fees. 31 EXHIBITORADS. Hollywood Media launched ExhibitorAds during the first quarter of 2002 as yet another expansion of the CinemaSource operations. ExhibitorAds leverages the movie theater showtimes from the CinemaSource data collection systems and our relationships with various movie exhibitors, to provide mission critical data services to our movie-exhibitor customers. The services include: 1) movie showtimes directory advertising creation for insertion in newspapers around the country, 2) Turn-key weekly movie showtimes and loyalty promotional e-mail services to theatre patrons, 3) Weekly in-theatre movie showtimes brochure creation and printing, and 4) web site creation and hosting services for the movie exhibition industry. In June 2004, we acquired Front Row Marketing, which is the industry leader in weekly showtime email data services to movie exhibitors and which business has been integrated into our ExhibitorAds business unit. ExhibitorAds has more than 60 exhibitor customers including AMC Theatres, Consolidated Theatres, Pacific Theatres, Crown Theatres, Harkins Theatres, GKC Theatres, Jack Loeks Theatres, Krikorian Theatres, Wallace Theatres, Key Cinemas and Rave Motion Pictures. BASELINE/STUDIOSYSTEMS ("BASELINE"). Baseline is a comprehensive entertainment database, research service, and application service provider offering information to movie studios, production companies, movie and TV distributors, entertainment agents, managers, producers, screenwriters, news organizations, and financial analysts covering the entertainment industry. Baseline's film and television database contains over 14,000 celebrity biographies, credits for over 130,000 released feature films, television series, miniseries, TV movies and specials dating back nearly 100 years, over 15,000 film and television projects in every stage of development and production, over 1,900 movie reviews, box office grosses dating back nearly 20 years, revenue and cost estimates for over 5,000 released feature films, over 18,000 company rosters and representation/contact information for over 50,000 entertainment professionals. Baseline provides applications that allow entertainment professionals to streamline workflow, increase efficiency, and expand market awareness. Baseline offers its data and application modules on an annual subscription basis, syndicates data to a number of leading information aggregators and publications, and also provides data on a pay-per-use basis. Baseline's customer base includes the seven major U.S. movie studios, numerous production companies, law firms, investment banks, news agencies, magazines, advertising agencies, consulting firms and other professionals in the entertainment industry. Baseline/StudioSystem's customers include MGM, Disney, Sony, Fox, DreamWorks, Universal Studios, Paramount, Viacom, Bloomberg, People Magazine, Lexis-Nexis, Showtime, HBO, the Directors Guild of America, Miramax Films, Warner Brothers, NYU, UCLA, USC, Writers Guild of America and more. In July 2004, Baseline's business and assets were substantially increased as a result of the closing of Hollywood Media's acquisition of Studio Systems, Inc., one of our leading competitors in the entertainment industry database and information services provider business. As a result of the acquisition, Studio Systems, Inc. became a subsidiary of Hollywood Media Corp. and its business is being integrated with Hollywood Media's Baseline/FilmTracker subsidiary. The combined business is now known as Baseline/StudioSystems. BROADWAY TICKETING DIVISION BROADWAY TICKETING: THEATRE DIRECT INTERNATIONAL ("TDI"); BROADWAY.COM AND 1-800-BROADWAY (COLLECTIVELY CALLED "BROADWAY TICKETING"). TDI. We acquired TDI as of September 15, 2000. Founded in 1990, TDI is a live theater-ticketing wholesaler that provides groups and individuals with access to theater tickets and knowledgeable service, covering shows on Broadway, Off-Broadway, and in London's West 32 End. TDI sells tickets directly to group buyers including travel agents and tour groups. TDI also manages a marketing cooperative that represents participating Broadway shows to the travel industry around the world. Recent Broadway shows marketed by this cooperative include Aida, Avenue Q, Beauty and the Beast, Bombay Dreams, Chicago, Dracula, Fame, 42nd Street, Hairspray, Little Shop of Horrors, Rent, The Lion King, The Phantom of the Opera and The Producers. In addition, TDI's education division, Broadway Classroom, markets group tickets along with educational programs to schools across the country. BROADWAY.COM AND 1-800-BROADWAY. We launched Broadway.com on May 1, 2000. Broadway.com offers the ability to purchase Broadway, Off-Broadway and London's West End theater tickets online. In addition, the site provides a wide variety of editorial content about the theater business, feature stories, opening nights, star profiles, photo opportunities and a critical roundup of reviews. Our 1-800-BROADWAY toll-free number, acquired in October 2001, features the ability to purchase Broadway, Off-Broadway and London's West End theater tickets over the phone and complements the online ticketing and information services available through Broadway.com. The combined businesses provide theater ticketing and related content for over 100 venues in multiple markets to consumer households and thousands of travel agencies, tour operators, corporations, educational institutions and affiliated websites. Our Broadway Ticketing division employs a knowledgeable sales force that offers ticket buyers a concierge-style service that includes show recommendations, hotel packages and dinner choices. We obtain tickets to sell through our arrangements with theater box offices and we also maintain our own inventory of tickets for sale. INTERNET DIVISIONS HOLLYWOOD.COM. Hollywood.com is a comprehensive website destination for movie event and TV content and information. Hollywood.com generates revenue by selling advertising on its website. Hollywood.com features in-depth movie information, including movie descriptions and reviews, movie showtime listings, entertainment news and an extensive multimedia library containing hundreds of hours of celebrity interviews, premier coverage and behind-the-scenes footage. Hollywood.com provides premier content and online ticketing services for movies creating a "one-stop destination" for movie information. Some of the largest advertisers who have advertised on Hollywood.com include Walt Disney Studios, New Line Cinema, Sony Studios, General Motors, Universal Studios, Visa, Colgate, HBO, A&E, British Airways, MGM, US Army, AT&T, Chase, Ford, Kodak, Fox and Warner Bros. As a result of its relationship with Hollywood Media's Data Business (CinemaSource and Baseline), Hollywood.com has access to a constantly updated database of information related to movies and entertainment. We believe these sources of content provide Hollywood.com with a competitive advantage over other entertainment-related websites that incur significant costs to create content of comparable quality and scope. Hollywood.com has further established its presence in the wireless arena. Through agreements with wireless carriers (AT&T, Cingular, Sprint, and Verizon), Hollywood.com provides a movie and entertainment destination on a variety of mobile phones. 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; 33 theater showtimes; 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 show tunes, and an in-depth Tony Awards(R) area. Broadway.com generates revenue from the sale of Broadway Theater tickets, packages of hotel rooms and theater tickets and advertising, with its principal business purpose being to generate ticket sales. In addition, this site was redesigned during 2004 and the redesigned site debuted in November 2004. CABLE TV DIVISION CABLE TV NETWORK INITIATIVES. To further leverage our base of proprietary content, Hollywood Media launched two interactive cable television channels in 2002: "Hollywood.com Television" and "Broadway.com Television." Both cable channels utilize existing Hollywood Media content and are designed for distribution on digital tiers of cable TV systems. The cable TV channels complement Hollywood Media's existing business units. Hollywood.com Television and Broadway.com Television offer audiences interactive entertainment and information, with on-demand video content including premieres, movie previews, reviews, behind-the-scenes footage, interviews and more, as well as up-to-date showtimes for the latest movies and current Broadway shows. Hollywood.com Television, (formerly called Totally Hollywood TV), is pursuing a national roll-out strategy and is currently available on certain cable TV systems of Cablevision Systems Corporation, Cox Communications, Comcast, Media Com, and Insight Communications. Broadway.com Television, (formerly called Totally Broadway TV), is distributed on Cablevision Systems' New York area systems. To date, only $1,320 has been generated from advertising on these cable networks in tests with various advertisers, and Hollywood Media expects future revenue to be derived from ad sales as their subscriber distribution grows. INTELLECTUAL PROPERTIES BUSINESS BOOK DEVELOPMENT AND BOOK LICENSING. Our Intellectual Properties division includes a book development and book licensing business owned and operated by our 51% owned subsidiary, Tekno Books, which develops and executes book projects, typically with best-selling authors. Tekno Books has worked with more than 60 New York Times best-selling authors, including Isaac Asimov, Tom Clancy, Tony Hillerman, John Jakes, Jonathan Kellerman, Dean Koontz, Robert Ludlum, Nora Roberts and Scott Turow, and numerous media celebrities, including Louis Rukeyser and Leonard Nimoy. Our intellectual properties division has licensed books for publication with more than 100 domestic book publishers, including Random House (Bertelsmann), Penguin Publishing Group (Pearson), Simon & Schuster (Viacom), HarperCollins (News Corp.), St. Martin's Press (Holtzbrink of Germany), Warner Books (Time Warner) and the publishing division of Barnes & Noble. Tekno Books has also produced numerous books under license from such entertainment companies as Universal Studios, New Line Cinema, CBS Television, DC Comics (Time Warner), and MGM Studios. Since 1980, Tekno Books has developed over 1,640 books that have been published. Another 3,415 foreign, audio, paperback, electronic, and other editions of these books have been sold to hundreds of publishers around the world, and published in 33 languages. Tekno's books have been finalists for, or winners of, more than 100 awards, including The Edgar Allan Poe Award, The Agatha Christie Award (Mystery), The Hugo Award (Science Fiction), The Nebula Award (Fantasy), The International Horror Guild Award (Horror) and The Sapphire Award (Romance). Tekno Books' current backlog and anticipated books for future publishing include more than 300 books under contract or in final 34 negotiations, including more than 50 books by New York Times best-selling authors. We are expanding into one of the largest areas of publishing, which is romance fiction, and one of the fastest growing areas of publishing, which is the Christian book market. In January 2003, Tekno Books was engaged to create two new spin-off series based on the best-selling LEFT BEHIND series. The Chief Executive Officer and founder of Tekno Books, Dr. Martin H. Greenberg, is the owner of the remaining 49% interest in Tekno Books. INTELLECTUAL PROPERTIES. Our Intellectual Properties division also owns the exclusive rights to intellectual properties that are complete stories and ideas for stories, created by best-selling authors and media celebrities. Some examples of our intellectual properties are ISAAC ASIMOV'S I-BOTS, ANNE MCCAFFREY'S ACORNA THE UNICORN GIRL, LEONARD NIMOY'S PRIMORTALS, and MICKEY SPILLANE'S MIKE DANGER. We license rights to our intellectual properties for use by licensees in developing projects in various media forms. We generally obtain the exclusive rights to the intellectual properties and the right to use the creator's name in the titles of the intellectual properties (e.g., MICKEY SPILLANE'S MIKE DANGER and LEONARD NIMOY'S PRIMORTALS). NETCO PARTNERS. In June 1995, Hollywood Media and C.P. Group Inc. ("C.P. Group"), entered into an agreement to form NetCo Partners. NetCo Partners owns 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. In 1997, NetCo Partners licensed to Putnam Berkley the rights to publish the first six TOM CLANCY'S NETFORCE books in North America for advance payments of $14 million. This agreement was subsequently renewed in December 2001 for four more books with guaranteed advances for North American book rights, which provide for advances to NetCo Partners of $2 million per book for the first two books and $1 million per book for the second two books against a percentage of the cover price. The first book in the series was adapted as a four-hour mini-series on ABC. NETFORCE books have so far been published in mass market paperback format. NetCo owns all rights in all media to the NETFORCE property, including film, television, video and games. NetCo licenses NETFORCE book rights to publishers in various foreign countries. Through its interest in NetCo, Hollywood Media receives distributions of its share of proceeds generated from the rights to the NETFORCE series. For additional information about NetCo Partners, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Equity in Earnings of Investments, and Note 9 -- Investments In And Advances To Equity Method Investees, of the unaudited Notes to Hollywood Media's Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q. MOVIETICKETS.COM, INC. MovieTickets.com is one of the two leading website destinations for the purchase of movie tickets through the Internet; its principal competitor (other than some theaters that may conduct their own Internet ticket sales) is Fandango. The MovieTickets.com web site allows users to purchase movie tickets and retrieve them at "will call" windows or kiosks at theaters. The web site also features bar coded tickets that can be printed at home and presented directly to the ticket taker at participating theaters. The web site contains movie content from Hollywood Media's various divisions for all current and future release movies, movie reviews and synopses, digitized movie trailers and photos, and box office results. The web site generates revenues from service 35 fees charged to users for the purchase of tickets and the sale of advertising. MovieTickets.com has been selected by AOL, Moviefone, MSN Network, Lycos Entertainment, Real Networks, Earthlink, and several other premier online destinations as the exclusive provider for online movie ticketing services. Hollywood Media launched the MovieTickets.com web site in May 2000 with several major theater exhibitors. Hollywood Media currently owns 26.2% of the equity of MovieTickets.com, Inc. See "Equity in Earnings of Investees" below, for additional information about our equity interest in MovieTickets.com, Inc. MovieTickets.com, Inc. entered into an agreement with Viacom Inc. effective August 2000 whereby Viacom Inc. acquired a 5% interest (now 4.1%) in MovieTickets.com, Inc. for $25 million of advertising and promotion over five years. In addition to the Viacom advertising and promotion, MovieTickets.com is promoted through on-screen advertising in most participating exhibitors' theaters. In March 2001, AOL purchased a non-interest bearing convertible preferred equity voting interest in MovieTickets.com, Inc. for $8.5 million in cash, which was convertible into common stock of MovieTickets.com, Inc. and which was converted in 2004. In connection with the 2001 transaction with AOL, MovieTickets.com's ticket inventory began to be promoted throughout America Online's interactive properties and ticket inventory of AOL's Moviefone became available through MovieTickets.com. Through an agreement announced in August 2004 between MovieTickets.com and America Online's Moviefone, MovieTickets.com has assumed the ticketing agreements that Moviefone had with its movie theater exhibitors, bringing the number of exhibitors MovieTickets.com will directly ticket for to over 30. The Moviefone exhibitor agreements assumed by MovieTickets.com include agreements with Clearview Cinemas, Landmark Theatres and Mann Theatres. Without taking into account the exhibitor agreements being assumed from Moviefone, MovieTickets.com, Inc.'s current participating exhibitors include AMC Entertainment Inc., National Amusements, Inc., Famous Players Inc., Hoyts Cinemas, Marcus Theatres, Consolidated Theatres, Consolidated Theatres Hawaii, Crown Theatres, Krikorian Premiere Theatres, Metropolitan Theatres, Pacific Theatres, Rave Motion Pictures, Ritz Theatres, Spotlight Theatres, Sayville Theatres, Baederwood Movie Theatre Co., Bryn Mawr Movie Theatre Co., the Narberth Theatre, and Cinemagic Movies. MovieTickets.com 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 50 and top 100 grossing theaters in North America. Additionally, MovieTickets.com launched in the United Kingdom in July of 2003. The following discussion and analysis should be read in conjunction with Hollywood Media's Unaudited Condensed Consolidated Financial Statements and the notes thereto included in Item 1 of Part I of this report. 36 RESULTS OF OPERATIONS The following table summarizes Hollywood Media's revenues, operating expenses and operating income (loss) by reportable segment for the nine months ended September 30, 2004 ("Y3-04") and 2003 ("Y3-03"), and the three months ended September 30, 2004 ("Q3-04") and 2003 ("Q3-03"):
BROADWAY DATA INTERNET INTELLECTUAL CABLE TICKETING BUSINESS AD SALES PROPERTIES TV OTHER TOTAL (a) (b) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Y3-04 Net Revenues $ 39,604,332 $ 5,669,060 $ 2,046,835 $ 1,951,630 $ -- $ -- $ 49,271,857 Operating Expenses 38,549,791 4,833,412 3,881,274 1,365,536 665,819 6,159,374 55,455,206 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating Income (loss) $ 1,054,541 $ 835,648 $ (1,834,439) $ 586,094 $ (665,819) $ (6,159,374) $ (6,183,349) ============ ============ ============ ============ ============ ============ ============ % of Total Net Revenues 80% 12% 4% 4% -- -- 100% Y3-03 (RESTATED) Net Revenues $ 36,525,556 $ 5,227,476 $ 1,923,737 $ 1,930,008 $ 3,000 $ -- $ 45,609,777 Operating Expenses 35,967,551 4,725,966 4,110,606 1,048,383 678,650 5,167,377 $ 51,698,533 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating Income (loss) $ 558,005 $ 501,510 $ (2,186,869) $ 881,625 (675,650) $ (5,167,377) $ (6,088,756) ============ ============ ============ ============ ============ ============ ============ % of Total Net Revenues 80% 12% 4% 4% -- -- 100% BROADWAY DATA INTERNET INTELLECTUAL CABLE TICKETING BUSINESS AD SALES PROPERTIES TV OTHER TOTAL (a) (b) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Q3-04 Net Revenues $ 11,654,166 $ 2,379,532 $ 514,859 $ 554,270 $ -- $ -- $ 15,102,827 Operating Expenses 11,541,679 2,121,923 1,270,465 438,247 228,205 2,500,837 18,101,356 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating Income (loss) $ 112,487 $ 257,609 $ (755,606) $ 116,023 $ (228,205) $ (2,500,837) $ (2,998,529) ============ ============ ============ ============ ============ ============ ============ % of Total Net Revenues 77% 16% 3% 4% -- -- 100% Q3-03 (RESTATED) Net Revenues $ 11,002,268 $ 1,731,244 $ 694,599 $ 496,119 $ 1,680 $ -- $ 13,925,910 Operating Expenses 10,517,066 1,565,048 1,378,190 384,755 244,500 1,847,170 15,936,729 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating Income (loss) $ 485,202 $ 166,196 $ (683,591) $ 111,364 $ (242,820) $ (1,847,170) $ (2,010,819) ============ ============ ============ ============ ============ ============ ============ % of Total Net Revenues 79% 12% 5% 4% -- -- 100%
37 a. Includes operating results for Studio Systems, Inc. which was acquired on July 1, 2004. b. Hollywood Media's 50% interest in NetCo Partners, which is accounted for under the equity method of accounting, is reported as equity in earnings of investees below "Operating income (loss)" in the condensed consolidated statement of operations. COMPOSITION OF OUR SEGMENTS IS AS FOLLOWS: o BROADWAY TICKETING - Includes our TDI ticketing business as well as our Broadway.com online ticketing operations and ticket sales through 1-800-BROADWAY. o DATA BUSINESS - Includes our CinemaSource, EventSource, ExhibitorAds and Baseline/StudioSystems operations. o INTERNET AD SALES - Includes advertising sold on the web sites Hollywood.com, Broadway.com and MovieTickets.com, and the AlwaysI subscription service which offers films to subscribers over the Internet. Hollywood Media earns a proprietary commission on monies collected for advertising sold on MovieTickets.com's website. o INTELLECTUAL PROPERTIES - Includes our book development and book licensing operation through our 51% owned subsidiary Tekno Books. This segment does not include our 50% interest in NetCo Partners. o CABLE TV - Includes two interactive cable television channels, "Hollywood.com Television" and "Broadway.com Television". NET REVENUES Total net revenues were $49,271,857 for Y3-04 as compared to $45,609,777 for Y3-03, an increase of $3,662,080 or 8% and $15,102,827 for Q3-04 as compared to $13,925,910 for Q3-03, an increase of $1,176,917 or 8%. The increase in revenue from Y3-03 to Y3-04 was primarily due to an 8% increase in both Broadway Ticketing and Data Business revenue as well as a 6% increase in Internet Ad Sales, and a 1% increase in Intellectual Properties revenue. The increase in revenue from Q3-03 to Q3-04 was primarily due to a 37% increase in revenue in the Data Business, primarily attributable to the July 1, 2004 acquisition of Studio Systems, Inc., a 12% increase in Intellectual Properties revenue and a 6% increase in Broadway Ticketing revenue, which were partially offset by a 26% decrease in Internet Ad Sales. Broadway Ticketing revenues were $39,604,332 and $36,525,556 for Y3-04 and Y3-03, respectively, an increase of $3,078,776 or 8% for Y3-04, and $11,654,166 for Q3-04 compared to $11,002,268 for Q3-03, respectively, an increase of $651,898 or 6%. Broadway Ticketing revenues increased Y3-04 versus Y3-03 due to an 18% increase in individual ticket sales primarily on Broadway.com, which was partially offset by a 3% decrease in wholesale group ticket sales. Broadway Ticketing revenues increased in Q3-04 over Q3-03 due to an 11% increase in individual ticket sales primarily on Broadway.com, which was partially offset by a 4% decrease in wholesale group ticket sales. The Broadway.com website was redesigned during 2004 and the redesigned site launched on November 3, 2004. Based on initial results, the launching of the redesigned Broadway.com is expected to have a significant positive impact on 38 future sales, as we are experiencing a sales increase since launch, which we believe is driven in part by website improvements which better facilitate the purchase process for customers. Broadway Ticketing revenue is generated from the sale of live theater tickets for Broadway, off-Broadway and London based live theater performances and hotel packages through Broadway.com and the 1-800-BROADWAY telephone number, and to domestic and international travel professionals, traveling consumers, business organizations, and schools. Broadway Ticketing revenue is recognized on the date of performance of the show. Ticket sales collected in advance of the date of performance are recorded as deferred revenues on our balance sheet and recognized as income upon performance date. The third quarter is generally seasonally slow in our Broadway Ticketing division. In addition to this seasonal trend, the GOP Convention was held in New York City during Q3-04, which management believes reduced the level of tourists and others entering the city for entertainment purposes. There was also unusually cold weather in New York in Q1-04 compared to the previous year, which management believes may have negatively impacted Broadway Ticketing revenues in Y3-04. Data Business revenues (which includes our Source businesses [CinemaSource, EventSource and ExhibitorAds], and Baseline/FilmTracker which changed its name on July 1, 2004 to Baseline/StudioSystems to reflect our acquisition of Studio Systems, Inc. ("SSI")), were $5,669,060 for Y3-04 as compared to $5,227,476 for Y3-03, an increase of $441,584 or 8% and $2,379,532 for Q3-04 as compared to $1,731,244 for Q3-03, an increase of $648,288 or 37%. The increase in Data Business revenues was primarily due to the July 1, 2004 acquisition of SSI. Our Baseline Business, division included in the Data Business, revenues (not including revenues from the SSI acquisition) increased from $1,416,140 in Y3-03 to $1,610,543 in Y3-04, an increase of $194,403 or 14% as compared to Y3-03. SSI added $672,192 in revenue during Q3-04. These revenue gains were offset by a decrease in Source Business revenue of $425,011 or 11% for the same nine month period. The increase in revenue from Q3-03 to Q3-04 was due to the SSI acquisition and a 12% increase in Baseline Business revenue, which were partially offset by a 6% decrease in Source Business revenue. The decrease in Source Business revenue in Y3-04 as compared to Y3-03, as well as in Q3-04 as compared to Q3-03, was, as previously reported, the result of a measured reduction in the level of event coverage in some smaller geographic markets. We determined that the collection of data in these smaller markets was not cost efficient and, in reducing these costs, there was a revenue decrease as most customers pay fees based on the total number of venues covered. The customer pipeline remains strong and the customer base is continuing to increase. Our Baseline business revenue increase in Y3-04 as compared to Y3-03 and Q3-04 as compared to Q3-03 is due to a high retainage of Baseline's current customers and continued expansion of Baseline's customer base. Internet Ad Sales revenue was $2,046,835 for Y3-04 as compared to $1,923,737 for Y3-03, an increase of $123,098 or 6%. Internet Ad Sales revenue was $514,859 and $694,599 for Q3-04 and Q3-03, respectively, a decrease of $179,740 or 26%. The decrease was due in large part to the following factors: a "soft" Q3-04 movie box office and the related reduction in movie studio advertising, transitioning of the ad sales team during Q3-04 to a new management structure as the result of our hiring of a new head of ad sales, and a new website launch. Internet Ad Sales revenue is primarily generated from the sale of sponsorships and banner advertisements on Hollywood.com. Revenue from our Intellectual Properties division was $1,951,630 for Y3-04 as compared to $1,930,008 for Y3-03 an increase of $21,622 or 1% and $554,270 and $496,119 for Q3-04 and Q3-03, respectively, an increase of $58,151 or 12%. The increase in revenues was attributable to the timing of the delivery of manuscripts resulting in more manuscripts delivered in Q3-04 as 39 compared to Q3-03. The Intellectual Properties division generates revenues from several different activities including book development and licensing and intellectual property licensing. Revenues vary quarter-to-quarter dependent on the timing of the delivery of the manuscripts to the publishers. Revenues are recognized when the earnings process is complete and ultimate collection of such revenues is no longer subject to contingencies. The Intellectual Properties division revenue does not include our 50% interest in NetCo Partners, which is accounted for under the equity method of accounting and under which, Hollywood Media's share of the income (loss) is reported as equity in earnings of investees. EQUITY IN EARNINGS (LOSSES) OF INVESTEES Equity in earnings (losses) of investees consisted of the following:
Nine Months Ended Three Months Ended -------------------------- --------------------------- September 30, September 30, -------------------------- --------------------------- Restated Restated 2004 2003 2004 2003 ----------- ----------- ----------- ----------- NetCo Partners (a) $ 557,713 $ 1,035,605 $ (30,373) $ 229,479 MovieTickets.com (b) -- -- -- -- ----------- ----------- ----------- ----------- $ 557,713 $ 1,035,605 $ (30,373) $ 229,479 =========== =========== =========== ===========
(a) NetCo Partners NetCo Partners owns and is primarily engaged in the development and licensing of TOM CLANCY'S NETFORCE. NetCo Partners recognizes revenues when the earnings process has been completed based on the terms of the various agreements, generally upon the delivery of the manuscript to the publisher and at the point where ultimate collection is substantially assured. When advances are received prior to completion of the earnings process, NetCo Partners defers recognition of revenue until the earnings process has been completed. Hollywood Media owns 50% of NetCo Partners and accounts for its investment under the equity method of accounting. Hollywood Media's 50% share of earnings (losses) was $(30,373) for Q3-04 as compared to $229,479 for Q3-03, and $557,713 for Y3-04 as compared to $1,035,605 for Y3-03. Revenues vary quarter-to-quarter dependent on timing of deliveries of various manuscripts to the publisher although, notwithstanding the timing of manuscript deliveries, one NETFORCE book is typically published each year in North America. (b) MovieTickets.com Hollywood Media owned 26.2% of the total equity in MovieTickets.com, Inc. joint venture at September 30, 2004. Hollywood Media records its investment in MovieTickets.com, Inc. under the equity method of accounting, recognizing its percentage of ownership of MovieTickets.com income or loss as equity in earnings of investees. Hollywood Media shares in 26.2% of the losses or income generated by the joint venture. The investment had been reduced to approximately zero by Hollywood Media because it had recognized previous losses and it had received a 100% return of its investment in MovieTickets.com. Hollywood Media is currently not providing for additional losses, if any, generated by MovieTickets.com as Hollywood Media had not guaranteed to fund future losses, if any, generated by MovieTickets.com. As a result, we have not recorded any share of the joint venture's results of operations in Y2-04 and Y2-03 related to our investment in MovieTickets.com. The Movietickets.com web site generates revenues from service fees charged to users for the purchase of tickets and the sale of advertising. 40 OPERATING EXPENSES COST OF REVENUE - TICKETING. Cost of revenue - ticketing was $34,350,187 for Y3-04 as compared to $31,629,607 for Y3-03 for an increase of $2,720,580 or 9%. The cost of revenue for Q3-04 was $10,197,864 compared to $9,133,834 for Q3-03 for an increase of $1,064,030 or 12%. Cost of revenue consists primarily of the cost of tickets and credit card fees for the Broadway Ticketing segment. As a percentage of ticketing revenue, cost of revenue - ticketing was 87% for both Y3-04 and Y3-03 and 88% and 83% for Q3-04 and Q3-03 respectively. The increase in cost of revenue as a percentage of ticketing revenue in Q3-04 compared to Q3-03 was primarily attributable to an increase in unsold inventory and charge backs resulting from the holding of the GOP convention in NYC and a shift in overall product mix. EDITORIAL, PRODUCTION, DEVELOPMENT AND TECHNOLOGY. Editorial, production, development and technology costs consist of payroll and related expenses for the editorial and production staff responsible for creating content and developing products for our Internet Ad Sales, Data Business, Intellectual Properties and Cable TV segments. Internet access and computer related expenses for the support and delivery of the Company's services and fees and royalties paid to authors and co-editors for the intellectual properties segments are also included. Editorial, production, development and technology costs for Y3-04 were $3,868,219 compared to $3,758,000 for Y3-03 for an increase of $110,219 or 3%. Q3-04 costs were $1,363,292 compared to $1,320,286 for Q3-03, an increase of $43,006 or 3%. As a percentage of revenues from our Internet Ad Sales, Data Business, Intellectual Properties and Cable TV segments, these costs were 40% and 41% for Y3-04 and Y3-03 and 40% and 45% for Q3-04 and Q3-03, respectively. Revenues from Internet Ad Sales decreased due to the launching of the new website and other factors discussed above, while fixed costs remained the same. This increase in the cost of Ad Sales revenue was offset by a decrease in the cost of Data Business revenues. Revenues increased 37% in the Data Business, while cost of revenues in the Data Business increased 2% from Q3-04 to Q3-03 primarily due to a savings in payroll expense as a percentage of revenue. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative ("SG&A") expenses consist of occupancy costs, production costs, human resources and administrative functions as well as professional and consulting service fees, telecommunications costs, provision for doubtful accounts receivable, general insurance costs, selling and marketing costs (such as commission due to advertising, marketing, promotional, business development, public relations, and commission due to advertising agencies, ad rep firms and other parties) and salaries and benefits. SG&A expenses for Y3-04 were $15,593,379 compared to $13,861,932 for Y3-03 for an increase of $1,731,447 or 12%. The increase is primarily due to operating expenses for SSI (we are in the process of developing a plan to eliminate a significant portion of SSI's fixed expenses through an integration process), an accrual of $330,800 in Q3-04 for the final settlement of the Water Garden lease litigation, an increase in fees relating to compliance for Sarbanes-Oxley, an increase in occupancy costs due to an early termination of a lease, an increase in accounting fees relating primarily to compliance with Sarbanes Oxley and an increase in affiliate advertising costs, offset partially by a decrease in legal expenses. The SG&A costs for Q3-04 were $5,977,937 compared to $4,794,737 for Q3-03, an increase of $1,183,200 or 25%. The increase in Q3-04 as compared to Q3-03 in SG&A is due primarily to the additional operating expenses of SSI as described above, an increase of $330,800 in the accrual for the final settlement of the Water Garden lease litigation, an increase in ad sales salaries as we added to our ad sales team, an increase in accounting fees relating to Sarbanes Oxley compliance, along with the increase in occupancy costs for the early termination of a lease. As a percentage of net revenues, selling, general and administrative expenses were 32% and 30% for Y3-04 and Y3-03, respectively, and 40% and 41 34% for Q3-04 and Q3-03, respectively. (See Note 11 of Unaudited Condensed Consolidated Financial Statements for more information on the Water Garden lease litigation). AMORTIZATION OF CBS ADVERTISING. Amortization of CBS advertising relating to our agreements with Viacom was $38,807 and $609,193 for Y3-04 and Y3-03, respectively, and $0 for Q3-04 compared to $102,464 for Q3-03. Under our agreement with Viacom, Hollywood Media issued shares of common stock and warrants in exchange for cash and CBS's advertising and promotional efforts over seven years across its full range of media properties. The fair value of the common stock and warrants issued to Viacom was recorded in the balance sheet as deferred advertising and amortized as the advertising was used each related contract year. Since June 30, 2004, unamortized deferred advertising has been zero. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense consists of depreciation of property and equipment, furniture and fixtures, website development, leasehold improvements, capital leases and amortization of goodwill and intangibles. Depreciation and amortization expense was $1,604,614 for Y3-04 as compared to $1,839,801 for Y3-03 for a decrease of $235,187 or 13%. Q3-04 depreciation and amortization expense was $562,263 compared to $585,408 for Q3-03, a decrease of $23,145 or 4%. The decrease was primarily attributable to certain tangible assets that became fully amortized during 2003. INTEREST, NET. Interest, net was $2,548,460 for Y3-04 as compared to $1,037,003 for Y3-03 and $1,762,959 for Q3-04, as compared to $372,963 for Q3-03. The increase of $1,511,457 in interest, net in Y3-04 over Y3-03, was primarily attributable to interest charges on the early conversion of $4.7 million in principal of convertible Debentures, on which the conversion price was reduced, resulting in an increase in the beneficial conversion feature and the associated amortization. For Q3-04 and Y3-04, $1,768,041 and $2,261,680, respectively, was recorded in interest expense for the amortization of the deferred finance costs and discount. Included in the interest expense was $1,332,811 directly attributable to the conversion. (See Note 6 of Unaudited Condensed Consolidated Financial statements). OTHER INCOME (EXPENSE), NET. Other, net was $786,851 for Y3-04 as compared to $(108,165) for Y3-03 and $59,178 for Q3-04 as compared to $(117,059) for Q3-03. The increase of $895,016 in other income (expense) for Y3-04 to Y3-03, net was primarily attributable to a gain recognized upon termination of a put-call option held by a former minority shareholder of Baseline in 2004, along with other expenses recognized in Q3-03 for the settlement of a guarantee and debt (See Note 5 of Unaudited Condensed Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES At September 30, 2004, we had cash and cash equivalents of $3,796,668 compared to cash and cash equivalents of $1,867,999 at December 31, 2003. Our net working capital deficit (current assets less current liabilities) at September 30, 2004 was $212,358 as compared to a working capital deficit of $6,490,321 at December 31, 2003. During the nine months ended September 30, 2004, net cash used in operating activities was $7,578,269, which cash usage included $2,970,474 to purchase Broadway ticketing inventory to be held for sale during 2004 along with an increase of $355,533 in deferred costs associated with Broadway ticket inventory, payment of $1,677,664 on various outstanding payables and other current liabilities. In addition, Hollywood Media made payments aggregating $847,805 during Y3-04 to settle the WaterGarden litigation, which will require no further payments from the Company. Net cash used in investing activities was $5,536,076; and net cash provided by financing activities was 42 $15,043,014, comprised primarily of net proceeds resulting from the private placement of common stock during the first quarter of 2004 (see Note 8 to the Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q report). As a result of the above, cash and cash equivalents increased by $1,928,669 for the nine months ended September 30, 2004. In comparison, during the nine months ended September 30, 2003, net cash used in operating activities was $1,935,537, net cash used in investing activities was $337,241, and net cash provided by financing activities was $364,670. On May 22, 2002, Hollywood Media issued an aggregate of $5.7 million in principal amount of 6% Senior Convertible Debentures due May 22, 2005 (the "Debentures") to a group of investors, upon payment of an aggregate $5.7 million cash investment from such investors. The Debentures are convertible at the option of the investors at any time through the maturity date into shares of common stock of Hollywood Media. Prior to conversion, the Debentures bear interest at 6% per annum, payable quarterly in cash or common stock. Mitchell Rubenstein, the Chairman of the Board and Chief Executive Officer, and Laurie S. Silvers, the Vice Chairman and President of Hollywood Media, participated in the financing with a $500,000 cash investment upon the same terms as the other investors. The Debentures are convertible at the option of the investors at any time through May 22, 2005 into shares of Hollywood Media common stock, par value $0.01 per share. The original conversion price of $3.46 per share has been adjusted and amended as described below. In addition, Hollywood Media can elect at its option to convert up to 50% of the convertible Debentures if the Debentures are still outstanding at maturity, subject to certain conditions. The investors also received fully vested detachable warrants (the "Warrants") to acquire at any time through May 22, 2007 an aggregate of 576,590 shares of common stock at an exercise price of $3.78 per share. On May 22, 2003, an investor holding at least seventy-five percent of such investor's shares of common stock issued or issuable to such investor under the Debentures, had the exercise price of the warrants held by such investor decreased to $3.46 per share, which equals the pre-adjustment conversion price of the Debentures. The Debentures and Warrants contain customary anti-dilution provisions as more fully described in the agreements. As a result of the private placement discussed in Note 8, the conversion price of the Debentures upon issuance of $3.46 per share was reduced to $3.30 per share, and the exercise price of the warrants was reduced to $3.34 per share, after giving effect to a weighted average anti-dilution provision per the agreements. During August and September of 2004, $4.7 million principal amount of the Debentures was converted into shares of Hollywood Media's common stock at a conversion price of $3.05 per share, including the $500,000 Debenture held by Mr. Rubenstein and Ms. Silvers. Prior to such conversions, the prevailing conversion price of the converted Debentures was reduced from $3.30 per share to $3.05 per share pursuant to Hollywood Media's negotiations and agreements with the converting investors for the purpose of facilitating such conversions. Following such conversions, the remaining $1.0 million Debenture still outstanding was amended to extend the maturity date to May 22, 2006 and to remove restrictive covenants, and the conversion price of this Debenture was reduced from $3.30 per share to $3.20 per share. During the fourth quarter of 2004, the Data Business is expected to sign approximately $1.8 million in annual contracts further solidifying the business's revenue run rate and providing an increase in sustained cash flow. In addition, SSI is being integrated into the Data Business and is expected to provide approximately $2.0 million in additional annual cash flow after efficiencies from the integration into Baseline, which is expected to be substantially completed in December 2004. Furthermore, based upon the critical mass we have achieved through this acquisition, we expect additional data customers to be added throughout 2005 providing additional sustained cash flows 43 without significant increases in costs. Hollywood Media invested approximately $4.8 million in cash to consummate the SSI acquisition on July 1, 2004. This amount could be reduced pending resolution of the $920,000 portion of the purchase price held currently held in escrow (see Note (5)). There can be no assurance that the new Data Business contracts or such cash flow improvements from the SSI integration will be realized to the extent anticipated. Based in part on the anticipated realization of the expected positive developments described in the preceding paragraph, including increasing Data Business cash flow from new and renewing contracts, and expected cost reductions in the Baseline/StudioSystems unit (and the corresponding increases in positive cash flow anticipated to result), we believe that our cash and cash equivalents, short-term investments, anticipated cash flow from operations, and potential amounts available if we undertake further equity or debt financing, should provide sufficient liquidity and capital resources through the end of the twelve-month period ending September 30, 2005. We have from time to time held discussions and negotiations with lending institutions about borrowing funds to finance our growth opportunities. As of the date of this Form 10-Q report, we currently anticipate capital expenditures during the remainder of 2004 of approximately $0.2 million for various systems and equipment upgrades (which expenditures do not include potential business acquisitions, and do not include costs being incurred (as described below) in connection with our review of internal controls and upgrading of information systems in preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal controls). At this time we are unable to accurately estimate the full amount of the costs that Hollywood Media will incur during 2004 in connection with preparations for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, however, such costs are currently anticipated to include an additional $0.3 million for consulting expertise and $0.4 million for audit expenses. Additional costs will be incurred in connection with Section 404 compliance preparations but have not been quantified at this time. CRITICAL ACCOUNTING POLICIES In response to the Security and Exchange Commission (SEC) Release Number 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" and SEC Release Number 33-8056, "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations," we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we will evaluate our estimates, including those related to asset impairment, accruals for compensation and related benefits, revenue recognition, allowance for doubtful accounts, and contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. For additional information on our significant accounting policies, including the critical accounting policies discussed below, see Note 4 to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2003. 44 TICKETING REVENUE RECOGNITION Ticket revenue is derived from the sale of live theater tickets for Broadway, off-Broadway and London shows to individuals, groups, travel agencies, tour groups and educational facilities. Revenue recognition is deferred on ticket sales until performance has taken place. Ticket revenue and cost of revenue are recorded on a gross basis. ADVERTISING COSTS Hollywood Media expenses the cost of advertising as incurred or when such advertising initially takes place. In the first quarter of 2000, Hollywood Media issued common stock and warrants to CBS with a fair value of approximately $137 million in exchange for approximately $105 million of advertising on CBS properties to be received over a period of seven years. Hollywood Media was entitled to utilize a specified portion of this advertising each contract year. The deferred advertising is carried on Hollywood Media's balance sheet as a deferred asset and is being amortized over the contract period as the advertising is utilized. Advertising expense recorded related to CBS advertising for the nine months ended September 30, 2004 and 2003 was $38,807 and $609,193 respectively. This is separately reported in the accompanying unaudited condensed consolidated statements of operations under the caption "Amortization of CBS Advertising." STOCK BASED COMPENSATION As permitted under Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transaction and Disclosure - an amendment of FAS 123" ("SFAS No. 148"), which amended Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS No. 123"), we have chosen to account for our Stock Plan under the intrinsic value method as allowed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations. Under APB No. 25, because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. FSAS No. 148 requires disclosure of the estimated fair value of our employee stock options granted and pro forma financial information assuming compensation expense was recorded using these fair values. IMPAIRMENT OF LONG-LIVED ASSETS Effective December 31, 2001, Hollywood Media adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121") and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," ("APB No. 30") for the disposal of a segment of a business. Consistent with SFAS No. 121, SFAS No. 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. 45 We evaluate the recoverability of long-lived assets not held for sale by comparing the carrying amount of the assets to the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying values of such assets, the assets are adjusted to their fair values. We determined fair value as the net present value of future cash flows. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." ("SFAS No. 142"). Under SFAS No. 142, goodwill and intangible assets acquired after June 30, 2001 were no longer subject to amortization. Goodwill and intangibles with indefinite lives acquired prior to June 30, 2001 ceased to be amortized beginning January 1, 2002. In addition, SFAS 142 changed the way we evaluated goodwill and intangibles for impairment. Beginning January 1, 2002, goodwill and certain intangibles are no longer amortized; however, they are subject to evaluation for impairment at least annually using a fair value based test. The fair value based test is a two-step test. The first step involved comparing the fair value of each of our reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds the fair value of the reporting unit, we are required to proceed to the second step. In the second step, the fair value of the reporting unit would be allocated to the assets (including unrecognized intangibles) and liabilities of the reporting unit, with any residual representing the implied fair value of goodwill. An impairment loss would be recognized if and to the extent that the carrying value of goodwill exceeded the implied value. As of September 30, 2004, Hollywood Media is not aware of any events or changes in circumstance that would require it to evaluate goodwill for impairment. Future charges in estimates used to conduct the impairment review, including revenue projections or market values could cause the analysis to indicate that Hollywood Media's goodwill is impaired in subsequent periods and result in a write-off of a portion or all of the goodwill. Hollywood Media is now in the process of performing its 2004 impairment test. INFLATION AND SEASONALITY Although Hollywood Media cannot accurately determine the precise effects of inflation, it does not believe inflation has a material effect on sales or results of operations. Hollywood Media considers its business to be somewhat seasonal and expects net revenues to be generally higher during the second and fourth quarters of each fiscal year for its Tekno Books book licensing business as a result of the general publishing industry practice of paying royalties semi-annually. The Broadway Ticketing business is also affected by seasonal variations with net revenues generally higher in the second quarter as a result of increased sales volumes due to the Tony Awards(C) and in the fourth quarter due to increased levels during the holiday period. In addition, although not seasonal, Hollywood Media's Intellectual Properties division and NetCo Partners both experience fluctuations in their respective revenue streams, earnings and cash flow as a result of the amount of time that is expended in the creation and development of the intellectual properties and their respective licensing agreements. The recognition of licensing revenue is typically triggered by specific contractual events which occur at different points in time rather than on a regular periodic basis. 46 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in our assets or liabilities that might occur due to changes in market rates and prices, such as interest or foreign currency exchange rates, as well as other relevant market rate or price changes. Interest rates charged on Hollywood Media's debt instruments are primarily fixed in nature. We therefore do not believe that the risk of loss relating to the effect of changes in market interest rates is material. We purchase and sell tickets to live theater shows in London's West End. We minimize our exposure to adverse changes in currency exchange rates by taking steps to reduce the time lag between the purchase and payment of tickets for the London shows and the collection of related sales proceeds. We further reduce our exposure by setting favorable currency conversion rates in our foreign ticket pricing. We do not believe the risk of loss relating to adverse changes in currency conversion rates to be material. ITEM 4. CONTROLS AND PROCEDURES CHIEF EXECUTIVE OFFICER AND VICE PRESIDENT OF FINANCE AND ACCOUNTING CERTIFICATIONS. The certifications of the Chief Executive Officer and the Vice President of Finance and Accounting required by Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended (the "Certifications") are filed as exhibits to this Form 10-Q. This section of the Form 10-Q contains the information concerning the evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) ("Disclosure Controls") and changes to internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) ("Internal Controls") referred to in the Certifications and this information should be read in conjunction with the Certifications for a more complete understanding of the topics presented. Our management, including the principal executive officer and principal financial officer, does not expect that our Disclosure Controls or Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the limitations in any and all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. EVALUATION OF DISCLOSURE CONTROLS. An evaluation was performed under the supervision and with the participation of Hollywood Media's management, including the Chief Executive Officer and the Vice President of Finance and Accounting (the principal financial and accounting officer), of the effectiveness of Hollywood Media's Disclosure Controls as of the end of the 47 period covered by this Form 10-Q. Based on that evaluation, Hollywood Media's management, including the Chief Executive Officer and the Vice President of Finance and Accounting, concluded that, as of the end of the period covered by this Form 10-Q, Hollywood Media's Disclosure Controls were designed to provide reasonable assurance of achieving their objectives and, at the "reasonable assurance" level, were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. CHANGES IN INTERNAL CONTROLS. There have been no changes in Hollywood Media's Internal Controls that occurred during the fiscal quarter covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, Hollywood Media's Internal Controls. We are in the process of documenting and testing our Internal Controls in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our Internal Controls and a report by our auditors addressing these assessments. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our Internal Controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. 48 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Note (11) - COMMITMENTS AND CONTINGENCIES - Litigation" in the Notes to Condensed Consolidated Financial Statements contained in Part I of this 10-Q Report. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The following securities were issued by Hollywood Media during the quarter ended September 30, 2004, in transactions that were not registered under the Securities Act of 1933. On July 1, 2004, Hollywood Media issued 73,249 shares of common stock, valued at $250,000, as part the purchase price for the acquisition of Studio Systems, Inc. On July 7, 2004, Hollywood Media issued 23,597 shares of common stock valued at $77,786 to the holders of the Debentures for interest due for the period April 30, 2004 through June 30, 2004. During the quarter, Hollywood Media issued 1,540,985 shares of common stock upon conversions of an aggregate of $4.7 million principal amount of the Debentures at a conversion price of $3.05 per share. In addition, Hollywood Media issued 71,969 shares of common stock valued at $108,522 for interest due on the Debentures. 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 and/or Regulation D thereunder, based upon investment representations to Hollywood Media relating thereto. Hollywood Media did not repurchase any shares of its common stock during the quarter ended September 30, 2004. ITEM 5. OTHER INFORMATION The employment agreements with each of Mitchell Rubenstein, Hollywood Media's Chief Executive Officer, and Laurie Silvers, the President, were amended pursuant to agreements dated November 15, 2004, for the purpose of clarifying the requirements under which their respective restricted stock grants made to them by Hollywood Media in August 2004 would vest in the event of termination of employment. The amendments specify the requirement of "good reason" (or cause) for accelerated vesting upon termination due to resignation. These restricted stock grants were 400,000 shares each, and vest over four years on a quarterly basis, beginning on October 1, 2004, unless vesting is accelerated upon specified events. 49 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits:
Incorporated by Exhibit Description Reference From 3.1 Articles of Amendment to Articles of Incorporation of Hollywood Media Corp. (*) for Designation of Preferences, Rights and Limitations of Series E Junior Preferred Stock. 10.1 Amendment to Debenture Agreement, dated as of September 29, 2004, by and (*) between Hollywood Media Corp. and Portside Growth & Opportunity Fund Ltd. 10.2 Amended and Restated 6% Senior Convertible Debenture Due May 22, 2006 (*) issued by Hollywood Media Corp. to Portside Growth & Opportunity Fund Ltd., dated October 15, 2004. 10.3 Warrant No. W-A-5 dated as of August 31, 2004 issued to CD Investment Partners, Ltd. (*) in replacement of Warrant No. W-A-4. 10.4 Agreement to Convert Debenture, dated as of August 30, 2004, by and between (*) Hollywood Media Corp. and Leonardo, L.P. 10.5 Conversion Notice, dated September 28, 2004, for 6% Senior Convertible (*) Debenture due May 22, 2005 held by Leonardo, L.P. 10.6 Agreement to Convert Debenture, dated as of August 31, 2004, by and between (*) Hollywood Media Corp. and CD Investment Partners, Ltd. 10.7 Conversion Notice, dated September 30, 2004, for 6% Senior Convertible (*) Debenture due May 22, 2005 held by CD Investment Partners, Ltd. 10.8 Conversion Notice, dated August 20, 2004, for 6% Senior Convertible (*) Debenture due May 22, 2005 held by Federated Kaufmann Fund. 10.9 Conversion Notice, dated August 20, 2004, for 6% Senior Convertible Debenture due May 22, 2005 held by Mitchell Rubenstein and Laurie Silvers. (*) 10.10 Employment Letter, dated as of April 2, 2003, by and between Hollywood (*) Media Corp. and Scott Gomez. 10.11 Amendment Agreement, dated as of November 15, 2004, to Employment Agreement (*) between Hollywood Media Corp. and Mitchell Rubenstein. 10.12 Amendment Agreement, dated as of November 15, 2004, to Employment Agreement (*) between Hollywood Media Corp. and Laurie S. Silvers. 31.1 Certification of Chief Executive Officer. (Section 302) (*) 31.2 Certification of Vice President of Finance and Accounting (Principal (*) financial and accounting officer). (Section 302) 32.1 Certification of Chief Executive Officer. (Section 906) (*) 32.2 Certification of Vice President of Finance and Accounting (Principal (*) financial and accounting officer). (Section 906)
- ------------------ * Filed as an exhibit to this Form 10-Q 50 (b) Reports on Form 8-K: The following Current Reports on Form 8-K were filed by Hollywood Media during the quarter ended September 30, 2004: Form 8-K filed July 2, 2004: Item 5 of the Form 8-K reported that on July 2, 2004 we issued a press release announcing that Hollywood Media consummated its acquisition of Studio Systems, Inc. in a transaction that closed on July 1, 2004, and a copy of the press release was included with the filing. Form 8-K filed July 16, 2004: Item 11 of the Form 8-K reported a temporary blackout period for the Hollywood Media Corp. 401(k) Retirement Savings Plan due to changes being made to the Plan, including changing the recordkeeper and investment options. The blackout period was expected to begin on August 24, 2004 and expected to end by September 20, 2004. Form 8-K filed August 11, 2004: Item 12 of the Form 8-K reported that on August 11, 2004 we issued a press release announcing Hollywood Media's financial results for the second quarter of fiscal 2004, and a copy of the press release was included with the filing. Form 8-K filed August 24, 2004: Item 1.01 of the Form 8-K reported that on August 20, 2004, Hollywood Media agreed to convert, and thereupon converted, an aggregate of $1.5 million principal amount of its 6% Convertible Debentures held by two holders into shares of Hollywood Media's common stock at a conversion price of $3.05 per share. Additional shares of common stock were to be issued upon such conversions in payment of accrued interest on the converted Debentures as provided under the terms of the Debentures. Item 3.02 of the Form 8-K reported the following issuances of equity securities by Hollywood Media in transactions that were not registered under the Securities Act of 1933: (1) 73,249 shares of common stock valued at $250,000 issued on July 1, 2004 in connection with the acquisition of Studio Systems, Inc.; (2) 23,597 shares of common stock valued at $77,786 issued on July 8, 2004 to the holders of the Debentures for interest due pursuant to the terms of the Debentures; and (3) 534,335 shares of common stock issued on August 20, 2004 upon conversion of $1.5 million aggregate principal amount of Debentures and as payment of interest due pursuant to the terms of the Debentures, as further described in Item 1.01 of the Form 8-K. Form 8-K filed September 1, 2004: Item 1.01 of the Form 8-K reported that on August 30, 2004, Hollywood Media entered into an agreement to convert $3.2 million principal amount of its 6% Senior Convertible Debentures held by two holders into shares of Hollywood Media's common stock at a conversion price of $3.05 per share on dates to be selected by the holders no later than September 30, 2004 (with respect to $200,000 of the Debentures) or December 31, 2004 (with respect to $3.0 million of the Debentures). Additional shares of common stock were to be issued upon such conversions in payment of accrued interest on the converted Debentures as provided under the terms of the Debentures. Item 3.02 of the Form 8-K reported that, as further described in Item 1.01 of the Form 8-K, Hollywood Media agreed to issue shares of its common stock upon conversion of $3.2 million aggregate principal amount of Debentures and as payment of interest due pursuant to the terms of the Debentures, pursuant to transactions not registered under the Securities Act of 1933. Form 8-K filed September 17, 2004: Item 1.01 of the Form 8-K reported that on September 16, 2004, Hollywood Media amended and restated its previously established 401(k) plan, known as the Hollywood Media Corp. 401(k) Retirement Savings Plan, in connection with Hollywood Media's appointment of Sentinel Benefits Group, Inc. as the administrator for the Plan. The restated Plan documents were included with the filing and replaced the prior corresponding Plan documents. 51 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HOLLYWOOD MEDIA CORP. Date: November 15, 2004 By: /s/ Mitchell Rubenstein ------------------------------------------------------------------- Mitchell Rubenstein, Chief Executive Officer (Principal executive officer) Date: November 15, 2004 By: /s/ Scott Gomez ------------------------------------------------------------------- Scott Gomez, Vice President of Finance and Accounting (Principal accounting officer)
52 EX-3.1 2 amendmenttoincorporation.txt AMENDMENT TO INCORPORATION Exhibit 3.1 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF HOLLYWOOD MEDIA CORP. FOR DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS OF SERIES E JUNIOR PREFERRED STOCK Pursuant to the provisions of Sections 607.0602 and 607.1006 of the Florida Business Corporation Act, Hollywood Media Corp. (the "Company"), a corporation organized and existing under the Florida Business Corporation Act, hereby adopts the following Articles of Amendment to its Articles of Incorporation. The amendment was adopted at a duly convened meeting of the Board of Directors held on October 1, 1999, and reconfirmed at a meeting of the Board of Directors on May 1, 2003. FIRST: Designation of Series E Junior Preferred Stock Of the 1,000,000 shares of Preferred Stock, par value $.01 per share, authorized pursuant to Article III of the Company's Articles of Incorporation, 240,000 of such shares are hereby designated as the Series E Junior Preferred Stock (the "Preferred Stock"). The powers, designations, preferences, and relative, participating, optional or other special rights of the Preferred Stock authorized hereunder and the qualifications, limitations and restrictions of such preferences and rights are as set forth on Exhibit A hereto. IN WITNESS WHEREOF, these Articles of Amendment to Articles of Incorporation have been executed by the undersigned duly authorized officer of the Company as of the 2nd day of August, 2004. HOLLYWOOD MEDIA CORP. By: /s/ Mitchell Rubenstein --------------------------- Mitchell Rubenstein Chief Executive Officer EXHIBIT A TO DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS OF SERIES E JUNIOR PREFERRED STOCK OF HOLLYWOOD MEDIA CORP. Section 1. Designation and Amount. The shares of such series shall be designated as "Series E Junior Preferred Stock" (the "Series E Preferred Stock") and the number of shares constituting such series shall be 240,000. Section 2. Dividends and Distributions. (A) Subject to the provisions for adjustment hereinafter set forth, and subject to the rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the Series E Preferred Stock with respect to dividends, the holders of shares of Series E Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) cash dividends in an amount per share (rounded to the nearest cent) equal to 1,000 times the aggregate per share amount of all cash dividends declared or paid on the Common Stock, $0.01 par value per share, of the Company (the "Common Stock") and (ii) a preferential cash dividend (the "Preferential Dividends"), if any, in preference to the holders of Common Stock, on the first day of each fiscal quarter of the Company of each year (each a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series E Preferred Stock, payable in an amount (except in the case of the first Quarterly Dividend Payment if the date of the first issuance of Series E Preferred Stock is a date other than a Quarterly Dividend Payment Date, in which case such payment shall be a prorated amount of such amount) equal to $0.001 per share of Series E Preferred Stock less the per share amount of all cash dividends declared on the Series E Preferred Stock pursuant to clause (i) of this sentence since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series E Preferred Stock. In the event the Company shall, at any time after the issuance of any share or fraction of a share of Series E Preferred Stock, make any distribution on the shares of Common Stock of the Company, whether by way of a dividend or a reclassification of stock, a recapitalization, reorganization or partial liquidation of the Company or otherwise, which is payable in cash or any debt security, debt instrument, real or personal property or any other property (other than cash dividends subject to the immediately preceding sentence, a distribution of shares of Common Stock or other capital stock of the Company or a distribution of rights or warrants to acquire any such share, including any debt security convertible into or exchangeable for any such share, at a price less than the Fair Market Value (as hereinafter defined) of such share), then, and in each such event, the Company shall simultaneously pay on each then outstanding share of Series E Preferred Stock of the Company a distribution, in like kind, of 1,000 times such distribution paid on a share of Common Stock (subject to the provisions for adjustment hereinafter set forth). The dividends and distributions on the Series E Preferred Stock to which holders thereof are entitled pursuant to clause (i) of the first sentence of this paragraph and pursuant to the second sentence of this paragraph are hereinafter referred to as "Dividends" and the multiple of such cash and non-cash dividends on the Common Stock applicable to the determination of the Dividends, which shall be 1,000 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple." In the event the Company 2 shall at any time after October 19, 1999 declare or pay any dividend or make any distribution on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Dividend Multiple thereafter applicable to the determination of the amount of Dividends which holders of shares of Series E Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Company shall declare each Dividend at the same time it declares any cash or non-cash dividend or distribution on the Common Stock in respect of which a Dividend is required to be paid. No cash or non-cash dividend or distribution on the Common Stock in respect of which a Dividend is required to be paid shall be paid or set aside for payment on the Common Stock unless a Dividend in respect of such dividend or distribution on the Common Stock shall be simultaneously paid, or set aside for payment, on the Series E Preferred Stock. (C) Preferential Dividends shall begin to accrue on outstanding shares of Series E Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of any shares of Series E Preferred Stock. Accrued but unpaid Preferential Dividends shall cumulate but shall not bear interest. Preferential Dividends paid on the shares of Series E Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. 3 Section 3. Voting Rights. The holders of shares of Series E Preferred Stock shall have the following voting rights: (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series E Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the holders of the Common Stock. The number of votes which a holder of Series E Preferred Stock is entitled to cast, as the same may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Vote Multiple." In the event the Company shall at any time after October 19, 1999 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series E Preferred Stock shall be entitled after such event shall be the Vote Multiple immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Amended and Restated Articles of Incorporation or by law, the holders of shares of Series E Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (C) Except as otherwise required by the Amended and Restated Articles of Incorporation or by law or set forth herein, holders of Series E Preferred Stock shall have no other special voting rights and their consent shall not be required (except to the extent they are entitled to vote with 4 holders of Common Stock as set forth herein) for the taking of any corporate action. Section 4. Certain Restrictions. (A) Whenever Preferential Dividends or Dividends are in arrears or the Company shall be in default of payment thereof, thereafter and until all accrued and unpaid Preferential Dividends and Dividends, whether or not declared, on shares of Series E Preferred Stock outstanding shall have been paid or set irrevocably aside for payment in full, and in addition to any and all other rights which any holder of shares of Series E Preferred Stock may have in such circumstances, the Company shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series E Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity as to dividends with the Series E Preferred Stock, unless dividends are paid ratably on the Series E Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled if the full dividends accrued thereon were to be paid; (iii) except as permitted by subparagraph (iv) of this paragraph 4(A), redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series E Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock 5 of the Company ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series E Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series E Preferred Stock, or any shares of stock ranking on a parity with the Series E Preferred Stock (either as to dividends or upon liquidation, dissolution or winding up), except in accordance with a purchase offer made to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series end classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any Subsidiary (as hereinafter defined) of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. A "Subsidiary" of the Company shall mean any corporation or other entity of which securities or other ownership interests having ordinary voting power sufficient to elect a majority of the board of directors of such corporation or other entity or other persons performing similar functions are beneficially owned, directly or indirectly, by the Company or by any corporation or other entity that is otherwise controlled by the Company. (C) The Company shall not issue any shares of Series E Preferred Stock except upon exercise of Rights issued pursuant to that certain Amended and Restated Rights Agreement dated as of August 23, 1996 between the Company and American Stock Transfer & Trust Company, as Rights Agent, as it may be amended from time to time, a copy of which is on file with the Secretary of the Company at its principal executive office and shall be made available to 6 stockholders of record without charge upon written request therefor addressed to said Secretary. Notwithstanding the foregoing sentence, nothing contained in the provisions hereof shall prohibit or restrict the Company from issuing for any purpose any series of Preferred Stock with rights and privileges similar to, different from, or greater than, those of the Series E Preferred Stock. Section 5. Reacquired Shares. Any shares of Series E Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares upon their retirement and cancellation shall become authorized but unissued shares of Preferred Stock, without designation as to series, and such shares may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. Section 6. Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series E Preferred Stock unless the holders of shares of Series E Preferred Stock shall have received for each share of Series E Preferred Stock, subject to adjustment as hereinafter provided, (A) $1,000.00 plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment or, (B) if greater than the amount specified in clause (i)(A) of this sentence, an amount equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock, as the same may be adjusted as hereinafter provided and (ii) to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Series E Preferred Stock, unless simultaneously therewith distributions are made ratably on the Series E Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of 7 Series E Preferred Stock are entitled under clause (i)(A) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquidation, dissolution or winding up. The amount to which holders of Series E Preferred Stock may be entitled upon liquidation, dissolution or winding up of the Company pursuant to clause (i)(B) of the foregoing sentence is hereinafter referred to as the "Participating Liquidation Amount" and the multiple of the amount to be distributed to holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Company applicable pursuant to said clause to the determination of the Participating Liquidation Amount, as said multiple may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Liquidation Multiple." In the event the Company shall at any time after October 19, 1999 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then, in each such case, the Liquidation Multiple thereafter applicable to the determination of the Participating Liquidation Amount to which holders of Series E Preferred Stock shall be entitled after such event shall be the Liquidation Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Certain Reclassifications and Other Events. (A) In the event that holders of shares of Common Stock of the Company receive after October 19, 1999 in respect of their shares of Common Stock any share of capital stock of the Company (other than any share of Common Stock of the Company), whether by way of reclassification, recapitalization, reorganization, dividend or other distribution or otherwise (a "Transaction"), 8 then, and in each such event, the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series E Preferred Stock shall be adjusted so that after such event the holders of Series E Preferred Stock shall be entitled, in respect of each share of Series E Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such adjustment, to (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such Transaction multiplied by the additional dividends which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock, (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such Transaction multiplied by the additional voting rights which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such Transaction multiplied by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company by virtue of the receipt in the Transaction of such capital stock, as the case may be, all as provided by the terms of such capital stock. (B) In the event that holders of shares of Common Stock of the Company receive after October 19, 1999 in respect of their shares of Common Stock any right or warrant to purchase Common Stock (including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for Common Stock) at a purchase price per share less than the Fair Market Value of a share of Common Stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series E Preferred Stock shall each be adjusted so that after such 9 event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be the product of the Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case may be, in effect immediately prior to such event multiplied by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock which could be acquired upon exercise in full of all such rights or warrants and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased, at the Fair Market Value of the Common Stock at the time of such issuance, by the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (C) In the event that holders of shares of Common Stock of the Company receive after October 19, 1999 in respect of their shares of Common Stock any right or warrant to purchase capital stock of the Company (other than shares of Common Stock), including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for capital stock of the Company (other than Common Stock), at a purchase price per share less than the Fair Market Value of such shares of capital stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon liquidation, dissolution or winding up of the Company of the shares of Series E Preferred Stock shall each be adjusted so that after such event each holder of a share of Series E Preferred Stock shall be entitled, in respect of each share of Series E Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such event, to receive (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such event multiplied, first, by the additional dividends to which the holder of a share of Common Stock shall be 10 entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction (as hereinafter defined) and (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such event multiplied, first, by the additional voting rights to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such event multiplied, first, by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction. For purposes of this paragraph, the "Discount Fraction" shall be a fraction the numerator of which shall be the difference between the Fair Market Value of a share of the capital stock subject to a right or warrant distributed to holders of shares of Common Stock of the Company as contemplated by this paragraph immediately after the distribution thereof and the purchase price per share for such share of capital stock pursuant to such right or warrant and the denominator of which shall be the Fair Market Value of a share of such capital stock immediately after the distribution of such right or warrant. (D) For purposes of this Certificate of Designations, the "Fair Market Value" of a share of capital stock of the Company (including a share of Common Stock) on any date shall be deemed to be the average of the daily closing price per share thereof over the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that, in the event that such Fair Market Value of any such share of 11 capital stock is determined during a period which includes any date that is within 30 Trading Days after (i) the ex-dividend date for a dividend or distribution on stock payable in shares of such stock or securities convertible into shares of such stock, or (ii) the effective date of any subdivision, split, combination, consolidation, reverse stock split or reclassification of such stock, then, and in each such case, the Fair Market Value shall be appropriately adjusted by the Board of Directors of the Company to take into account ex-dividend or post-effective date trading. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way (in either case, as reported in the applicable transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange), or, if the shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the applicable transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares are listed or admitted to trading or, if the shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or if on any such date the shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares are listed or admitted to trading is open for the transaction of business or, if the shares are not listed or admitted to trading on any national securities exchange, on which the New York Stock Exchange or such other national securities exchange as may be selected by the Board of Directors of the Company is open. If the shares are not publicly held or not so listed or traded on any day within the period of 12 30 Trading Days applicable to the determination of Fair Market Value thereof as aforesaid, "Fair Market Value" shall mean the fair market value thereof per share as determined in good faith by the Board of Directors of the Company. In either case referred to in the foregoing sentence, the determination of Fair Market Value shall be described in a statement filed with the Secretary of the Company. Section 8. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each outstanding share of Series E Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged multiplied by the highest of the Vote Multiple, the Dividend Multiple or the Liquidation Multiple in effect immediately prior to such event. Section 9. Effective Time of Adjustments. (A) Adjustments to the Series E Preferred Stock required by the provisions hereof shall be effective as of the time at which the event requiring such adjustments occurs. (B) The Company shall give prompt written notice to each holder of a share of Series E Preferred Stock of the effect of any adjustment to the voting rights, dividend rights or rights upon liquidation, dissolution or winding up of the Company of such shares required by the provisions hereof. Notwithstanding the foregoing sentence, the failure of the Company to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. Section 10. No Redemption. The shares of Series E Preferred Stock shall not be redeemable at the option of the Company or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Company may 13 acquire shares of Series E Preferred Stock in any other manner permitted by law, the provisions hereof and the Amended and Restated Articles of Incorporation of the Company. Section 11. Ranking. Unless otherwise provided in the Amended and Restated Articles of Incorporation of the Company or a Certificate of Designations relating to a subsequent series of preferred stock of the Company, the Series E Preferred Stock shall rank junior to all other series of the Company's preferred stock as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and senior to the Common Stock. Section 12. Amendment. The provisions hereof and the Amended and Restated Articles of Incorporation of the Company shall not be amended in any manner which would adversely affect the rights, privileges or powers of the Series E Preferred Stock without, in addition to any other vote of stockholders required by law, the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series E Preferred Stock, voting together as a single class. 14 EX-10.1 3 amendeddebenture-portside.txt AMEND TO DEBENTURE - PORTSIDE GROWTH Exhibit 10.1 AMENDMENT TO DEBENTURE AGREEMENT THIS AGREEMENT (this "AGREEMENT"), is made and entered into as of September 29, 2004, by and between HOLLYWOOD MEDIA CORP., a Florida corporation (the "COMPANY"), and PORTSIDE GROWTH & OPPORTUNITY FUND LTD. ("HOLDER"). WITNESSETH: WHEREAS, Holder is the registered holder of the Company's "6% Senior Convertible Debenture Due May 22, 2005" in the principal amount of $1,000,000 issued under Certificate No. 2, dated as of May 22, 2002 (the "DEBENTURE"), which Debenture by its terms is convertible into shares of common stock, par value $0.01, of the Company ("COMMON STOCK"). WHEREAS, the Debenture Certificate recites that as of the date of issuance of the Debenture to Holder the Debenture was convertible based on a Conversion Price of $3.46 per share, however, as a result of certain antidilution adjustments under the terms of the Debenture in connection with the Company's private placement in February 2004, the Conversion Price was reduced to $3.30 per share. WHEREAS, the Debenture was purchased by the Holder pursuant to a Securities Purchase Agreement dated as of May 22, 2002 (the "Purchase Agreement") among the Company, the Holder and other purchasers. WHEREAS, the parties hereto desire to hereby amend the Debenture upon the terms and agreements provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties, intending to be legally bound, hereby acknowledge, confirm and agree as follows: 1. Notwithstanding anything to the contrary in the Debenture or the Purchase Agreement, the Company and Holder hereby agree that: a. The Debenture is hereby amended such that the May 22, 2005 "Maturity Date" of the Debenture (as defined therein, which date is subject to extension as provided therein), is hereby changed and extended from May 22, 2005 to May 22, 2006. b. The current Conversion Price of the Debenture, as adjusted, is hereby amended and changed from $3.30 per share to $3.20 per share as of the date hereof, and the Debenture is hereby amended accordingly. c. Sections 24 and 25 of the Debenture (and the related Exhibit A to the Debenture) and all of the terms and provisions thereof are hereby deleted and removed in their entirety from the Debenture and shall cease to have any force and effect; it being agreed that the Debenture is hereby amended to remove such portions of 1 the Debenture, and further agreed that the Holder shall promptly deliver the existing original Debenture document (or affidavit of lost certificate in customary form) to the Company and the Company shall thereupon promptly execute and deliver (with delivery no later than 5 business days following receipt thereof) to Holder a new Debenture containing the amendments thereto as agreed in this Agreement (and further agreed that the Holder shall not assign or transfer the Debenture prior to receiving such amended Debenture). d. The Holder hereby waives Section 4(o) of the Purchase Agreement and any and all rights of the Holder and restrictions on the Company thereunder, and the parties further agree that the Purchase Agreement is hereby amended to remove and delete Section 4(o) in its entirety from the Purchase Agreement. 2. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of New York. This Agreement constitutes the entire understanding and agreement between the parties hereto with respect to the subject matter hereof. 3. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. IN WITNESS WHEREOF, the undersigned parties have executed this AMENDMENT TO DEBENTURE AGREEMENT as of the day and year first above written. HOLLYWOOD MEDIA CORP. PORTSIDE GROWTH & OPPORTUNITY FUND LTD. By: /s/ Mitchell Rubenstein By: /s/ Jeff Solomon ----------------------- ---------------- Name: Mitchell Rubenstein Name: Jeff Solomon Title: Chief Executive Officer Title: Managing Member 2 EX-10.2 4 restateddebenture-portside.txt RESTATED DEBENTURE - PORTSIDE GROWTH Exhibit 10.2 THIS IS THE AMENDED AND RESTATED DEBENTURE WHICH HAS BEEN ISSUED PURSUANT TO AN AMENDMENT TO DEBENTURE AGREEMENT (THE "DEBENTURE AMENDMENT") DATED SEPTEMBER 29, 2004 BETWEEN HOLLYWOOD MEDIA CORP. AND PORTSIDE GROWTH & OPPORTUNITY FUND LTD. THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY THE SECURITIES. THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR PURPOSES OF APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS DEBENTURE. THIS DEBENTURE HAS AN ISSUE PRICE OF $955,491.36, AN AGGREGATE AMOUNT OF OID OF $44,508.64, AN ISSUE DATE OF MAY 22, 2002 AND A YIELD TO MATURITY OF 7.689%. No. 2 $1,000,000.00 HOLLYWOOD MEDIA CORP. 6% SENIOR CONVERTIBLE DEBENTURE DUE MAY 22, 2006 THIS DEBENTURE (this "Debenture") is one of a duly authorized issue of Debentures of HOLLYWOOD MEDIA CORP., a corporation duly organized and existing under the laws of the State of Florida (the "Company"), designated as its 6% Senior Convertible Debentures Due May 22, 2005 (although this amended and restated Debenture has been amended such that it is due May 22, 2006, as provided herein), in an aggregate principal amount of up to Five Million, Seven Hundred Thousand U.S. Dollars (U.S. $5,700,000) (the "Debentures"). FOR VALUE RECEIVED, the Company promises to pay to Portside Growth & Opportunity Fund Ltd., the holder hereof, or its registered assigns (the "Holder"), the principal sum of One Million Dollars ($1,000,000.00) on May 22, 2006 (subject to extension as provided herein, the "Maturity Date") and to pay interest ("Interest Payments") on the Outstanding Principal Amount at the rate of 6% per annum which shall be cumulative, accrue daily from the date of issuance of this Debenture and be due and payable in arrears on the first day of each Quarterly Period commencing with the Quarterly Period immediately following the date of issuance of this Debenture (each, an "Interest Payment Date"). If the Maturity Date is not a Business Day, then the Maturity Date shall be deemed to be the Business Day immediately following such date. If an Interest Payment Date is not a Business Day, then the Interest Payment shall be due and payable on the Business Day immediately following such Interest Payment Date. Subject to the limitations in Sections 11 and 26, interest shall be payable by the issuance of shares of Common Stock ("Interest Shares") to the Holder or, at the option of the Company, in cash (the "Cash Interest Payment"); provided, however, that the Company may not make Cash Interest Payments and interest payments shall be payable in Interest Shares unless the Company provides written notice to each holder of Debentures at least five Business Days prior to the applicable Interest Payment Date that such Interest Payments shall be made in cash. Interest Shares shall be paid in a number of fully paid and nonassessable shares (rounded up or down to the nearest whole share) of Common Stock equal to the quotient of (1) the amount of the Interest Payment due on the applicable Interest Payment Date divided by (2) ninety-five percent (95%) of the arithmetic average of the Closing Sale Price of the Common Stock on the five consecutive Business Days ending on and including the third Business Day immediately preceding the applicable Interest Payment Date (the "Interest Share Conversion Rate"). Notwithstanding the foregoing, the Company shall be required to make a Cash Interest Payment on any Interest Payment Date if (a) any event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing on the Interest Payment Date or any date which is within 10 Business Days prior to the Interest Payment Date, unless otherwise consented to in writing by the holder of the Debenture entitled to receive such Interest Payment or (b) from and after the time that any Registration Statement (as defined in the Registration Rights Agreement, the "Registration Statement") is required to be effective, such Registration Statement is not then effective and available for the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) on the Interest Payment Date or each date which is within 10 Business Days prior to the Interest Payment Date. Any accrued and unpaid interest which is not paid within five (5) Business Days of the Interest Payment Date on which such payment of interest was due shall bear interest at the rate of 14.0% per annum from such Interest Payment Date until the same is paid in full (or, if less, the maximum interest rate then permitted by applicable law) (the "Default Interest"). Interest Payments and payments of principal will be paid only to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register"). This Debenture is subject to the following additional provisions: 1. Exchange. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different denominations, as requested by the Holder surrendering the same. No service charge will be charged to the Holder for such registration transfer or exchange. 2. Transfers. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged in the United States only in compliance with the Securities Act of 1933, as amended (the "Act"), and applicable state securities laws. Prior to due presentment for transfer of this Debenture, the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and all other purposes, whether or not this Debenture is overdue, and the Company shall not be affected by notice to the contrary. 2 3. Definitions. For purposes of this Debenture, the location of defined terms in this Debenture is set forth on the Index of Terms attached hereto and the following terms shall have the following meanings: "Approved Stock Plan shall mean any employee benefit plan, stock incentive plan or other similar plan or arrangement which has been approved by the Board of Directors of the Company or any authorized committee thereof, pursuant to which the Company's securities may be issued to any employee, officer, consultant or director for services provided to the Company. "Bloomberg" shall mean Bloomberg Financial Markets or any other similar financial reporting service as may be selected from time to time by the Company and the holders of not less than 60% of the then Outstanding Principal Amount of Debentures issued on the Original Issuance Date. "Business Day" shall mean any day other than Saturday, Sunday or any other day on which commercial banks in The City of New York are authorized or required by law to remain closed. "Cash Transaction" means any Organic Change with a third party on an arm's length basis pursuant to which the holders of the Common Stock are to receive consideration consisting solely of cash. "Closing Date" shall mean the first date on which Debentures are issued pursuant to the Securities Purchase Agreement. "Closing Sale Price" shall mean, for any security as of any date, the last closing trade price for such security on the Principal Market as reported by Bloomberg, or if the Principal Market begins to operate on an extended hours basis, and does not designate the closing trade price, then the last trade price at 4:00 p.m., New York City Time, as reported by Bloomberg, or if the foregoing do not apply, the last closing trade price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the last closing ask price of such security as reported by Bloomberg, or, if no last closing ask price is reported for such security by Bloomberg, the average of the highest bid price and the lowest ask price of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Sale Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of no less than 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If the Company and the holders of the Debentures are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(d)(iii) below. All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. "Common Stock" shall mean the Common Stock, par value $0.01 per share, of the Company. 3 "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 6(a)(i) and 6(a)(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any shares of Common Stock owned or held by or for the account of the Company or issuable upon conversion of the Debentures or exercise of the Warrants. "Conversion Failure" shall mean that for any reason the Holder has not received all of the shares of Common Stock to which the Holder is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Debenture. "Conversion Price" shall mean as of any Conversion Date or other date of determination $3.46, subject to adjustment as provided in Section 6, Anti-dilution Adjustments to Conversion Price (which adjusted Conversion Price as of September 29, 2004, including adjustment thereto as provided in the Debenture Amendment, is $3.20). "Convertible Securities" shall mean any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock. "Default Conversion Price" means the lower of (a) the Conversion Price then in effect and (b) 95% of the lowest Closing Sale Price during the three (3) trading days ending on and including the Conversion Date or other date of determination. "Issuance Date" shall mean, with respect to each Debenture, the date of issuance of the applicable Debenture. "Maturity Conversion Price" means the arithmetic average of the Weighted Average Price of the Common Stock on each trading day during the Maturity Measuring Period; provided, however, that for each Price Failure Date during the Maturity Measuring Period, for purposes of calculating the Maturity Conversion Price, the Weighted Average Price of the Common Stock on such Price Failure Date shall be equal to $3.00 (subject to adjustment for stock splits, stock dividends, stock combinations and similar transactions). "Maturity Date Conversion Conditions" means all of the following: (1) as of the date of the Maturity Date Election Notice, the Weighted Average Price is no less than $3.00 (subject to adjustment for stock splits, stock dividends, stock combinations and similar transactions), (2) the average daily volume of the Common Stock during the period commencing at 9:30 a.m., New York City time, and ending at 4:00 p.m., New York City time, on the Principal Market for the 20 trading days prior to the date of the Maturity Date Election Notice is no less than 100,000, excluding in each calculation of average daily volume all block trades of 15,000 or more shares of the Common Stock, (3) the average daily volume of the Common Stock during the period commencing at 9:30 a.m., New York City time, and ending at 4:00 p.m., New York City time, on the Principal Market for the 60 trading days prior to the date of the Maturity Date Election Notice is no less than 100,000, excluding in each calculation of average daily volume all block trades of 15,000 or more shares of the Common Stock, (4) no event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default has occurred and is continuing on (i) the date of the Maturity Date Election Notice, 4 (ii) the Maturity Date or (iii) any date which is within 10 Business Days prior to the date of the Maturity Date Election Notice or the Maturity Date and (5) each Registration Statement that is required to be effective shall be effective and available for the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) on (i) the date of the Maturity Date Election Notice, (ii) the Maturity Date and (iii) any date which is within 10 Business Days prior to the date of the Maturity Date Election Notice and the Maturity Date. "Maturity Measuring Period" means the 40 trading days immediately preceding May 22, 2006. "NASDAQ" shall mean The Nasdaq National Market, The Nasdaq Small Cap Market or the American Stock Exchange. "NYSE" shall mean The New York Stock Exchange, Inc. "Options" shall mean any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "Original Issuance Date" shall mean the first date on which any Debentures have been issued pursuant to the Securities Purchase Agreement. "Outstanding Principal Amount" shall mean the principal sum outstanding from time to time under this Debenture. "Person" shall mean an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Price Failure Date" means each trading day during the Maturity Measuring Period during which the Weighted Average Price of the Common Stock is less than $3.00 (subject to adjustment for stock splits, stock dividends, stock combinations and similar transactions). "Principal Market" shall mean NASDAQ, or if the Common Stock is not traded on NASDAQ, then the principal securities exchange or trading market for the Common Stock. "Quarterly Period" means each of the following periods: the period beginning on and including January 1 and ending on and including March 31; the period beginning on and including April 1 and ending on and including June 30, the period beginning on and including July 1 and ending on and including September 30; and the period beginning on and including October 1 and ending on and including December 31. "Registration Rights Agreement" shall mean that certain registration rights agreement between the Company and the initial holders of the Debentures relating to the filing of a registration statement covering the resale of the shares of Common Stock issuable upon conversion of the Debentures and exercise of the Warrants, as such agreement may be amended from time to time as provided in such agreement. 5 "SEC" shall mean the United States Securities and Exchange Commission. "Securities Purchase Agreement" shall mean that certain securities purchase agreement between the Company and the initial holders of the Debentures, as such agreement may be amended from time to time as provided in such agreement. "Strategic Financing" shall mean the issuance of Common Stock or Options in connection with any acquisition by the Company, by whatever means, of any business, assets or technologies, or to any strategic investor, vendor, customer, lease or similar arrangement, the primary purpose of which is not to raise equity capital; provided that the aggregate number of shares of Common Stock which the Company may issue pursuant to this definition shall not exceed (i) 25% of the total outstanding equity on the Closing Date in connection with any one or more related issuances to strategic investors, vendors, customers, lessors or similar parties or (ii) 40% of the total outstanding equity on the Closing Date in connection with all issuances to strategic investors, vendors, customers, lessors or similar parties (in each case, subject to adjustment for stock splits, stock dividends, stock combinations and similar transactions). "Warrants" shall mean the warrants to purchase shares of Common Stock issued by the Company pursuant to the Securities Purchase Agreement. "Weighted Average Price" shall mean, for any security as of any date, the dollar volume-weighted average price per share for such security on the Principal Market during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg through its "Volume at Price" function or, if the foregoing does not apply, the dollar volume-weighted average price per share of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of no less than 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If the Company and the holders of the Debentures are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(d)(iii) with the term "Weighted Average Price" being substituted for the term "Closing Sale Price." All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. 4. Conversion at the Option of the Holder. The Holder of this Debenture shall have the following conversion rights: (a) Holder's Right to Convert. Subject to Sections 11 and 26, at any time or times until 5:00 p.m., New York City Time, on the Business Day prior to the Maturity Date this Debenture is convertible, at the option of the Holder hereof, into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 4(d) at the Conversion Rate (as defined below). The 6 Holder hereof may convert a portion of the Outstanding Principal Amount of this Debenture if such portion is an integral multiple of $1,000. If this Debenture remains outstanding on the Maturity Date, then this Debenture shall be redeemed or converted into shares of Common Stock by the Company in accordance with Section 5(a). Notwithstanding anything herein to the contrary, concurrent with each delivery of Conversion Shares to a holder pursuant to this Debenture, the Company shall pay (in Interest Shares, only if all terms, conditions and requirements set forth in this Debenture concerning payment of interest in the form of Interest Shares are satisfied, or cash as determined by the Company) to such holder all accrued and unpaid interest on the Outstanding Principal Amount then being converted from the last date on which interest had been paid on such Outstanding Principal Amount through the Conversion Date. (b) Partial Conversion of Debenture. If this Debenture is converted in part, the remaining portion of this Debenture not so converted shall remain entitled to the conversion rights provided herein. (c) Conversion Price for Holder Converted Shares. The Outstanding Principal Amount of this Debenture that is converted into shares of Common Stock shall be convertible into the number of shares of Common Stock which results from application of the following formula: P ---------------- Conversion Price P = Outstanding Principal Amount of this Debenture submitted for conversion The number of shares of Common Stock into which this Debenture hereto may be converted pursuant to the foregoing formula is hereafter referred to as the "Conversion Rate." (d) Mechanics of Conversion. The conversion of this Debenture shall be conducted in the following manner: (i) Holder's Delivery Requirements. To convert this Debenture (in whole or in part) into full shares of Common Stock on any date, the Holder shall (A) transmit by facsimile (or otherwise physically deliver), for receipt on or prior to 5:00 p.m., New York City Time, on such date, a copy of a properly completed notice of conversion executed by the Holder in the form attached hereto as Exhibit I (the "Conversion Notice") to the Company and the Company's designated transfer agent (the "Transfer Agent") and (B) surrender this Debenture to a common carrier for delivery to the Company as soon as practicable following such date. (ii) Company's Response. Upon receipt by the Company of a copy of a Conversion Notice, the Company shall (A) as soon as practicable, but in any event within two (2) Business Days, send, via facsimile, a confirmation of receipt of such Conversion Notice to such holder and the Transfer Agent, which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein and (B) then, on or 7 before the second (2nd) Business Day following the date of receipt by the Company of such Conversion Notice (the "Share Delivery Date"), (x) issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled, or (y) in the case of a public resale of such Conversion Shares in accordance with the provisions of the Irrevocable Transfer Agent Instructions, provided the Transfer Agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and, if required by DTC, the holder provides a customary representation letter to DTC, upon the request of the holder, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's designee's balance account with DTC through its Deposit Withdrawal Agent Commission system. If the specified principal amount submitted for conversion is less than the then Outstanding Principal Amount of this Debenture, then the Company shall, as soon as practicable using reasonable best efforts, and in no event later than five Business Days after receipt of the Debenture (the "Debenture Delivery Date") and at its own expense, issue and deliver to the holder a new Debenture representing the Outstanding Principal Amount not converted. The effective date of conversion (the "Conversion Date") shall be deemed to be the date on which the Company receives by facsimile the Conversion Notice, and the Person or Persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (iii) Dispute Resolution. In the case of a dispute as to the determination of the Closing Sale Price, the Conversion Price or the arithmetic calculation of the Conversion Rate, the Company shall instruct the Transfer Agent to issue to the Holder the number of shares of Common Stock that is not disputed and shall transmit an explanation of the disputed determinations or arithmetic calculations to the Holder via facsimile within two (2) Business Days of receipt of the Holder's Conversion Notice or other date of determination. If the Holder and the Company are unable to agree upon the determination of the Closing Sale Price, the Conversion Price or arithmetic calculation of the Conversion Rate within two (2) Business Days of such disputed determination or arithmetic calculation being transmitted to the Holder, then the Company shall within two (2) Business Days submit via facsimile (A) the disputed determination of the Closing Sale Price to an independent, reputable investment bank selected by the Company and approved by the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding or (B) the disputed determination of the Conversion Price or the disputed arithmetic calculation of the Conversion Rate to the Company's independent, outside accountant. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holders of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent manifest error. (iv) Company's Failure to Timely Convert. (A) If (x) within five (5) Business Days after the Company's receipt of the facsimile copy of a Conversion Notice the Company has failed to issue and deliver a certificate to a Holder or credit the Holder's 8 designee's balance account with DTC, in accordance with Section 4(d) hereof for the number of shares of Common Stock to which the Holder is entitled upon the Holder's conversion of this Debenture or (y) within five (5) Business Days of the Company's receipt of this Debenture the Company has failed to issue and deliver a Debenture representing the principal amount of this Debenture not so converted, then in addition to all other available remedies which such holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification pursuant to Section 8 thereof), the Company shall pay additional damages to such holder for each day after the Share Delivery Date that such conversion is not timely effected and/or each day after the Debenture Delivery Date that this Debenture is not delivered in an amount equal to 0.05% of the product of (I) the sum of the number of shares of Common Stock not issued to the holder on or prior to the Share Delivery Date and to which such holder is entitled as set forth in the applicable Conversion Notice and, in the event the Company has failed to deliver a Debenture to the holder on or prior to the Debenture Delivery Date, the number of shares of Common Stock issuable upon conversion of this Debenture as of the Debenture Delivery Date and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date, in the case of the failure to deliver Common Stock, or the Debenture Delivery Date, in the case of failure to deliver a Debenture. The foregoing notwithstanding, the damages set forth in this Section 4(d)(iv) shall be stayed with respect to the number of shares of Common Stock for which there is a good faith dispute being resolved pursuant to Section 4(d)(iii), pending the resolution of such dispute. (B) If for any reason a holder has not received all of the shares of Common Stock to which such holder is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Debenture, then the Holder, upon written notice to the Company, with a copy to the Transfer Agent, may void its Conversion Notice; provided that the voiding of the Holder's Conversion Notice shall not affect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to Section 4(d)(iv)(A) or otherwise. (e) No Fractional Shares. The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up or down to the nearest whole share. 5. Redemption, Conversion and Defeasement. (a) Mandatory Redemption and Conversion at Maturity. (i) If (A) this Debenture remains outstanding on the Maturity Date, (B) the Maturity Date Conversion Conditions shall have been satisfied or waived in writing by the Holder and (C) the Company shall have delivered to the Holder a Maturity Date Election Notice in the manner provided in Section 5(a)(ii), the Company shall convert, without the Holder being required to give a Conversion Notice (a "Maturity Date Mandatory Conversion"), the amount of the Outstanding Principal Amount of this Debenture designated for conversion in the Maturity Date Election Notice less any amount of the Outstanding Principal Amount that has been converted by the Holder pursuant to Section 4(a) between 9 the date of delivery of the Maturity Date Election Notice and the date on which a Maturity Date Mandatory Conversion is effected, into the number of fully paid, validly issued and nonassessable shares of Common Stock, which results from application of the following formula: P ------------------ Maturity Conversion Price P = Outstanding Principal Amount of this Debenture subject to the Maturity Date Mandatory Conversion (ii) If the Company desires to effect a Maturity Date Mandatory Conversion, then on or prior to the date which is 60 trading days prior to the Maturity Date, the Company shall deliver written notice to the Holder (a "Maturity Date Election Notice"), which Maturity Date Election Notice shall state (x) the Outstanding Principal Amount of this Debenture the Company has elected to convert on the Maturity Date pursuant to a Maturity Date Mandatory Conversion, which amount shall not exceed fifty percent (50%) of the Outstanding Principal Amount of this Debenture on the date immediately preceding the delivery of the Maturity Date Election Notice and (y) the Outstanding Principal Amount of this Debenture the Company has elected to redeem on the Maturity Date pursuant to a Maturity Date Mandatory Redemption (as defined below). If the Company has elected more than one of the Maturity Date Mandatory Conversion and Maturity Date Mandatory Redemption with respect to the Maturity Date, then the Company shall redeem the Outstanding Principal Amount of this Debenture and/or convert the Outstanding Principal Amount of this Debenture pro rata from the Holders of Debentures then outstanding (based on the Outstanding Principal Amount of this Debenture on the Issuance Date relative to the total Outstanding Principal Amount issued to all Holders on the Issuance Date (such relative amount being referred to herein as each such Holder's "Maturity Allocation Percentage")). In the event that any initial Holder of this Debenture shall sell or otherwise transfer any portion of this Debenture, then the transferee shall be allocated a pro rata portion of such Holder's Maturity Date Allocation Percentage. If the Company fails to deliver to the Holder a Maturity Date Election Notice at least 60 trading days prior to the Maturity Date, then the Company shall be deemed to have elected a Maturity Date Mandatory Redemption for the entire Outstanding Principal Amount of this Debenture. (iii) In the event there is a Maturity Date Mandatory Conversion and one or more Price Failure Dates occur during the Maturity Measuring Period, the Company shall (A) pay on the Maturity Date, in addition to the payment of the Maturity Date Redemption Price to be paid to the holder pursuant to Section 5(b), an amount equal to the product of (x) the quotient of the aggregate number of Price Failure Dates divided by 40 and (y) the Maturity Date Redemption Price that would have been paid if the Company had not elected a Maturity Date Mandatory Conversion with respect to the Outstanding Principal Amount of this Debenture subject to the Maturity Date Mandatory Conversion (the "Price Failure Payment"), and (B) shall reduce the number of shares of Common Stock deliverable on the Maturity Date by the product of (x) the quotient of the aggregate number of Price Failure Dates divided by 40 and (y) the number of shares of Common Stock otherwise deliverable on the Maturity Date pursuant to the Maturity Date Mandatory Conversion. 10 (iv) If the Company has elected a Maturity Date Mandatory Conversion, then the Outstanding Principal Amount of this Debenture subject thereto shall be converted at the Maturity Conversion Price as if the Holder had delivered a Conversion Notice with respect to such Outstanding Principal Amount on the Maturity Date. Promptly following the Maturity Date, the Holder shall surrender this Debenture to the Company. If the Company has elected a Maturity Date Mandatory Conversion and the Holder of this Debenture has not received all of the shares of Common Stock to which the Holder is entitled and/or the Company has failed to pay the Maturity Date Redemption Price and/or any portion of a Price Failure Payment in a timely manner as described above, then the Maturity Date shall be automatically extended until the date the Holder receives such shares of Common Stock and/or Maturity Date Redemption Price and/or Price Failure Payment, as applicable, and shall be further extended for as long as an Event of Default shall have occurred and be continuing or an event shall have occurred and be continuing which with the passage of time and the failure to cure would result in an Event of Default and during any such extended period, the Holder shall have the right to convert at any time and from time to time all or any portion of the Outstanding Principal Amount of this Debenture that is subject to a Maturity Date Mandatory Conversion into shares of Common Stock pursuant to Section 4 at the lower of (A) the Maturity Conversion Price and (B) the Default Conversion Price. Notwithstanding anything to the contrary in this Section 5(a), the Holder may convert the Outstanding Principal Amount of this Debenture (including the Outstanding Principal Amount with respect to which the Company has elected a Maturity Date Mandatory Conversion or has elected a Maturity Date Mandatory Redemption), but subject to Section 11, into shares of Common Stock pursuant to Section 4 on or prior to the date immediately preceding the Maturity Date. (v) In the event a Holder delivers a Conversion Notice to the Company after such Holder's receipt of a Maturity Date Election Notice and the Company has elected in such Maturity Date Election Notice both of the Maturity Date Mandatory Conversion and Maturity Date Mandatory Redemption, then the Outstanding Principal Amount covered by such Conversion Notice shall be deducted, first, from the Outstanding Principal Amount designated by the Company as being subject to a Maturity Date Mandatory Conversion in the Maturity Date Election Notice, and then from the Outstanding Principal Amount designated by the Company as being subject to a Maturity Date Mandatory Redemption in such Maturity Date Election Notice. (b) Mandatory Redemption at Maturity. If this Debenture remains outstanding on the Maturity Date, the Company shall redeem (a "Maturity Date Mandatory Redemption") the Outstanding Principal Amount of this Debenture that is not subject to a Maturity Date Mandatory Conversion for an amount in cash (the "Maturity Date Redemption Price") equal to the Outstanding Principal Amount of the Debenture not converted into shares of Common Stock pursuant to a Maturity Date Mandatory Conversion, or otherwise, plus accrued and unpaid interest thereon. The Maturity Date Redemption Price shall be paid on the Maturity Date to the Holder by wire transfer of immediately available funds to an account designated in writing by such Holder. Promptly following payment of the Maturity Date Redemption Price, the Holder shall surrender this Debenture to the Company. (c) Payment Failures If the Company fails to make any payment of a Maturity Date Redemption Price and/or fails to make any Price Failure Payment, 11 then in addition to any remedy the Holder may have under this Debenture, the Securities Purchase Agreement and the Registration Rights Agreement, until the Maturity Date Redemption Price and/or Price Failure Payment, as applicable, is paid in full, (x) the Maturity Date Redemption Price and/or the amount of any Price Failure Payment, as applicable, payable in respect of such unpaid Maturity Date Redemption Price and/or unpaid Price Failure Payment shall bear interest at the rate of 1.5% per month, prorated for partial months, and (y) the Holder shall have the option to require the Company to convert any or all of the Outstanding Principal Amount of this Debenture subject to redemption and for which the Maturity Date Redemption Price (together with any interest thereon) has not been paid and/or any amount of a Price Failure Payment (together with any interest thereon) that has not been paid, into a number of shares of Common Stock equal to the quotient of the Maturity Date Redemption Price (together with any interest thereon) and/or the Price Failure Payment (together with any interest thereon), as applicable, divided by the Default Conversion Price. (d) Trading Restrictions. On each trading day during the Maturity Measuring Period, the Holder shall not sell (including short sales) shares of Common Stock representing more than ten percent (10%) of the trading volume of the Common Stock on the Principal Market on such trading day. (e) [Intentionally Omitted]. 6. Anti-dilution Adjustments to Conversion Price. The Conversion Price will be subject to adjustment from time to time as provided in this Section 6: (a) Anti-dilution Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on or after the Closing Date and prior to the twelve (12) month anniversary of the Closing Date, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (but excluding shares of Common Stock: (v) deemed to have been issued by the Company in connection with an Approved Stock Plan; (w) deemed to have been issued upon issuance of the Debentures or the Warrants, or issued upon conversion of the Debentures or exercise of the Warrants; (x) issued upon exercise of Options or Convertible Securities which are outstanding on the date immediately preceding the Closing Date, provided that such issuance of shares of Common Stock upon exercise of such Options or Convertible Securities is made pursuant to the terms of such Options or Convertible Securities in effect on the date immediately preceding the Closing Date, such Options or Convertible Securities are not amended after the date immediately preceding the Closing Date other than with respect to Options originally issued pursuant to an Approved Stock Plan and the purchase or exercise price provided for in any such Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any such Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock does not change at any time after the Original Issuance Date; (y) issued to the public pursuant to an underwritten offering registered pursuant to the Securities Act (but in all events excluding offerings pursuant to "equity lines" or similar products); and (z) issued pursuant to a Strategic Financing ((v) through (z) collectively "Excluded Issuances")) for a consideration per share (the "New Securities Issuance Price") less than the Conversion Price in effect immediately prior to such time (each such sale or issuance, a "Dilutive Issuance"), then concurrent with such Dilutive Issuance, 12 the Conversion Price then in effect shall be reduced to an amount equal to the New Securities Issuance Price. If and whenever on or after the twelve (12) month anniversary of the Closing Date and prior to the Maturity Date, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (but excluding shares of Common Stock issued or deemed to have been issued pursuant to any Excluded Issuance) in a Dilutive Issuance, then concurrent with such Dilutive Issuance, the Conversion Price then in effect shall be reduced to a price (rounded to the nearest cent) equal to the product of (A) the Conversion Price in effect immediately prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the Conversion Price in effect immediately prior to such Dilutive Issuance and the number of shares of Common Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any, received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the Conversion Price in effect immediately prior to such Dilutive Issuance by (II) the number of shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. For purposes of determining the adjusted Conversion Price under this Section 6(a), the following shall be applicable: (i) Issuance of Options. If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 6(a)(i), the "lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share. For the purposes of this Section 6(a)(ii), the "lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion, exchange or exercise of such Convertible Security. No further 13 adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section 6(a), no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 6(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of the Debentures are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect. (iv) Calculation of Consideration Received. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, then solely for purposes of this Section 6, the Options will be deemed to have been issued for a consideration of $0.01. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the arithmetic average of the Closing Sale Prices of such securities during the ten (10) consecutive trading days ending on the date of receipt of such securities. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within five Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company and the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company. 14 (v) Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by combination, reverse stock split or otherwise) its outstanding shares of Common Stock into a smaller number of shares and the Conversion Price in effect immediately prior to such combination will be proportionately increased. (c) Holder's Right of Alternative Conversion Price Following Issuance of Convertible Securities. If the Company issues or sells any Options or Convertible Securities after the Closing Date that are convertible into or exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including by way of one or more reset(s) to a fixed price (each of the formulations for such variable price being herein referred to as, the "Variable Price"), the Company shall provide written notice thereof via facsimile and overnight courier to the Holder (the "Variable Notice") on the date of issuance of such Convertible Securities or Options. From and after the date the Company issues any such Convertible Securities or Options with a Variable Price, but only for so long as such Convertible Securities or Options are outstanding, the Holder shall have the right, but not the obligation, in its sole discretion to substitute the Variable Price for the Conversion Price upon conversion of any Debentures held by it by designating in the Conversion Notice delivered upon conversion of such Debentures that solely for purposes of such conversion the Holder is relying on the Variable Price rather than the Conversion Price then in effect. The Holder's election to rely on a Variable Price for a particular conversion of Debentures shall not obligate the Holder to rely on a Variable Price for any future conversions of Debentures. (d) Other Events. If any event occurs of the type contemplated by the provisions of this Section 6 in a private transaction (the primary purpose of which is to raise equity capital) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features other than pursuant to an Excluded Issuance), then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the Debentures; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 6. (e) Notices. (i) Promptly following any adjustment of the Conversion Price pursuant to this Section 6, the Company will give written notice thereof to the 15 Holder, setting forth in reasonable detail, and certifying, the calculation of such adjustment. In the case of a dispute as to the determination of such adjustment, then such dispute shall be resolved in accordance with the procedures set forth in Section 4(d)(iii). (ii) The Company will give written notice to the Holder at least ten (10) Business Days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined in Section 7(a)), dissolution or liquidation, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. (iii) The Company will also give written notice to the Holder at least ten (10) Business Days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. 7. Other Rights. (a) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any (i) sale of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor, or, if applicable, the parent of the successor, resulting from such Organic Change (in each case, the "Acquiring Entity") a written agreement to deliver to each holder of Outstanding Principal Amount of the Debentures in exchange for such securities, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to the Debentures, and reasonably satisfactory to the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding; provided that the new security of the Acquiring Entity shall not be required to be of rank equal to the Debenture if the issuance of a security of such rank is not permitted by, or is inconsistent with, any agreement or instrument to which the Acquiring Entity is a party or any security of the Acquiring Entity that is outstanding, upon the consummation of the Organic Change. Prior to the consummation of any other Organic Change, the Company shall make appropriate provision to insure that each of the holders of the Debentures will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Debentures such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of shares of Common Stock which would have been acquirable and receivable upon the conversion of such holder's Debentures as of the date of such Organic Change (without taking into account any limitations or restrictions on the convertibility of the Debentures). 16 (b) Optional Redemption at Holder's Election Upon Change of Control. In addition to the rights of the holders of Debentures under this Debenture, the Securities Purchase Agreement and the Registration Rights Agreement, upon a Change of Control (as defined below) of the Company each holder of Debentures shall have the right, at such holder's option, to require the Company to redeem all or a portion of such holder's Debentures at a price equal to 100% of the Outstanding Principal Amount of such Debentures plus the product of (1) 1.75 and (2) the dollar amount of all Interest Payments scheduled to be paid following the consummation of the Change of Control and on or prior to the Maturity Date on the total Outstanding Principal Amount of the Debentures on the date of consummation of the Change of Control ("Change of Control Redemption Price"). No sooner than 20 Business Days nor later than 10 Business Days prior to the consummation of a Change of Control, but not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via facsimile and overnight courier (a "Notice of Change of Control") to each holder of Debentures. At any time during the period beginning after receipt of a Notice of Change of Control (or, in the event a Notice of Change of Control is not delivered at least 10 Business Days prior to a Change of Control, at any time on or after the date which is 10 Business Days prior to a Change of Control) and ending on the date one (1) Business Day prior to such Change of Control, any holder of the Debentures then outstanding may require the Company to redeem all or a portion of the holder's Debentures then outstanding by delivering written notice thereof via facsimile and overnight courier (a "Notice of Redemption Upon Change of Control") to the Company, which Notice of Redemption Upon Change of Control shall indicate (i) the principal amount of the Debentures that such holder is submitting for redemption, and (ii) the applicable Change of Control Redemption Price, as calculated pursuant to this Section 7(b). Upon the Company's receipt of a Notice(s) of Redemption Upon Change of Control from any holder of Debentures, the Company shall promptly, but in no event later than two (2) Business Days following such receipt, notify each holder of Debentures by facsimile of the Company's receipt of such Notice(s) of Redemption Upon Change of Control. The Company shall deliver to the holder of each Debenture who has delivered a Notice of Redemption upon Change of Control, the applicable Change of Control Redemption Price simultaneously with the consummation of the Change of Control provided that a holder's Debentures shall have been so delivered to the Company. For purposes of this Section 7(b), "Change of Control" means (i) the consolidation, merger or other business combination of the Company with or into another Person (other than (A) a consolidation, merger or other business combination in which holders of the Company's voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company), (ii) the sale or transfer of all or substantially all of the Company's assets, or (iii) a tender or exchange offer made to and accepted by the holders of more than 50% of the aggregate voting power of the outstanding Common Stock. (c) Optional Redemption At the Company's Election Upon Cash Transaction. At any time or times on or after the date the Company publicly discloses a pending, proposed or intended Cash Transaction, the Company shall have the right, in its sole discretion, to require that all, but not less than all, of the Outstanding Principal Amount of this Debenture be redeemed ("Cash 17 Transaction Redemption Election") at a price equal to 100% of the Outstanding Principal Amount of this Debenture plus the product of (1) 1.75 and (2) the dollar amount of all Interest Payments scheduled to be paid following the consummation of the Cash Transaction and on or prior to the Maturity Date on the total Outstanding Principal Amount of the Debentures redeemed on the date of consummation of the Cash Transaction (the "Cash Transaction Redemption Price"). The Company shall exercise its right to make a Cash Transaction Redemption Election by providing each holder of Debentures written notice ("Notice of Cash Transaction Redemption") by facsimile or overnight courier, after the public disclosure of a proposed, pending or intended Cash Transaction and at least ten (10) Business Days prior to the date of consummation of the Cash Transaction ("Cash Transaction Election Redemption Date"), which Cash Transaction Election Redemption Date shall be the date of the consummation of the Cash Transaction. The Notice of Cash Transaction Redemption shall indicate the anticipated Cash Transaction Election Redemption Date. If the Company has exercised its right of Cash Transaction Redemption Election then the Outstanding Principal Amount of the Debenture at the time of the consummation of the Cash Transaction shall be redeemed on the Cash Transaction Election Redemption Date by payment by or on behalf of the Company to each holder of Debentures of the applicable Cash Transaction Redemption Price concurrent with the closing of the Cash Transaction. All holders of Debentures shall thereupon, if the Cash Transaction Redemption Price has been paid, except as specifically set forth herein, in the Securities Purchase Agreement or in the Registration Rights Agreement, cease to have any rights with respect to the Debentures and within two (2) Business Day after the Cash Transaction Election Redemption Date, or such earlier date as the Company and holders of no less then 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date mutually agree, shall surrender all Debentures to the Company. (d) Right to Convert on an Organic Change or Change of Control or Agreement of the Parties. In addition to the foregoing, following the announcement of any Change of Control or other Organic Change following which the Company is not the surviving entity or otherwise upon the mutual agreement of the Company and holders of at least 60% of the Outstanding Principal Amount of all Debentures issued on the Original Issuance Date, the Holder shall continue pursuant to Section 4(a) hereof to have the right to convert the Outstanding Principal Amount of this Debenture at the then prevailing Conversion Rate until the Debenture is redeemed or otherwise converted pursuant to this Section 7. 8. Reservation of Stock Issuable Upon Conversion. The Company shall, so long as any of the Debentures are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversions of the Debentures, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Debentures then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 120% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all of the Debentures (without regard to any limitations on conversion). 9. [Intentionally Omitted]. 10. No Impairment. The Company shall not intentionally take any action which would impair the rights and privileges of the Debentures set forth herein or the Holders thereof. 18 11. Limitation on Beneficial Ownership. The Company shall not effect and shall have no obligation to effect any conversion of Debentures, and no holder of Debentures shall have the right to convert any Debentures, to the extent that after giving effect to such conversion, the beneficial owner of such shares (together with such Person's affiliates) would have acquired, through conversion of Debentures or otherwise, beneficial ownership of a number of shares of Common Stock that exceeds 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by a Person and its affiliates shall include the number of shares of Common Stock issuable upon conversion of the Debentures with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted Debentures beneficially owned by such Person or any of its affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company (including, without limitation, any warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Person or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 11, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this Section 11, in determining the number of outstanding shares of Common Stock, a holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company's most recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2) a more recent public announcement by the Company, or (3) any other notice by the Company or its transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written request of the Holder, the Company shall promptly, but in no event later than two (2) Business Days following the receipt of such notice, confirm in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to conversions of Debentures by the Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. 12. Obligations Absolute. No provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place and rate, and in the manner, herein prescribed. 13. Waivers of Demand, Etc. The Company hereby expressly waives (to the extent permitted by applicable law) demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and will be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. 14. Replacement Debentures. In the event that any Holder notifies the Company that its Debenture(s) have been lost, stolen or destroyed, replacement Debenture(s) identical in all respects to the original Debenture(s) (except for registration number and Outstanding Principal Amount, if different than that shown on the original Debenture(s)) shall be issued by the Company to the Holder, provided that the Holder executes and delivers to the Company an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such Debenture(s). 19 14A. Payment of Expenses. The Company agrees to pay all reasonable expenses, including reasonable attorneys' fees, which may be incurred by the Holder in successfully enforcing the provisions of this Debenture and/or successfully collecting any amount due under this Debenture, the Securities Purchase Agreement, the Warrants or the Registration Rights Agreement. 15. Defaults. The following shall constitute "Events of Default": (a) Any Event of Default under any other Debenture; or (b) The suspension from trading or failure of the Common Stock to be listed on NASDAQ or the NYSE for more than an aggregate of ten (10) trading days in any 365-day period; or (c) Any money judgment (including any arbitration award, but only if reduced to a judgment), writ or warrant of attachment, or similar process in excess of Two Hundred and Fifty Thousand Dollars ($250,000) in the aggregate, net of any applicable insurance coverage, shall be entered or filed against the Company, its subsidiaries or any of their properties or other assets and which shall remain unpaid, unvacated, unbonded and unstayed for a period of seventy-five (75) days; or (d) The Company shall default in the payment when due of (i) interest on this Debenture, and such default shall continue for thirty (30) calendar days after the due date thereof, or (ii) the Outstanding Principal Amount of this Debenture; or (e) Any of the representations or warranties made by the Company herein, in the Securities Purchase Agreement, the Warrants or the Registration Rights Agreement shall be untrue in any material respect at the time made and such condition (to the extent capable of being cured) shall continue uncured for a period of ten (10) Business Days after notice from the Holder of such condition; and such breach of representations and warranties, singly or in the aggregate, would have a Material Adverse Effect or materially impair the ability of the Company to perform or satisfy its obligations to the Holder pursuant to the Transaction Documents; or (f) The Company shall fail to perform or observe in any material respect any material covenant or agreement in the Securities Purchase Agreement, the Warrants, the Registration Rights Agreement or this Debenture (as any of the foregoing may be amended), including, without limitation, the failure to honor any Conversion Notice and deliver shares pursuant thereto, and such failure shall continue uncured for a period of ten (10) Business Days after notice from the Holder of such failure; or (g) The Company shall (i) become insolvent; (ii) admit in writing its inability to pay its debts generally as they mature; (iii) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (iv) apply for or consent to the appointment of a trustee, liquidator or receiver for it or for a substantial part of its property or business; or 20 (h) A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; or (i) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within sixty (60) days thereafter; or (j) The Company shall fail to pay any debt for borrowed money or other similar obligation or liability ("Indebtedness") (excluding Indebtedness evidenced by the Debentures) of the Company, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), in an outstanding principal amount equal to or in excess of One Million Dollars ($1,000,000), singly or in the aggregate and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, or any such Indebtedness of the Company shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (k) [Intentionally Omitted]; (l) [Intentionally Omitted]; (m) Bankruptcy, reorganization, insolvency or liquidation proceedings or other similar proceedings, or relief under any bankruptcy law or any similar law for the relief of debt shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit to any material allegations of, or default in answering a petition filed in any such proceeding. Unless an Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default), upon the occurrence of an Event of Default, and for so long as such Event of Default shall be continuing, at the option of and (except in the case of clause (h) above) on notice by the Holder to the Company in writing and in the Holder's sole discretion, the Holder may consider this Debenture immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any other instruments contained to the contrary notwithstanding to the extent permitted by applicable law, and the Holder may immediately, and without expiration of any further period of grace, enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. In such event this Debenture shall be redeemed at a redemption price equal to 100% of the Outstanding Principal Amount of the Debenture, plus accrued and unpaid interest on this Debenture. In addition to the foregoing, upon an Event of Default, the rate of interest on this Debenture, shall, to the maximum extent of the law, be permanently increased by two percent (2%) per annum (i.e., from 6% to 8% per annum) commencing on the first day of the thirty (30) day period (or part thereof) following the Event of Default; and, solely in the case of an Event of Default triggered by a Conversion Failure, an additional two percent (2%) per annum commencing on the first day of each of the second and third such thirty (30) day periods (or part thereof); and an additional one percent (1%) on the 21 first day of each consecutive thirty (30) day period (or part thereof) thereafter until this Debenture has been duly converted or redeemed as herein provided; provided that in no event shall the rate of interest exceed the lower of 20% or the highest rate permitted by applicable law. The Company shall within one (1) Business Day notify each Holder of Debentures upon becoming aware of the occurrence of any Event of Default (whether or not waived by any other Holder of Debentures) or of any action taken by any Holder of Debentures with respect to the occurrence of any Event of Default. 16. Savings Clause. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any way be affected or impaired thereby. 17. Entire Agreement. This Debenture and the agreements referred to in this Debenture constitute the full and entire understanding and agreement between the Company and the Holder with respect to the subject hereof. Neither this Debenture nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Holder. 18. Assignment, Etc. The Holder may, subject to compliance with the Securities Purchase Agreement and to applicable federal and state securities laws, transfer or assign this Debenture or any portion thereof and may pledge, encumber or transfer its rights or interest in and to this Debenture or any part hereof, provided, that such transfer or assignment of this Debenture does not result in more than ten (10) holders of the total Outstanding Principal Amount of all Debentures and any such part or portion of this Debenture constitutes at least 10% of the Outstanding Principal Amount or such lesser amount if such transfer involves the entire Outstanding Principal Amount then held by such transferor. Any such transfer or assignment shall only be effective upon the Company's receipt of written notice thereof. Each such assignee, transferee and pledgee shall have all of the rights of the Holder under this Debenture. The Company agrees that, subject to compliance with the Securities Purchase Agreement, after receipt by the Company of written notice of assignment from the Holder and the Holder's assignee, all principal, interest and other amounts which are then, and thereafter become, due under this Debenture shall be paid to such assignee, transferee or pledgee at the place of payment designated in such notice. This Debenture shall be binding upon the Company and its successors and shall inure to the benefit of the Holder and its successors and registered assigns. 19. No Waiver. No failure on the part of the Holder to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right, remedy or power hereunder preclude any other or future exercise of any other right, remedy or power. Each and every right, remedy or power hereby granted to the Holder or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by the Holder from time to time. 20. Notices. Unless otherwise provided herein, any notices, consents, waivers or other communications required or permitted to be given under the terms of this Debenture must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when 22 sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Hollywood Media Corp. 2255 Glades Road Suite 221-A Boca Raton, FL 33431 Telephone: (561) 998-8000 Facsimile: (561) 998-2974 Attention: Chief Executive Officer With a copy to: Hollywood Media Corp. 2255 Glades Road Suite 221-A Boca Raton, FL 33431 Telephone: (561) 998-8000 Facsimile: (561) 998-2974 Attention: General Counsel If to a holder, to its address and facsimile number set forth on the Schedule of Buyers attached to the Securities Purchase Agreement, with copies to such holder's representatives as set forth on the Schedule of Buyers, or to such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by 23 the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 21. Miscellaneous. Whenever the sense of this Debenture requires, words in the singular shall be deemed to include the plural and words in the plural shall be deemed to include the singular. Paragraph headings are for convenience only and shall not affect the meaning of this document. 22. Choice of Law and Venue; Waiver of Jury Trial. THIS DEBENTURE SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). The parties hereto hereby agree that all actions or proceedings arising directly or indirectly from or in connection with this Debenture shall be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York located in New York County, New York. The parties hereto consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by registered mail, return receipt requested, directed as provided in Section 20 (and service so made shall be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. The parties hereto hereby waive any right to a jury trial in connection with any litigation pursuant to this Debenture. 23. Rule 144. With a view to making available to the Holder the benefits of Rule 144 promulgated under the Act ("Rule 144") and any other rule or regulation of the SEC that may at any time permit the Holder to sell the underlying stock of the Company issuable upon conversion or exercise of the Debentures and the Warrants to the public without registration, the Company agrees to use its reasonable best efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (c) furnish to any Holder, promptly upon request, a written statement by the Company (provided true at the time) that it has complied with the applicable reporting and filing requirements of the Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and copies of such other reports and documents (if any) so filed by the Company as may be reasonably requested to permit any such Holder to take advantage of any rule or regulation of the SEC permitting the selling of any such securities without registration. 24 24. [Intentionally Omitted]. 25. [Intentionally Omitted]. 26. Limitation on Number of Conversion Shares. The Company (1) shall not be obligated to issue Conversion Shares upon conversion of this Debenture and (2) shall not be permitted to issue Interest Shares (but instead shall make Cash Interest Payments) to the extent that the issuance of such shares of Common Stock would cause the Company to exceed that number of shares of Common Stock which the Company may issue under this Debenture (the "Exchange Cap") without breaching the Company's obligations under the rules or regulations of the Principal Market, except that such limitation shall not apply in the event that the Company obtains the approval of its stockholders as required by the Principal Market (or any successor rule or regulation) for issuances of Common Stock in excess of such amount. Until such approval is obtained, the holder of this Debenture shall not be issued, upon conversion of this Debenture, Conversion Shares in an amount greater than the difference between (i) the product of (x) the Exchange Cap amount multiplied by (y) a fraction, the numerator of which is the aggregate principal amount of Debentures issued to such Holder pursuant to the Securities Purchase Agreement and the denominator of which is the aggregate principal amount of all the Debentures issued to all Debenture holders pursuant to the Securities Purchase Agreement and (ii) the sum of (A) the aggregate number of Interest Shares issued to the holder of this Debenture (and all predecessor holders) as of the date of such conversion plus (B) the aggregate number of shares of Common Stock issued to the holder of this Debenture (and all predecessor holders) upon the exercise of any Warrants held by such holder (and all predecessor holders) as of the date of such conversion (such difference, the "Cap Allocation Amount"). If at any time when the Holder shall deliver a Conversion Notice pursuant to Section 4 hereof the Company shall be prohibited pursuant to the provisions of this Section 26 from issuing all or any portion of the Conversion Shares issuable pursuant to such Conversion Notice, then the Company shall pay in immediately available funds to the holder of this Debenture within two (2) Business Days of the date of delivery of such Conversion Notice, an amount in cash equal to the product of (X) the number of shares of Common Stock which could not be issued by virtue of the limitations contained in this Section 26 multiplied by (Y) the average of the Closing Sale Prices of the Common Stock on each of the five (5) trading days ending on the third trading day immediately preceding the date the date of delivery of such Conversion Notice. The Outstanding Principal Amount of this Debenture shall be reduced by an amount equal to the Outstanding Principal Amount of this Debenture designated in the Conversion Notice that could not be converted by virtue of the limitations set forth in this Section 26 and for which the Company has made payment pursuant to the immediately preceding sentence. 27. Taxes. (a) The Company shall pay any and all documentary, stamp, transfer (but only in respect of the registered holder thereof) and other similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon the conversion of Debentures; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Stock or other securities or property in a name other than that of the registered holder of this Debenture to be converted and such holder shall pay such amount, if any, to cover any applicable transfer or similar tax. 25 (b) The Company shall be permitted to withhold from any amounts payable to a Debenture holder or a holder of Common Stock any taxes required by law to be withheld from such amount. If the Company shall be required to withhold or deduct any tax, levy or other governmental charge, excluding (A) net income taxes, franchise taxes, or taxes imposed on or measured by net income (or overall gross receipts, to the extent such tax is imposed in lieu of a tax on net income by a jurisdiction that does not impose any tax based on or measured by net income) on any Debenture holder by the jurisdiction in which such Debenture holder is organized or any other jurisdiction in which such Debenture holder would be subject to tax without regard to the transactions contemplated hereby and (B) U.S. Federal withholding taxes (unless such U.S. Federal withholding taxes would not be imposed but for a change in or amendment to the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations or any other administrative authority thereunder or any tax treaty or the release or promulgation of any judicial decision relating thereto, in each case, on or after the date such Debenture holder acquires a Debenture (each, a "Change in Law")) (all such non-excluded taxes, levies or other governmental charges, "Taxes") from any payment of interest, or any accrual of original issue discount, for U.S. Federal income tax purposes made hereunder or under any Debenture to or for the benefit of any Debenture holder, then (A) the amount payable shall be increased by the amount necessary so that after making all required deductions and withholdings (including deductions and withholdings with respect to additional amounts payable under this Section 27(b)) such Debenture holder shall receive an amount equal to the amount it would have received if no such deduction or withholding of Taxes had been required, (B) the Company shall make such deduction or withholding and (C) the Company shall pay the full amount deducted to the appropriate governmental authority in accordance with applicable law. If any Debenture holder is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (each a "Non-U.S. Debenture Holder"), it shall deliver to the Company two copies of either (A) U.S. Internal Revenue Service Form W-8BEN (claiming complete exemption from U.S. Federal withholding tax under an income tax treaty), or any successor form; (B) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form; (C) in the case of a Non-U.S. Debenture Holder claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code, with respect to payments of "portfolio interest," U.S. Internal Revenue Service Form W-8BEN (certifying as to beneficial ownership), or any successor form, and a certificate in form and substance reasonably acceptable to the Company representing that such Non-U.S. Debenture Holder is not a "bank" for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Company and is not a "controlled foreign corporation" related to the Company (within the meaning of Section 864(d)(4) of the Code); or (D) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such Non-U.S. Debenture Holder's entitlement to a complete exemption from U.S. Federal withholding tax, as applicable, in all cases such forms and other documents being properly completed and duly executed by such Non-U.S. Debenture Holder claiming complete exemption from U.S. Federal withholding tax on payments of interest (or of original issue discount) for U.S. Federal income tax purposes by the Company under the Debentures. Each Debenture holder and each holder of common stock that is organized under the laws of a 26 jurisdiction other than the United States, any State thereof or the District of Columbia (each a "Non-U.S. Equity Holder") also shall deliver to the Company, to the extent legally able to do so, with respect to payments of dividends for U.S. Federal income tax purposes by the Company, if applicable, two copies of either (A) U.S. Internal Revenue Service Form W-8BEN (claiming a reduction of U.S. Federal withholding tax under an applicable income tax treaty, if any), or any successor form, (B) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form, or (C) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such Non-U.S. Equity Holder's entitlement to an exemption from, or a reduction of, U.S. Federal withholding tax on payments of dividends for U.S. Federal income tax purposes by the Company, as applicable, in all cases such forms and other documents being properly completed and duly executed by such Non-U.S. Equity Holder. In addition, each Debenture holder and each holder of Common Stock that is not otherwise exempt from "back-up withholding" shall deliver to the Company two properly completed and duly executed copies of either (A) U.S. Internal Revenue Service Form W-8BEN, or any successor form, (B) U.S. Internal Revenue Service Form W-8ECI, or any successor form, (C) U.S. Internal Revenue Service Form W-9, or any successor form, or (D) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service, as applicable, in each case indicating that such Debenture holder or holder of Common Stock is not subject to "back-up withholding" for U.S. Federal income tax purposes. The forms and other documents required to be delivered pursuant to this Section 27(b) shall be delivered (A) on or prior to the Initial Closing Date and (B) from time to time thereafter if within ten (10) Business Days after receipt of a written request therefor by the Company. In addition, each Debenture holder and each holder of Common Stock shall promptly notify the Company at any time it determines that it is no longer in a position to provide any previously delivered (or requested) form, document or certificate to the Company, including as a result in whole or in part from a Change in Law; provided, however, that the failure to provide such notice shall not affect any Debenture holder's right to any additional amounts hereunder. (c) Notwithstanding anything to the contrary in Section 27(b) above, the Company shall not be required to pay any additional amount to any Debenture holder pursuant to the preceding paragraph to the extent the Tax in respect of which such additional amount would otherwise be payable would not have been imposed but for the failure of such Debenture holder to comply with its obligations under such paragraph; provided, however, that the failure to provide the applicable form, document or certificate pursuant to the preceding paragraph as provided in the notice required by the preceding paragraph resulting in whole or in part from a Change in Law shall not affect such Debenture holder's right to any additional amounts hereunder. 27 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. This Debenture Originally Issued as of May 22, 2002 This Amended and Restated Debenture has been executed on this 15th day of October, 2004. HOLLYWOOD MEDIA CORP. By: /s/ Mitchell Rubenstein ------------------------------------- Name: Mitchell Rubenstein Title: Chief Executive Officer ATTEST /s/ Brian J. Walsh - ------------------ Name: Brian J. Walsh Title: 28 EXHIBIT I (To be Executed by Registered Holder in order to Convert Debenture) CONVERSION NOTICE FOR 6% SENIOR CONVERTIBLE DEBENTURE DUE MAY 22, 2006 The undersigned, as Holder of the 6% Senior Convertible Debenture Due May 22, 2006 of HOLLYWOOD MEDIA CORP. (the "Company"), No. _, in the outstanding principal amount of $_______ (the "Debenture"), hereby elects to convert $_______ of the outstanding principal amount of the Debenture into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: ---------------------------------------------------- Principal Amount of Debentures to be converted: ------------------------ Tax ID Number (If applicable): ---------------------------------------- Please confirm the following information: Conversion Price: ------------------------------------------------------ Number of shares of Common Stock to be issued: Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES ____ No ____ Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: ----------------------------------------------------- -------------------------------------------------------------- Address: ----------------------------------------------------- Telephone Number: ----------------------------------------------------- Facsimile Number: --------------------------------------------- Authorization: ------------------------------------------------ By: ----------------------------------------------------------- Title: -------------------------------------------------------- Dated: Account Number (if electronic book entry transfer):___________ Transaction Code Number (if electronic book entry transfer):_________ [NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT] EX-10.3 5 restatedwarrant-cdinvest.txt RESTATED WARRANT CD INVESTMENT Exhibit 10.3 THIS IS THE AMENDED AND RESTATED WARRANT WHICH HAS BEEN ISSUED AS OF AUGUST 31, 2004 PURSUANT TO AN AGREEMENT TO AMEND WARRANT DATED AUGUST 31, 2004 BETWEEN HOLLYWOOD MEDIA CORP. AND CD INVESTMENT PARTNERS, LTD. THIS WARRANT IS ISSUED IN REPLACEMENT OF THAT CERTAIN WARRANT NO. W-A-4 DATED AS OF JULY 1, 2002. THE SECURITIES REPRESENTED BY THIS CERTIFICATE (AND, AS OF THE DATE OF ORIGINAL ISSUANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, ANY UNDERLYING SECURITIES) HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR ANY SECURITIES ISSUABLE UPON THE EXERCISE HEREOF MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED OTHER THAN (A) TO HOLLYWOOD MEDIA CORP. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO RULE 144 UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT. THE HOLDER OF THIS CERTIFICATE AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY OR ANY SECURITY ISSUED UPON EXERCISE HEREOF IS TRANSFERRED (UNLESS SUCH SECURITY IS TRANSFERRED PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY PROPOSED TRANSFER PURSUANT TO CLAUSES (B), (C) OR (D) ABOVE, THE COMPANY MAY REQUIRE THAT THE TRANSFEROR FURNISH IT WITH AN OPINION OF COUNSEL CONFIRMING THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE RESPECTIVE MEANINGS ASSIGNED TO THEM IN REGULATION S UNDER THE SECURITIES ACT. WARRANT to Purchase Shares of Common Stock of HOLLYWOOD MEDIA CORP. Certificate No. W-A-5 ----- THIS IS TO CERTIFY THAT, CD INVESTMENT PARTNERS, LTD., or its registered assigns, is entitled to purchase in whole or in part from time to time from HOLLYWOOD MEDIA CORP., a Florida corporation (the "Company"), at any time up to 5:00 p.m., New York time, on May 22, 2007 (the "Expiration Date"), 181,211 shares of Common Stock, par value $0.01, of the Company (the "Common Stock") at a purchase price of $4.00 per share of Common Stock (the "Exercise Price"), as adjusted from time to time pursuant to Section 4 below), subject to the terms and conditions herein. Each exercise made hereunder must be for a minimum of the lesser of (x) one thousand (1,000) shares of Common Stock and (y) the entire remaining number of shares of Common Stock covered by this Warrant. All capitalized terms used herein without definition shall have the respective meanings assigned thereto in the Securities Purchase Agreement, dated as of April 25, 2001 (the "Securities Purchase Agreement"), entered into among the Company, Societe Generale ("SG") and Velocity Investment Partners, Ltd. ("Velocity") (SG and Velocity, together the "Purchasers"). SECTION 1. Exercise of Warrant. (a) At any time until 5:00 p.m., New York time, on the Expiration Date, the registered holder of this Warrant (the "Holder") may exercise this Warrant, on one or more occasions, in whole or in part, by delivering to the Company, (a) a written notice of the Holder's election to exercise this Warrant in substantially the form of Annex A hereto, which notice (the "Exercise Notice") shall specify the number of shares of Common Stock to be purchased and may be delivered by facsimile transmission, (b) a certified or bank check or checks payable to the Company, or by wire transfer of immediately available funds, in an aggregate amount equal to the aggregate Exercise Price for the number of shares of Common Stock as to which this Warrant is being exercised (unless the Holder elects to effect a Cashless Exercise (as hereinafter defined) pursuant to this Section 1(c) this Warrant). Subject to applicable law, in the event the Holder may resell shares of Common Stock acquired upon exercise of this Warrant without restriction pursuant to an effective registration statement or otherwise, the Company shall cause the transfer agent with respect to its Common Stock, which transfer agent is participating in the Depositary Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, to electronically transmit the shares of Common Stock issuable to the Holder upon exercise of this Warrant by crediting the account of the Holder's prime broker with DTC through DTC's Deposit Withdrawal Agent Commission ("DWAC") system, within three (3) business days after exercise of this Warrant by the Holder. In the event the Holder otherwise elects in writing, however, or such shares of Common Stock can not be resold without restriction, the Company shall, as promptly as practicable and in any event within three (3) business days after exercise of this Warrant by the Holder, cause the transfer agent to deliver to the Holder a stock certificate or certificates representing the aggregate number of shares of Common Stock issuable to the Holder as a result of such exercise. The stock certificate or certificates representing shares of Common Stock so delivered shall be in such denominations as may be specified in the Exercise Notice and shall be registered in the name of the Holder or, subject to compliance with Section 9.03 below, such other name or names as shall be designated in such Exercise Notice. (b) Shares of Common Stock shall be deemed to have been issued and the Holder or, subject to compliance with Section 9.03 below, any other Person so designated to be named therein shall be deemed to have become a Holder of record of such shares, including, to the extent permitted by law, the right to vote such shares or to consent or to receive notice as a stockholder, as of the date of the date of receipt of the Exercise Notice; provided that the payment of the Exercise Price is received by the Company within twenty-four hours of receipt of the Exercise Notice and this Warrant is received by the Company within three (3) business days of receipt of the Exercise Notice. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of shares of Common Stock, execute and deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the shares of Common 2 Stock represented by the unexercised portion of this Warrant, which new Warrant shall in all other respects be identical to this Warrant, or, if the Company elects, it shall make appropriate notation on this Warrant and the same returned to the Holder. (c) Upon exercise of this Warrant, in whole or in part, the Holder may elect, only at such time as there shall not be an effective registration statement covering the resale of shares of Common Stock to be issued upon exercise of this Warrant, to receive a reduced number of shares of Common Stock in lieu of tendering the Exercise Price in cash ("Cashless Exercise"). In such case, the number of shares of Common Stock to be issued to the Holder shall be computed using the following formula: X = Y(A-B) ----- A where: X = the number of shares of Common Stock to be issued to the Holder; Y = the number of shares of Common Stock for which an election to exercise under this Warrant has been made; A = The Market Price (as hereinafter defined) of one share of Common Stock on the trading day immediately prior to the date that the Exercise Notice is duly surrendered to the Company for full or partial exercise; and B = the Exercise Price. The "Market Price" per share of Common Stock or any other security at any date means (i) the average closing sale price for such security for the five (5) consecutive trading days immediately prior to (but excluding) the date of determination on The Nasdaq Stock Market, Inc., or such other U.S. national securities exchange, as reported by The Nasdaq Stock Market, Inc. or, if not so reported by The Nasdaq Stock Market, Inc., the average of the high bid and low asked quotations for one share of such security as reported by the National Quotations Bureau Incorporated or similar organization for such five consecutive trading days, (ii) if the closing price for such security cannot be calculated in the manner specified in clause (i) at the relevant time, the fair market value of one share of such security as of the date of determination as determined in good faith by the Board of Directors of the Company. (d) All shares of Common Stock issuable upon the exercise of this Warrant shall, upon payment therefor in accordance herewith, be duly and validly issued, fully paid and nonassessable and free and clear of any liens (unless created by or through the Holder of this Warrant). The Company shall not be required to issue a fractional share of Common Stock upon exercise of this Warrant. As to any fraction of a share that the Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the applicable Market Price determined in accordance with the foregoing. SECTION 2. [Intentionally Omitted]. SECTION 3. Transfer, Division and Combination. Subject to Section 9.03 hereof, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company, upon surrender of this Warrant to the Company, together with a written assignment of this Warrant, substantially in the form of Annex B hereto, duly executed by the Holder or its 3 agent or attorney. Upon such surrender, the Company shall, subject to Section 9.04 hereof, (a) execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, (b) issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned and (c) promptly cancel this Warrant. SECTION 4. Antidilution Provisions. 4.01 Changes in Common Stock. In the event that at any time or from time to time the Company shall, (i) pay a dividend or make a distribution on its Common Stock in shares of Common Stock or other shares of capital stock of the Company, (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) increase or decrease the number of shares of Common Stock outstanding by reclassification of its Common Stock, then the number of shares of Common Stock issuable upon exercise of this Warrant immediately after the happening of such event shall be adjusted so that, after giving effect to such adjustment, the Holder of this Warrant shall be entitled to receive the number of shares of Common Stock upon exercise of this Warrant that the Holder would have been entitled to receive had this Warrant been exercised immediately prior to the happening of such event (or, in the case of a dividend or distribution of shares of Common Stock, immediately prior to the record date therefor). An adjustment made pursuant to this Section 4.01 shall become effective immediately after the distribution date, retroactive to the record date therefor in the case of a dividend or distribution in shares of Common Stock, and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. 4.02 Cash Dividends and Other Distributions. In the event that at any time or from time to time the Company shall distribute to holders of Common Stock (i) any dividend or other distribution (including any dividend or distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) of cash, evidences of its indebtedness, shares of its capital stock or any other assets or securities or (ii) any options, warrants, securities or other rights to subscribe for or purchase any of the foregoing (other than (A) any dividend or distribution described in Section 4.01, (B) any rights, options, warrants or securities described in Section 4.03 or Section 4.04 and (C) any cash dividends or other cash distributions made to holders of Common Stock from current or retained earnings, provided that such dividends do not exceed $500,000 in any fiscal year), then the number of shares of Common Stock that may be acquired upon exercise of this Warrant immediately prior to such record date for any such distribution shall be increased to a number determined by multiplying the number of shares of Common Stock that may be acquired upon the exercise of this Warrant immediately prior to such record date for any such distribution by a fraction, the numerator of which shall be the Market Price per share of Common Stock as of such record date and the denominator of which shall be such Market Price per share of Common Stock less the sum of (x) the amount of cash, if any, distributed per share of Common Stock and (y) the then fair value (as determined in good faith by the Company's Board of Directors, whose determination shall be evidenced by a board resolution that will be sent to Holders) of the portion, if any, of the distribution applicable to one share of Common Stock consisting of evidences of indebtedness, shares of stock, securities, other property, warrants, options or subscription or purchase rights; and the Exercise Price shall be decreased to an amount determined by dividing the Exercise Price immediately prior to such record date by the above fraction. Such adjustments shall be made, and shall only become effective, whenever any such distribution is made; provided, 4 however, that the Company is not required to make an adjustment pursuant to this Section 4.02 if at the time of such distribution the Company makes the same distribution to Holders of Warrants as it makes to holders of Common Stock pro rata based on the number of shares of Common Stock for which such Warrants are exercisable. No adjustment shall be made pursuant to this Section 4.02 if such adjustment would have the effect of decreasing the number of shares of Common Stock issuable upon exercise of this Warrant or increasing the Exercise Price. 4.03 Issuance of Common Stock. In the event that at any time or from time to time the Company shall (other than (i) upon the exercise, exchange or conversion of any securities of the Company that are exercisable or exchangeable for, or convertible into, shares of Common Stock and that are outstanding as of the date of the issuance of this Warrant (the "Initial Issuance Date"), or (ii) upon the exercise of stock options granted under or pursuant to any stock option plan of the Company that has been approved by its Board of Directors), issue shares of Common Stock for a consideration per share that is less than the lesser of the then effective Exercise Price or the Market Price per share of Common Stock on the date of issuance, the number of shares of Common Stock that may be acquired upon the exercise of this Warrant immediately after such issuance shall be increased by multiplying the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such issuance by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding on the date of such issuance plus (B) the number of additional shares of Common Stock to be issued and the denominator of which shall be the sum of (X) the number of shares of Common Stock outstanding on the date of such issuance plus (Y) the number of shares of Common Stock that the aggregate offering price of the total number of shares of Common Stock so to be issued would purchase at the lesser of the then effective Exercise Price or such Market Price. In the event of any such adjustment, the Exercise Price shall be decreased to an amount determined by dividing the Exercise Price immediately prior to such issuance by the aforementioned fraction. Such adjustment shall be made, and shall only become effective, whenever such shares are issued. No adjustment shall be made pursuant to this Section 4.03 if such adjustment would have the effect of decreasing the number of shares of Common Stock issuable upon exercise of this Warrant or increasing the Exercise Price. In case the consideration for any shares of Common Stock may be paid in whole or in part in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company. Such adjustment shall be made successively whenever the date of such issuance is fixed. 4.04 Issuance of Convertible Securities. In the event that at any time or from time to time the Company shall issue rights, options or warrants to acquire, or securities convertible or exchangeable into, Common Stock (other than the issuance by the Company of stock options under or pursuant to any stock option plan of the Company that has been approved by its Board of Directors) entitling the holders thereof to acquire shares of Common Stock at an exercise or conversion price per share that (when aggregated, as applicable, with the price or other consideration received for any such rights, options or warrants exercisable for Common Stock or for such securities convertible or exchangeable into Common Stock) for consideration per share that is less than the lesser of the then effective Exercise Price or Market Price on the date of issuance of such Common Stock, the number of shares of Common Stock that may be acquired upon exercise of this Warrant immediately after such issuance shall be increased by multiplying the number of shares of Common Stock that may be acquired upon exercise of this Warrant immediately prior to such issuance by a fraction, the numerator of which shall be the sum of (A) the number of shares of 5 Common Stock outstanding on the date of such issuance plus (B) the number of additional shares of Common Stock to be issued (or into which the convertible or exchangeable securities so to be issued are initially convertible), and the denominator of which shall be the sum of (X) the number of shares of Common Stock outstanding on the date of such issuance plus (Y) the number of shares of Common Stock that the aggregate offering price of the total number of shares of Common Stock so to be issued (or the aggregate issue price of the convertible or exchangeable securities so to be issued) would purchase at the lesser of the then Effective Exercise Price or such Market Price on the date of issuance of such convertible securities. In the event of any such adjustment, the Exercise Price shall be decreased to a number determined by dividing the Exercise Price immediately prior to such issuance by the aforementioned fraction. Such adjustment shall be made, and shall only become effective, whenever such rights, options, warrants or securities are issued. No adjustment shall be made pursuant to this Section 4.04 if such adjustment would have the effect of decreasing the number of shares of Common Stock issuable upon exercise of this Warrant or increasing the Exercise Price. In case the price for such securities may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company. Such adjustment shall be made successively whenever the date of such issuance is fixed. 4.05 Combination; Liquidation. (a) Except as provided in Section 4.05(b), in the event of a Combination (as hereinafter defined), the Holder shall have the right to receive upon exercise of this Warrant the kind and amount of shares of capital stock or other securities or property that the Holder would have been entitled to receive upon completion of or as a result of such Combination had such Warrant been exercised immediately prior to such event or to the relevant record date for any such entitlement. Unless paragraph (b) is applicable to a Combination, the Company shall provide, as a condition to such Combination, that the surviving or acquiring Person (the "Successor Company") in such Combination will enter into an agreement confirming the Holders' rights pursuant to this Section 4.05(a) and providing for adjustments, that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this Section 4.05(a) shall similarly apply to successive Combinations involving any Successor Company. A "Combination" means an event in which the Company consolidates with or merges with or into another Person. (b) In the event of (i) a Combination where consideration to the holders of Common Stock in exchange for their shares is payable solely in cash or (ii) the dissolution, liquidation or winding-up of the Company, the Holder of this Warrant shall be entitled to receive, upon surrender of this Warrant, such cash distributions on an equal basis with the holders of Common Stock, as if this Warrant had been exercised immediately prior to such event, less the product of the Exercise Price times the number of shares of Common Stock with respect to which this Warrant was then exercisable. In the event of any Combination described in this Section 4.05(b), the surviving or acquiring Person and, in the event of any dissolution, liquidation or winding-up of the Company, the Company shall distribute as promptly as practicable under the circumstances to the Holder upon surrender of this Warrant, the funds, if any, necessary to pay the Holder the amounts to which the Holder is entitled as described above. 6 4.06 Superseding Adjustment. Upon the expiration of any rights, options, warrants or conversion or exchange privileges that resulted in adjustments pursuant to this Section 4, if any thereof shall not have been exercised, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be readjusted pursuant to the applicable section of Section 4 as if (i) the only shares of Common Stock issuable upon exercise of such rights, options, warrants, conversion or exchange privileges were the shares of Common Stock, if any, actually issued upon the exercise of such rights, options, warrants or conversion or exchange privileges and (ii) shares of Common Stock actually issued, if any, were issuable for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for this issuance, sale or grant of all such rights, options, warrants or conversion or exchange privileges whether or not exercised and the Exercise Price shall be readjusted inversely; provided, however, that no such readjustment shall have the effect of decreasing the number of shares of Common Stock issuable upon the exercise of this Warrant below the number of shares of Common Stock issuable upon the exercise of this Warrant, or increasing the Exercise Price to an amount below the Exercise Price in effect, immediately prior to any adjustment made therein on account of such issuance, sale or grant of such rights, options, warrants or conversion or exchange privileges. 4.07 Minimum Adjustment. The adjustments required by the preceding sections of this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that no adjustment of the Exercise Price or the number of shares of Common Stock issuable upon exercise of this Warrant that would otherwise be required shall be made unless and until such adjustment either by itself or with other adjustments not previously made increases or decreases by at least 1% the Exercise Price or the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 4 and not previously made, would result in a minimum adjustment. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest one-tenth of a share. 4.08 Notice of Adjustment. Whenever the Exercise Price or the number of shares of Common Stock and other property, if any, issuable upon exercise of the Warrants is adjusted, as herein provided, the Company shall deliver to the Holder of this Warrant a certificate setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which (i) the Company's Board of Directors determined the then fair value of any evidences of indebtedness, other securities or property or warrants, options or other subscription or purchase rights and (ii) the Market Price of the Common Stock was determined, to the extent such determinations were required hereunder), and specifying the Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant after giving effect to such adjustment. 4.09 Notice of Certain Transactions. In the event that the Company shall propose to (a) pay any dividend payable in securities of any class to the holders of its Common Stock or to make any other non-cash dividend or distribution to the holders of its Common Stock, (b) offer the holders of its Common Stock rights to subscribe for or to purchase any securities convertible into shares of Common Stock or shares of stock of any class or any other 7 securities, rights or options, (c) issue to the holders of its Common Stock any (i) shares of Common Stock, (ii) rights, options or warrants entitling the holders thereof to subscribe for shares of Common Stock or (iii) securities convertible into, or exchangeable or exercisable for, shares of Common Stock (in the case of (i), (ii) and (iii), if such issuance or adjustment would result in an adjustment hereunder), (d) effect any capital reorganization, reclassification, consolidation or merger, (e) effect the voluntary or involuntary dissolution, liquidation or winding-up of the Company or (f) make a tender offer or exchange offer with respect to the Common Stock, the Company shall within five (5) days after any such event send the Holder a notice of such proposed action or offer unless the same is publicly announced. Such notice shall, to the extent the same has not been publicly announced, specify the record date for the purposes of such dividend, distribution or rights, or the date such issuance or event is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, and shall, to the extent the same has not been publicly announced and if the same would have any effect on the Common Stock and on the number of shares of Common Stock, the number and kind of any other shares of stock and other property issuable upon exercise of this Warrant and the Exercise Price (after giving effect to any adjustment pursuant to Section 4 that will be required as a result of such action), specify such effect. Such notice shall be given as promptly as possible and (x) in the case of any action covered by clause (a) or (b) above, at least 10 days prior to the record date for determining holders of the Common Stock for purposes of such action or (y) in the case of any other such action, at least twenty (20) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock, whichever shall be the earlier. Notwithstanding anything contained herein to the contrary, the Company shall not provide to the Holder any material non-public information in order to satisfy its obligations pursuant to this Section 4.09. 4.10 Adjustment to Warrant Certificate. This Warrant Certificate need not be changed because of any adjustment made pursuant to this Section 4, and any Warrant issued after such adjustment may state the same Exercise Price and the same number of shares of Common Stock issuable upon exercise of the Warrant as are stated in this Warrant. The Company, however, may at any time in its sole discretion make any change in the form of this Warrant that it may deem appropriate to give effect to such adjustments and that does not affect the substance of this Warrant, and any Warrant thereafter issued or countersigned, whether in exchange or substitution for this Warrant or otherwise, may be in the form as so changed. SECTION 5. [Intentionally Omitted] SECTION 6. Taking of Record; Stock and Warrant Transfer Books. In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision hereof refers to the taking of a record of such holders, the Company shall in each such case take such a record as of the close of business on a business day. SECTION 7. Expenses, Transfer Taxes and Other Charges. The Company shall pay any and all expenses (other than transfer taxes) and other charges, including all costs associated with the preparation, issue and delivery of stock or warrant certificates, that are incurred in respect of the issuance or delivery of shares of Common Stock upon exercise of this Warrant pursuant to Section 1 hereof or in connection with any division or combination of this Warrant pursuant to Section 3 hereof. The Company shall not, however, be 8 required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which this Warrant is registered, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established, to the satisfaction of the Company, that such tax has been paid. SECTION 8. No Voting Rights. This Warrant shall not entitle the Holder to any voting or other rights as a stockholder of the Company. SECTION 9. Miscellaneous. 9.01 Office of Company. So long as any of this Warrant remains outstanding, the Company shall maintain an office in the United States of America where this Warrant may be presented for exercise, transfer, division or combination as in this Warrant provided. Such office shall be at 2255 Glades Road, Suite 221A Boca Raton, Florida or at the office of such registrar and transfer agent as the Company may from time to time designate, unless and until the Company shall designate and maintain some other office for such purposes and give notice thereof to all Holders. 9.02 Notices Generally. Any notices and other communications pursuant to the provisions hereof shall be sent in accordance with Section 7.03 of the Securities Purchase Agreement. 9.03 Restrictions on Transferability; Restriction on Exercise. (a) The number of shares of Common Stock that may be acquired by the Holder upon exercise pursuant to the terms hereof shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by such Holder (other than by virtue of the ownership of securities or rights to acquire securities (including the Warrants) that have limitations on the Holder's right to convert, exercise or purchase similar to the limitation set forth herein (the "Excluded Shares")), together with all shares of Common Stock deemed beneficially owned (not counting such affiliate's Excluded Shares) by the Holder's "affiliates" (as defined Rule 144 of the Act) ("Aggregation Parties") that would be aggregated for purposes of determining whether a group under Section 13(d) of the Securities Exchange Act of 1934, as amended, exists, would exceed 4.99% of the total issued and outstanding shares of the Company's Common Stock (the "Restricted Ownership Percentage"). (b) The Holder covenants at all times on each day (each such day being referred to as a "Covenant Day") as follows: During the balance of such Covenant Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and the succeeding 61 days being referred to as the "Covenant Period") such Holder will not acquire shares of Common Stock pursuant to any right (including the exercise of the Warrants) existing at the commencement of the Covenant Period to the extent the number of shares so acquired by such Holder and its Aggregation Parties (ignoring all dispositions) would exceed: 9 (x) the Restricted Ownership Percentage of the total number of shares of Common Stock outstanding at the commencement of the Covenant Period, MINUS (y) the number of shares of Common Stock owned by such holder and its Aggregation Parties at the commencement of the Covenant Period. A new and independent covenant will be deemed to be given by the holder as of each moment of each Covenant Day. No covenant will terminate, diminish or modify any other covenant. The Holder agrees to comply with each such covenant. This Section controls in the case of any conflict with any other provision of the Transaction Documents. The Company's obligation to issue shares of common stock upon exercise of the Warrant B which would exceed such limits referred to in this Section shall be suspended to the extent necessary until such time, if any, as such Shares may be issued in compliance with such restrictions. The provisions of this section shall be applicable and binding on any successor Holder of this Warrant. This section may only be amended upon the approval of the stockholders of the Company and the stockholders are deemed third party beneficiaries of this section. 9.04 Assignment. This Warrant and the rights, duties and obligations hereunder may not be assigned or delegated by the Company or any Holder may not assign its rights hereunder, without the prior written consent of the other party, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, no consent shall be required for a transfer by a Holder to any of its Affiliates. 9.05 Saturdays, Sundays or Holidays. If the last appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or legal holiday, then such action may be taken or such right may be exercised on the next succeeding day. 9.06 Governing Law. This Warrant shall be governed by, and construed in accordance with, the law of the State of New York without giving effect to conflicts of law principles thereof. 9.07 Limitation of Liability. No provision hereof, in the absence of affirmative action by the Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company, by any creditor of the Company or any other Person. IN WITNESS WHEREOF, the Company has duly executed this Amended and Restated Warrant. Dated: October 26, 2004 HOLLYWOOD MEDIA CORP. By: /s/ Mitchell Rubenstein --------------------------------------- Name: Mitchell Rubenstein Title: Chairman and Chief Executive Officer 10 ANNEX A ELECTION TO PURCHASE (To Be Executed Upon Exercise of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant, to receive ________ shares of Common Stock of Hollywood Media Corp. and [herewith tenders payment of the Exercise Price for such shares in the amount of $_________] [hereby elects to effect a Cashless Exercise] in accordance with the terms of this Warrant. The undersigned requests that [certificates for such shares in denominations of ________ be registered in the name of ______________________ whose address is _____________________ and that such shares be delivered to ________________, whose address is ___________________]. [Such shares be delivered to [the undersigned] [other person] electronically through DTC]. The undersigned represents and warrants that the number of shares of Common Stock to be received pursuant to this Election to Purchase, together with the shares of Common Stock beneficially owned by the undersigned (and its affiliates) on the date of this Election to Purchase, if applicable, do not exceed 4.9% of the outstanding shares of Common Stock of the Company (as set forth in the Company's most recent filing with the Securities and Exchange Commission unless the Company shall notify the Holder that a greater or lesser number of shares is outstanding). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Warrant to which Election to Purchase is attached. [Name of Holder] By: --------------------------- Name: -------------------------- Title: ------------------------- NOTE: The above signature(s) must correspond with the name written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatever. Date: _________________ A-1 ANNEX B ASSIGNMENT (To be signed only upon assignment of this Warrant) FOR VALUE RECEIVED, ________________ hereby sells, assigns and transfers unto _________________whose address is ________________________and whose social security number or other identifying number is _______________, the within Warrant, together with all right, title and interest represented thereby, and does hereby irrevocably constitute and appoint ___________________, attorney, to transfer said Warrant on the books of the within-named Company, with full power of substitution in the premises. By: --------------------------- Name: -------------------------- Title: ------------------------- NOTE: The above signature(s) must correspond with the name written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatever. Date: ____________________ B-1 EX-10.4 6 leonardo-debenture.txt LEONARDO DEBENTURE Exhibit 10.4 AGREEMENT TO CONVERT DEBENTURE ------------------------------ THIS AGREEMENT (this "AGREEMENT"), is made and entered into as of August 30, 2004, by and between Hollywood Media Corp., a Florida corporation (the "COMPANY"), and Leonardo, L.P. ("HOLDER"). WITNESSETH: WHEREAS, Holder is the registered holder of the Company's "6% Senior Convertible Debenture Due May 22, 2005" in the principal amount of $3,000,000 issued under Certificate No. 1, dated as of May 22, 2002 (the "DEBENTURE"), which Debenture by its terms is convertible into shares of common stock, par value $0.01, of the Company ("COMMON STOCK"). WHEREAS, the Debenture Certificate recites that as of the date of issuance of the Debenture to Holder the Debenture was convertible based on a Conversion Price of $3.46 per share, however, as a result of certain antidilution adjustments under the terms of the Debenture in connection with the Company's private placement in February 2004, the Conversion Price was reduced to $3.30 per share. WHEREAS, the parties hereto desire to agree to convert the Debenture upon the terms and agreements provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties, intending to be legally bound, hereby acknowledge, confirm and agree as follows: 1. Notwithstanding anything to the contrary in the Debenture, it is agreed that the Debenture shall automatically convert and be converted in full into shares of Common Stock, on the terms provided below, on and as of any one date to be selected by Holder (as evidenced by delivery of a Conversion Notice in the form attached hereto as Exhibit I) from among the days in the period commencing with the date hereof through December 31, 2004, provided, however, that if no such date is selected then such conversion shall automatically occur on and be effective as of 12:00 Noon (EST) on December 31, 2004 assuming that on such date the Company's Registration Statement on Form S-3 (SEC File No. 333-91090) registering the resale of the shares of Common Stock remains effective or that the shares are eligible for resale by Holder under SEC Rule 144(k) and the certificates issued without restrictive legend as to securities laws). Pursuant to such conversion, the full ($3,000,000) principal amount of the Debenture shall automatically be converted at a Conversion Price of $3.05 per share of Common Stock into an aggregate of 983,607 shares of Common Stock on and as of the specified conversion date (subject to Anti-dilution Adjustments applicable to the Debenture (under the terms of the Debenture) prior to the date of conversion, if any). Accrued and unpaid interest on the Debenture through and as of the conversion date shall be paid in Interest Shares as provided in Section 4(a) of the Debenture. The Debenture shall terminate and cease to be outstanding effective upon such conversion and the issuance of the 983,607 shares of Common Stock and the Interest Shares. 1 2. Promptly after the date of conversion under the foregoing section 1, Holder will deliver the original Debenture to the Company, and Holder will sign and deliver to the Company the conversion notice attached to this Agreement (if not previously done as contemplated in section 1 above). 3. Unless required by applicable law, no party hereto shall make any disclosure of this Agreement or any of the matters contained herein; it being agreed that either party may make such disclosure if such party determines in its good faith judgment that disclosure is required by law (and it being further contemplated that the Company may be required to disclose this agreement on Form 8-K or other SEC filings). 4. The Company represents and warrants that (i) the issuance of the Common Stock upon conversion of the Debenture has been duly authorized and no additional corporate or stockholder action is required for the approval thereof, (ii) no consent, authorization, order or approval of, or filing or registration with, any governmental authority or other person is required for the execution and delivery by the Company of this Agreement, the Company's performance of its obligations hereunder and/or the amendment to the Debenture contemplated hereby and (iii) the shares of Common Stock to be issued upon conversion of the Debentures and the Interest Shares will be duly authorized, validly issued, fully paid and nonassessable. 5. Holder represents and warrants that no consent, authorization, order or approval of, or filing or registration with, any governmental authority or other person is required for the execution and delivery by Holder of this Agreement, Holder's performance of its obligations hereunder and/or the amendment to the Debenture contemplated hereby. 6. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of New York. This Agreement constitutes the entire understanding and agreement between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the undersigned parties have executed this AGREEMENT TO CONVERT DEBENTURE as of the day and year first above written. HOLLYWOOD MEDIA CORP. LEONARDO, L.P. By: /s/ Mitchell Rubenstein By: /s/ Joseph R. Wekselblatt ----------------------------- --------------------------- Name: Mitchell Rubenstein Name: Title: Chief Executive Officer Title: Leonardo, L.P. By Leonardo Capital Management Inc, General Partner By Angelo, Gordon & Co., L.P. Director By Joseph R. Wekselblatt, C.F.O. 2 EXHIBIT I --------- (To be Executed by Registered Holder ------------------------------------ in order to Convert Debenture) ------------------------------ CONVERSION NOTICE ----------------- FOR --- 6% SENIOR CONVERTIBLE DEBENTURE DUE MAY 22, 2005 ------------------------------------------------ The undersigned, LEONARDO, L.P., as Holder of the 6% Senior Convertible Debenture Due May 22, 2005 of HOLLYWOOD MEDIA CORP. (the "Company"), No. 1, in the outstanding principal amount of $3,000,000 (the "Debenture"), hereby elects to convert ALL of the outstanding principal amount of the Debenture into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: ________, 2004 Principal Amount of Debentures to be converted: $3,000,000 Tax ID Number (If applicable): 98-012-0439 Please confirm the following information: Conversion Price: $3.05 per Share Number of shares of Common Stock to be issued: 983,607 SHARES Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES ____ No _X_ Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: - -------------------------------------------------- DELIVERY INSTRUCTIONS: ---------------------- Leonardo, L.P. c/o Angelo Gordon, LP 245 Park Avenue New York, NY 10167 Attention: Gary Wolf - -------------------------------------------------- Issue to: Leonardo, L.P Address: 245 Park Avenue New York, NY 10167 Telephone Number: (212) 692-2018 Facsimile Number: (212) 867-6449 Authorization (signature) : -------------------------------------------- By (print name) : ------------------------------------------------------ Title (for Holder): ---------------------------------------------------- Dated: _________, 2004 3 ACKNOWLEDGMENT HOLLYWOOD MEDIA CORP. (the "Company") hereby acknowledges this Conversion Notice by LEONARDO, L.P. and hereby directs American Stock Transfer & Trust Co. ("AST") to issue the above indicated 983,607 shares of Common Stock in accordance with the agreed Transfer Agent Instructions dated May 22, 2002 from the Company and acknowledged and agreed to by American Stock Transfer & Trust Co. In accordance with said Transfer Agent Instructions, the stock certificates for such shares may be issued without the restrictive legend therein if AST is provided with the requisite opinion of counsel (it being contemplated that the shares may be eligible for sale under Rule 144(k) thereby eliminating the need for such legend if provided in such opinion). HOLLYWOOD MEDIA CORP. By: ------------------------------- Name: ------------------------- Title: ------------------------- Dated: __________, 2004 4 EX-10.5 7 debenturenotice-leonardo.txt SENIOR DEBENTURE LEONARDO Exhibit 10.5 EXHIBIT I (To be Executed by Registered Holder in order to Convert Debenture) CONVERSION NOTICE FOR 6% SENIOR CONVERTIBLE DEBENTURE DUE MAY 22, 2005 The undersigned, LEONARDO, L.P., as Holder of the 6% Senior Convertible Debenture Due May 22, 2005 of HOLLYWOOD MEDIA CORP. (the "Company"), No. 1, in the outstanding principal amount of $3,000,000 (the "Debenture"), hereby elects to convert ALL of the outstanding principal amount of the Debenture into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: September 28, 2004 Principal Amount of Debentures to be converted: $3,000,000 Tax ID Number (If applicable): 98-012-0439 Please confirm the following information: Conversion Price: $3.05 per Share Number of shares of Common Stock to be issued: 983,607 SHARES, plus $90,000 of interest payable in shares of Common Stock. Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (Check one) YES [ ] NO [X] Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: - -------------------------------------------------- DELIVERY INSTRUCTIONS: Leonardo, L.P. c/o Angelo Gordon, LP 245 Park Avenue New York, NY 10167 Attention: Gary Wolf - -------------------------------------------------- Issue to: Leonardo, L.P Address: 245 Park Avenue New York, NY 10167 Telephone Number: (212) 692-2018 Facsimile Number: (212) 867-6449 Authorization (signature): /s/ Michael L. Gordon --------------------- By (print name): Michael L. Gordon Title (for Holder): Authorized Signatory Dated: September 28, 2004 1 ACKNOWLEDGMENT HOLLYWOOD MEDIA CORP. (the "Company") hereby acknowledges this Conversion Notice by LEONARDO, L.P. and hereby directs American Stock Transfer & Trust Co. ("AST") to issue the above indicated 983,607 shares of Common Stock, plus 28,432 shares in payment of interest, in accordance with the agreed Transfer Agent Instructions dated May 22, 2002 from the Company and acknowledged and agreed to by American Stock Transfer & Trust Co. In accordance with said Transfer Agent Instructions, the stock certificates for such shares may be issued without the restrictive legend therein if AST is provided with the requisite opinion of counsel (it being contemplated that the shares may be eligible for sale under Rule 144(k) thereby eliminating the need for such legend if provided in such opinion). HOLLYWOOD MEDIA CORP. By: /s/ Mitchell Rubenstein -------------------------- Name: Mitchell Rubenstein Title: Chief Executive Officer Dated: September 28, 2004 2 EX-10.6 8 convertdebenture-cdinvest.txt CD INVESTMENT DEBENTURE Exhibit 10.6 AGREEMENT TO CONVERT DEBENTURE ------------------------------ THIS AGREEMENT (this "AGREEMENT"), is made and entered into as of the 31st day of August, 2004, by and between Hollywood Media Corp., a Florida corporation (the "COMPANY"), and CD Investment Partners, Ltd. ("CD"). WITNESSETH: WHEREAS, CD is the registered holder of the Company's "6% Senior Convertible Debenture Due May 22, 2005" issued under Certificate No. 5, dated as of May 22, 2002 (the "DEBENTURE"), which Debenture by its terms is convertible into shares of common stock, par value $0.01, of the Company ("COMMON STOCK"). WHEREAS, the Debenture Certificate recites that as of the date of issuance of the Debenture to CD the Debenture was convertible based on a Conversion Price of $3.46 per share, however, as a result of certain antidilution adjustments under the terms of the Debenture in connection with the Company's private placement in February 2004, the Conversion Price was reduced to $3.30 per share. WHEREAS, the Debenture was originally purchased from the Company by and thereupon issued to, Carpe Diem Long Short Fund, LLC in May 2002, and the Debenture was subsequently assigned to CD as of March 1, 2003. WHEREAS, the parties hereto desire to agree to convert the Debenture upon the terms and agreements provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties, intending to be legally bound, hereby acknowledge, confirm and agree as follows: 1. Notwithstanding anything to the contrary in the Debenture, it is agreed that the Debenture shall automatically convert and be converted into shares of Common Stock, on the terms provided below, on and as of any date to be selected by CD (as evidenced by delivery of a Conversion Notice in the form attached hereto as Exhibit I) from the days commencing with the date hereof through September 30, 2004, provided, however, that if no such date is selected then such conversion shall be on and effective as of September 30, 2004. Pursuant to such conversion, the full ($200,000) principal amount of the Debenture shall automatically be converted at a Conversion Price of $3.05 per share of Common Stock into an aggregate of 65,574 shares of Common Stock. Accrued and unpaid interest on the Debenture shall be paid in Interest Shares as provided in Section 4(a) of the Debenture except that the number of Interest Shares shall be calculated using a price of $3.05 per share (it being understood and agreed that the number of Interest Shares shall be 1,005 if the Debenture is converted on September 30, 2004). The Debenture shall terminate and cease to be 1 outstanding effective upon such conversion. Certificates evidencing the shares of Common Stock issuable upon conversion of the Debenture and the Interest Shares shall be delivered to CD no later than three (3) trading days after CD's delivery of the Conversion Notice to the Company. 2. CD will deliver the original Debenture to the Company promptly after the date of conversion under the foregoing section 1, and CD will sign and deliver to the Company the conversion notice attached to this Agreement. 3. CD hereby confirms to the Company that (i) CD does not have any (and CD hereby releases any) claims under the terms of the Debenture (or its related registration rights agreement) arising out of or related to the Company's communications to CD, dated April 20, 2004, regarding its acquisition of Studio Systems, Inc. or the Company's consummation of the acquisition and (ii) CD's consent was not required for the consummation of such acquisition. 4. No party hereto shall make any disclosure of this Agreement or any of the matters contained herein; it being agreed that either party shall be permitted to disclose this Agreement or any of the matters contained herein if such party determines in its good faith judgment that such disclosure is required by applicable law. 5. The Company represents and warrants that (i) the issuance of the Common Stock upon conversion of the Debenture has been duly authorized and no additional corporate or stockholder action is required for the approval thereof and (ii) no consent, authorization, order or approval of, or filing or registration with, any governmental authority or other person is required for the execution and delivery by the Company of this Agreement, the Company's performance of its obligations hereunder and/or the amendment to the Debenture contemplated hereby. 6. CD represents and warrants that no consent, authorization, order or approval of, or filing or registration with, any governmental authority or other person is required for the execution and delivery by CD of this Agreement or CD's performance of its obligations hereunder. 7. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall constitute one instrument. 8. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of New York. This Agreement constitutes the entire understanding and agreement between the parties hereto with respect to the subject matter hereof. [signature page follows] 2 IN WITNESS WHEREOF, the undersigned parties have executed this AGREEMENT TO CONVERT DEBENTURE as of the day and year first above written. HOLLYWOOD MEDIA CORP. CD INVESTMENT PARTNERS, LTD. By: CD Capital Management LLC By: /s/ Mitchell Rubenstein Its: Investment Manager ----------------------- Name: Mitchell Rubenstein Title: Chief Executive Officer By: /s/ John Ziegelman ------------------ Name: John Ziegelman Title: President 3 EXHIBIT I --------- (To be Executed by Registered Holder ------------------------------------ in order to Convert Debenture) ------------------------------ CONVERSION NOTICE ----------------- FOR --- 6% SENIOR CONVERTIBLE DEBENTURE DUE MAY 22, 2005 ------------------------------------------------ The undersigned, CD INVESTMENT PARTNERS, LTD., as Holder of the 6% Senior Convertible Debenture Due May 22, 2005 of HOLLYWOOD MEDIA CORP. (the "Company"), No. 5, in the outstanding principal amount of $200,000 (the "Debenture"), hereby elects to convert ALL of the outstanding principal amount of the Debenture into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: ________, 2004 Principal Amount of Debentures to be converted: $200,000 Tax ID Number (If applicable): 01-0758615 Please confirm the following information: Conversion Price: $3.05 per Share Number of shares of Common Stock to be issued: 65,574 SHARES Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES ____ No _X_ Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: CD Investment Partners, Ltd. Address: 2 North Riverside Plaza, Suite 600 Chicago, Illinois 60606 Attn: John Ziegelman, President Telephone Number: (312) 466-3226 Facsimile Number: (312) 559-1288 Authorization (signature) : -------------------------------------------- By (print name) : ------------------------------------------------------ Title (for Holder): ---------------------------------------------------- Dated: _________, 2004 4 ACKNOWLEDGMENT HOLLYWOOD MEDIA CORP. (the "Company") hereby acknowledges this Conversion Notice by CD INVESTMENT PARTNERS, LTD. and hereby directs American Stock Transfer & Trust Co. ("AST") to issue the above indicated 65,574 shares of Common Stock in accordance with the agreed Transfer Agent Instructions dated May 22, 2002 from the Company and acknowledged and agreed to by American Stock Transfer & Trust Co. In accordance with said Transfer Agent Instructions, the stock certificates for such shares may be issued without the restrictive legend therein if AST is provided with the requisite opinion of counsel (it being contemplated that the shares may be eligible for sale under Rule 144(k) thereby eliminating the need for such legend if provided in such opinion). HOLLYWOOD MEDIA CORP. By: ------------------------------------ Name: ------------------------------ Title: ------------------------------ Dated: _______, 2004 5 EX-10.7 9 debenturenotice-cd.txt SENIOR DEBENTURE CD INVESTMENT Exhibit 10.7 EXHIBIT I (To be Executed by Registered Holder ------------------------------------ in order to Convert Debenture) ------------------------------ CONVERSION NOTICE FOR 6% SENIOR CONVERTIBLE DEBENTURE DUE MAY 22, 2005 The undersigned, CD INVESTMENT PARTNERS, LTD., as Holder of the 6% Senior Convertible Debenture Due May 22, 2005 of HOLLYWOOD MEDIA CORP. (the "Company"), No. 5, in the outstanding principal amount of $200,000 (the "Debenture"), hereby elects to convert ALL of the outstanding principal amount of the Debenture into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: September 30, 2004 Principal Amount of Debentures to be converted: $200,000 Tax ID Number (If applicable): 01-0758615 Please confirm the following information: Conversion Price: $3.05 per Share Number of shares of Common Stock to be issued: 65,574 SHARES, plus 1005 Interest Shares for total shares on conversion of 66,579 Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES [ ] NO [X] Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: CD Investment Partners, Ltd. Address: 2 North Riverside Plaza, Suite 600 Chicago, Illinois 60606 Attn: John Ziegelman, President Telephone Number: (312) 466-3226 Facsimile Number: (312) 559-1288 Authorization (signature): /s/ John Ziegelman ------------------ By (print name): John Ziegelman -------------- Title (for Holder): -------------------------- Dated: Sept 30, 2004 1 ACKNOWLEDGMENT HOLLYWOOD MEDIA CORP. (the "Company") hereby acknowledges this Conversion Notice by CD INVESTMENT PARTNERS, LTD. and hereby directs American Stock Transfer & Trust Co. ("AST") to issue the above indicated 66,579 shares of Common Stock in accordance with the agreed Transfer Agent Instructions dated May 22, 2002 from the Company and acknowledged and agreed to by American Stock Transfer & Trust Co. In accordance with said Transfer Agent Instructions, the stock certificates for such shares may be issued without the restrictive legend therein if AST is provided with the requisite opinion of counsel (it being contemplated that the shares may be eligible for sale under Rule 144(k) thereby eliminating the need for such legend if provided in such opinion). HOLLYWOOD MEDIA CORP. By: /s/ Mitchell Rubenstein -------------------------- Name: Mitchell Rubenstein Title: Chief Executive Officer Dated: September 30, 2004 2 EX-10.8 10 debenturenotice-federated.txt SENIOR DEBENTURE FEDERATED Exhibit 10.8 EXHIBIT I (To be Executed by Registered Holder in order to Convert Debenture) CONVERSION NOTICE FOR 6% SENIOR CONVERTIBLE DEBENTURE DUE MAY 22, 2005 The undersigned, FEDERATED KAUFFMANN FUND, as Holder of the 6% Senior Convertible Debenture Due May 22, 2005 of HOLLYWOOD MEDIA CORP. (the "Company"), No. 3, in the outstanding principal amount of $1,000,000 (the "Debenture"), hereby elects to convert ALL of the outstanding principal amount of the Debenture into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: August 20, 2004 Principal Amount of Debentures to be converted: $1,000,000 Tax ID Number (If applicable): 13-2605091 Please confirm the following information: Conversion Price: $3.05 per Share Number of shares of Common Stock to be issued: 327,869 SHARES Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES [ ] NO [X] Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: Federated Kaufmann Fund, a portfolio of Federated Equity Funds Address: 140 East 45th Street, 43rd Floor New York, NY 10017 Attn: Judith Reardon Telephone Number: (212) 922-2999 Facsimile Number: (212) 661-2266 Account Number (if electronic book entry transfer): 997 Transaction Code Number (if electronic book entry transfer): (to be supplied directly to Transfer Agent) Authorization (SIGNATURE): /s/ Hans P. Utsch ----------------------------------------- By (PRINT NAME): Hans P. Utsch --------------------------------------------------- Title (for Holder): VP, Portfolio Manager Dated: August 19, 2004 ACKNOWLEDGMENT HOLLYWOOD MEDIA CORP. (the "Company") hereby acknowledges this Conversion Notice by FEDERATED KAUFFMANN FUND and hereby directs American Stock Transfer & Trust Co. to issue the above indicated 327,869 shares of Common Stock in accordance with the agreed Transfer Agent Instructions dated May 22, 2002 from the Company and acknowledged and agreed to by American Stock Transfer & Trust Co. In accordance with said Transfer Agent Instructions, the stock certificates for such shares may be issued without the restrictive legend therein if AST is provided with the requisite opinion of counsel (it being contemplated that the shares may be eligible for sale under Rule 144(k) thereby eliminating the need for such legend if provided in such opinion). HOLLYWOOD MEDIA CORP. By: /s/ Mitchell Rubenstein -------------------------- Name: Mitchell Rubenstein Title: Chief Executive Officer Dated: August 20, 2004 EX-10.9 11 debenturenotice-mitchell.txt SENIOR DEBENTURE MITCHELL Exhibit 10.9 EXHIBIT I (To be Executed by Registered Holder in order to Convert Debenture) CONVERSION NOTICE FOR 6% SENIOR CONVERTIBLE DEBENTURE DUE MAY 22, 2005 The undersigned, MITCHELL RUBENSTEIN AND LAURIE SILVERS as joint tenants by the entirety, as Holder of the 6% Senior Convertible Debenture Due May 22, 2005 of HOLLYWOOD MEDIA CORP. (the "Company"), No. 4, in the outstanding principal amount of $500,000 (the "Debenture"), hereby elects to convert ALL of the outstanding principal amount of the Debenture into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: August 20, 2004 Principal Amount of Debentures to be converted: $500,000 Tax ID Number (If applicable): on file Please confirm the following information: Conversion Price: $3.05 per Share Number of shares of Common Stock to be issued: 163,935 SHARES Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES ____ No _X_ Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: Mitchell Rubenstein and Laurie Silvers as joint tenants by the entirety Address: home address - on file Telephone Number: Facsimile Number: Authorization (SIGNATURE) : /s/ Mitchell Rubenstein --------- -------------------------------------------- By (PRINT NAME) : Mitchell Rubenstein ---------- Authorization (SIGNATURE) : /s/ Laurie Silvers --------- -------------------------------------------- By (PRINT NAME) : Laurie Silvers ---------- Dated: August 20, 2004 ACKNOWLEDGMENT HOLLYWOOD MEDIA CORP. (the "Company") hereby acknowledges this Conversion Notice by MITCHELL RUBENSTEIN AND LAURIE SILVERS as joint tenants by the entirety and hereby directs American Stock Transfer & Trust Co. to issue the above indicated 163,935 shares of Common Stock in accordance with the attached Conversion Notice and further instructions to be sent by the Company's legal counsel including directions as to restrictive legends due to registration requirements and exemptions under securities laws if applicable. In accordance with said Instructions, the stock certificates for such shares may be issued. HOLLYWOOD MEDIA CORP. By: /s/ Mitchell Rubenstein ------------------------------ Name: Mitchell Rubenstein Title: Chief Executive Officer Dated: August 20, 2004 EX-10.10 12 gomez-employment.txt GOMEZ EMPLOYMENT CONTRACT Exhibit 10.10 HOLLYWOOD MEDIA CORP. April 2, 2003 Scott Gomez 12570 SW 151 Street, Unit #128 Miami, Fl 33186 Dear Scott: We are pleased to extend to you an offer of employment with Hollywood Media Corp. as Vice President - Accounting and Finance reporting to the Chief Executive Officer. This offer is contingent upon successful completion of a background investigation. Enclosed please find a Background Check Release Authorization form. Please complete this form and fax it to the attention of Chris Muise at (561) 998-2974. Assuming favorable results for the above, we would like you to commence employment on April 21, 2003 under the following terms: A. SALARY Your starting salary will be four thousand three hundred twenty-six dollars and ninety-two cents ($4,326.92) per bi-weekly pay period, (one hundred twelve thousand five hundred dollars ($112,500) annually). Following successful completion of twelve (12) months of full-time employment, your salary will be changed to four thousand eight hundred seven dollars and sixty-nine cents ($4,807.69) per bi-weekly pay period (one hundred twenty-five thousand dollars ($125,000) annually). B. STOCK OPTIONS On the date your employment commences, you will be granted options to purchase 20,000 shares (the "Options") of Hollywood Media Corp. Common Stock. The options will have an exercise price equal to the closing sale price of the Common Stock on the NASDAQ Market on the trading day immediately preceding the employment commencement date. The options will vest twenty-five percent (25%) per year over four (4) years (subject to your remaining an active employee of Hollywood Media Corp. at each vesting date) and will have a five (5) year term from the date of grant. The Options shall be granted under (and therefore subject to all terms and conditions of) Hollywood Media Corp.'s applicable stock option plan and any amendments thereto, and any successor plan thereto and all rules and regulations of the Securities and Exchange Commission and NASDAQ applicable to stock option plans. C. TERMINATION If, at any time during the first two years following your commencement of employment with the Company, your employment is terminated by the Company without cause, the Company agrees to pay to you severance equal to the lesser of (a) twelve (12) months' salary at the salary rate then in effect, or (b) the salary due you for the remaining balance of the two (2) year employment term. This payment to be made in a lump-sum payment within sixty (60) days of the date of the termination. Initial: /s/ SG --------------- 2255 Glades Road o Suite 219A o Boca Raton, Florida 33431-7383 Telephone 561.998.8000 o Fax 561.998.2974 The Company also reserves the right to terminate your employment and all Company obligations hereunder by written notice to you, for cause. For purposes of this agreement, "cause" shall be defined as personal dishonesty, willful misconduct, intentional or continual failure to perform stated and material duties after reasonable notice and opportunity to cure any failure or default, a known breach of fiduciary duties where such breach is made known to you and you are given a reasonable opportunity to remedy or cure the breach, or if you commit any acts of dishonesty, fraud, misrepresentation, or other acts of moral turpitude against the Company. In the event the Company terminates this agreement for cause, or in the event, you leave employment with the Company on your own initiative, the Company shall no longer be obligated to make any further salary payments to you beginning on such date and you shall not be entitled to any severance payment as described hereunder. A. GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL This Agreement will be governed by and construed in accordance with the laws of the State of Florida, without reference to conflicts of law rules, and without regard to its location of execution or performance. Jurisdiction and venue for any claim or cause of action arising under this Agreement shall be exclusively in the courts located in Palm Beach County, Florida. EACH PARTY WAIVES ITS RIGHT TO A JURY TRIAL IN ANY COURT ACTION ARISING BETWEEN THE PARTIES, WHETHER UNDER THIS AGREEMENT OR OTHERWISE RELATED TO THIS AGREEMENT, AND WHETHER MADE BY CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR OTHERWISE. THE AGREEMENT OF EACH PARTY TO WAIVE ITS RIGHT TO A JURY TRIAL WILL BE BINDING ON ITS SUCCESSORS AND ASSIGNS. You will find information enclosed with this letter briefly explaining the Company's variety of benefits. More comprehensive information regarding these benefits is contained in the Employee Handbook that will be issued to you on your first day of employment. On your first day of employment please arrive at 9:00 a.m. for your "New Hire Orientation." You may park in any space that is not marked Reserved or Visitor. In compliance with the Immigration Reform and Control Act of 1986, the Company requires proof of identity and eligibility to work in the US within three (3) days of hire. We have included a list of these approved documents with this letter for your reference. Please bring with you either one (1) item from Column A OR one (1) item from Column B AND one item from Column C. Scott, on behalf of the management of Hollywood Media Corp., we look forward to having you on board as an integral part of our organization. Regards, /s/ Lisa A. Beadle Lisa A. Beadle, PHR Director of Human Resources Enclosures cc: HRD Files Initial: /s/ SG --------------- BENEFITS SUMMARY - ---------------- This summary briefly highlights each of these benefits plans. Nothing in this summary, however, should be read to create any contractual obligations beyond the rights and protections afforded in the formal legal documents that govern these plans. The Company reserves the right to modify or terminate any and all of its benefits plans, policies, and arrangements at any time at its sole discretion. Medical, Dental, and Disability Benefits - ---------------------------------------- You will be eligible to participate in the Company's benefit plans on the first of the month following thirty (30) days of continuous employment. 401(k) Retirement Savings Plan - ------------------------------ You will be eligible to participate in the Company's 401(k) Retirement Savings Plan on the first of the month following one (1) year of continuous employment. Information regarding this plan will be made available to you prior to eligibility. Direct Deposit - -------------- If you would like to participate in this benefit, please bring a voided check for direct deposit into a checking account. For direct deposit into a savings account please provide an account confirmation slip from your bank. You may choose to have your money deposited in up to three separate accounts. Paid Vacation - ------------- After one (1) year of employment, you receive ten (10) days of paid vacation time per year. After five (5) years of employment, you receive fifteen (15) days of paid vacation time per year. Complete information regarding the vacation plan can be found in the Employee Handbook that will be issued to you on your first day of employment. Paid Sick Days - -------------- After completing ninety (90) days of employment, you receive five (5) days of paid sick time per year. Paid Personal Days - ------------------ After completing ninety (90) days of employment, you receive three (3) days of paid personal time per year. Initial: /s/ SG --------------- EX-10.11 13 mremployment1011.txt RUBENSTEIN EMPLOYMENT AGREEMENT Exhibit 10.11 AMENDMENT AGREEMENT FOR EMPLOYMENT AGREEMENT BETWEEN HOLLYWOOD MEDIA CORP. AND MITCHELL RUBENSTEIN AMENDMENT AGREEMENT (the "Agreement") dated November 15, 2004 and effective as of May 31, 2004 by and between HOLLYWOOD MEDIA CORP., a Florida corporation (the "Company") and MITCHELL RUBENSTEIN (the "Executive"). WITNESSETH: WHEREAS, the Executive has served as Chairman of the Board and Chief Executive Officer of the Company since its inception, and presently serves in this capacity pursuant to a written Employment Agreement with the Company entered into as of July 1, 1993, as amended by that certain Extension and Amendment Agreement entered into as of July 1, 1998 between the Company and the Executive, by that certain Extension and Amendment Agreement entered into as of July 1, 2003 (the "2003 Amendment") between the Company and the Executive, and by that certain Extension and Amendment Agreement entered into as of May 31, 2004 (the "2004 Amendment") between the Company and the Executive (collectively, the "Current Employment Agreement"); WHEREAS, the parties desire to enter into this Agreement to clarify certain matters regarding the vesting of the shares of restricted stock (the "Shares") granted to the Executive under Section 2 of the 2004 Amendment. WHEREAS, Section 2 of the 2004 Amendment currently provides, with respect to vesting of the Shares, that the Shares will vest over a period of four years at the rate of 6.25 percent per calendar quarter commencing with the first vesting on October 1, 2004, and the 2004 Amendment further states that "in the event that a "Change of Control" (as defined in the Current Employment Agreement, as amended) of the Company occurs prior to the end of such four-year period, or in the event that the Executive's employment ends at any time prior to the end of such four-year period other than for "Cause" (as defined in the Current Employment Agreement), said grant shall vest in full immediately." WHEREAS, with respect to vesting the parties desire to clarify (i) the events upon which Shares will vest, and (ii) the parties' respective rights and obligations with respect to any portion of the Shares that is not vested ("Unvested Shares"). NOW, THEREFORE, the parties, intending to be legally bound, agree as follows, and the Current Employment Agreement is hereby amended as follows, NUNC PRO TUNC, as if these terms were included in the 2004 Amendment: Unless otherwise expressly defined herein, all capitalized terms used herein shall have the meanings set forth in the Current Employment Agreement. 1. Limitation on Vesting in the Event of Termination by Executive unless With Good Reason. Notwithstanding anything to the contrary in Section 2 of the 2004 Amendment, in the event that the Executive's employment is voluntarily terminated by the Executive (and is not actually or constructively terminated by the Company) then the Executive's Unvested Shares at the time of such termination shall not vest by reason of such termination unless the Executive resigns from employment within 60 days after the occurrence of "Good Reason" (as defined below), in which case all of the Unvested Shares shall become vested in full upon such resignation. Good Reason. For all purposes under this Agreement, "Good Reason" for resignation will exist upon the occurrence of any of the following: (i) any reduction in the Executive's Base Salary; (ii) any change made by the Company in the Executive's title or position with the Company such that he ceases to be the Chief Executive Officer of Hollywood Media Corp. (the parent company) or that materially reduces his authority from that which he currently holds as Chief Executive Officer and Chairman of the Board of the Company; or (iii) any other breach by the Company of its obligations under the Current Employment Agreement, as amended, that is not corrected within thirty (30) days following the Executive's written notice thereof to the Company. 2. Restrictions on Unvested Shares; Forfeit of Unvested Shares. (a) The Unvested Shares may not be sold, pledged or otherwise transferred until vested (it being agreed that any vested portion of the Shares is not subject to any restrictions in this Agreement). (b) Upon any termination of the Executive's employment with the Company, the Unvested Shares which are not vested as of the time of termination (excluding any Unvested Shares that vest as a result of the termination), shall be forfeited by the Executive, and the Executive shall transfer (and in any event shall be deemed to have transferred) all such forfeited shares back to the Company and such shares shall thereupon be cancelled and void and cease to be outstanding for all purposes. 3. Legend. All certificates representing any Unvested Shares subject to the provisions of this Agreement shall have endorsed thereon the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A VESTING SCHEDULE SET FORTH IN THAT CERTAIN EXTENSION AND AMENDMENT AGREEMENT DATED AS OF MAY 31, 2004, AS AMENDED, BETWEEN THE COMPANY AND THE HOLDER, AND NO PORTION OF THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED PRIOR TO VESTING AS PROVIDED IN SUCH AGREEMENT. 4. Changes in Stock. In the event that as a result of any stock dividend, stock split or other change in the Company's Common Stock, or any merger or sale of all or substantially all of the assets of other acquisition of the Company, the Executive shall in his capacity as owner of Unvested Shares (the "Prior Shares") be entitled to new or additional or different shares or securities, such new or additional or different shares or securities shall thereupon be considered to be Unvested Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to this Agreement. 5. Miscellaneous. (a) The Company shall not be required (i) to transfer on its books any shares of stock of the Company which have been (or purported to be) sold or transferred in violation of this Agreement, or (ii) to treat as owner of such shares any transferee (or purported transferee) of shares transferred (or purported to be transferred) in violation of this Agreement. 2 (b) Except with respect to any shares that are forfeited as provided above, as to which forfeited Shares the Executive shall have no rights, the parties acknowledge and agree that neither this Agreement nor the 2004 Amendment limit or restrict the Executive's rights of a shareholder with respect to any of the Shares (except for the restrictions on transfer of Unvested Shares provided herein and under the 2004 Amendment) including the Executive's right to vote the Shares and to receive any dividends paid to or made with respect to the Shares. (c) The parties agree to execute such further instruments and to take such action as may reasonably be necessary to carry out the purposes and intent of this Agreement. 6. Reaffirmation of Employment Agreement. No provision of this Agreement shall be deemed to enlarge the terms or provisions of the Current Employment Agreement or the rights of the Executive thereunder. Except as expressly provided in this Agreement, all other provisions, terms and benefits set forth in the Current Employment Agreement shall remain in full force and effect. 7. Counterparts. This Agreement may be executed in counterparts, each of which, when executed, shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 8. The changes made by this amendment to the Current Employment Agreement should be given effect from and after May 31, 2004, NUNC PRO TUNC, as if these terms were included in the 2004 Amendment. IN WITNESS WHEREOF, the parties hereto have or have caused their respective duly authorized representatives to execute this Agreement as of the date first written above. COMPANY: HOLLYWOOD MEDIA CORP., a Florida corporation By: /s/ Scott Gomez ------------------------------ Name: Scott Gomez Title: Vice President of Finance and Accounting EXECUTIVE: /s/ Mitchell Rubenstein --------------------------------- Mitchell Rubenstein EX-10.12 14 lsemployment1012.txt SILVERS EMPLOYMENT AGREEMENT Exhibit 10.12 AMENDMENT AGREEMENT FOR EMPLOYMENT AGREEMENT BETWEEN HOLLYWOOD MEDIA CORP. AND LAURIE S. SILVERS AMENDMENT AGREEMENT (the "Agreement") dated November 15, 2004 and effective as of May 31, 2004 by and between HOLLYWOOD MEDIA CORP., a Florida corporation (the "Company") and LAURIE S. SILVERS (the "Executive"). WITNESSETH: WHEREAS, the Executive has served as President of the Company since its inception, and presently serves in this capacity pursuant to a written Employment Agreement with the Company entered into as of July 1, 1993, as amended by that certain Extension and Amendment Agreement entered into as of July 1, 1998 between the Company and the Executive, by that certain Extension and Amendment Agreement entered into as of July 1, 2003 (the "2003 Amendment") between the Company and the Executive, and by that certain Extension and Amendment Agreement entered into as of May 31, 2004 (the "2004 Amendment") between the Company and the Executive (collectively, the "Current Employment Agreement"); WHEREAS, the parties desire to enter into this Agreement to clarify certain matters regarding the vesting of the shares of restricted stock (the "Shares") granted to the Executive under Section 2 of the 2004 Amendment. WHEREAS, Section 2 of the 2004 Amendment currently provides, with respect to vesting of the Shares, that the Shares will vest over a period of four years at the rate of 6.25 percent per calendar quarter commencing with the first vesting on October 1, 2004, and the 2004 Amendment further states that "in the event that a "Change of Control" (as defined in the Current Employment Agreement, as amended) of the Company occurs prior to the end of such four-year period, or in the event that the Executive's employment ends at any time prior to the end of such four-year period other than for "Cause" (as defined in the Current Employment Agreement), said grant shall vest in full immediately." WHEREAS, with respect to vesting the parties desire to clarify (i) the events upon which Shares will vest, and (ii) the parties' respective rights and obligations with respect to any portion of the Shares that is not vested ("Unvested Shares"). NOW, THEREFORE, the parties, intending to be legally bound, agree as follows, and the Current Employment Agreement is hereby amended as follows, NUNC PRO TUNC, as if these terms were included in the 2004 Amendment: Unless otherwise expressly defined herein, all capitalized terms used herein shall have the meanings set forth in the Current Employment Agreement. 1. Limitation on Vesting in the Event of Termination by Executive unless With Good Reason. Notwithstanding anything to the contrary in Section 2 of the 2004 Amendment, in the event that the Executive's employment is voluntarily terminated by the Executive (and is not actually or constructively terminated by the Company) then the Executive's Unvested Shares at the time of such termination shall not vest by reason of such termination unless the Executive resigns from employment within 60 days after the occurrence of "Good Reason" (as defined below), in which case all of the Unvested Shares shall become vested in full upon such resignation. Good Reason. For all purposes under this Agreement, "Good Reason" for resignation will exist upon the occurrence of any of the following: (i) any reduction in the Executive's Base Salary; (ii) any change made by the Company in the Executive's title or position with the Company such that she ceases to be the President of Hollywood Media Corp. (the parent company) or that materially reduces her authority from that which she currently holds as President of the Company; or (iii) any other breach by the Company of its obligations under the Current Employment Agreement, as amended, that is not corrected within thirty (30) days following the Executive's written notice thereof to the Company. 2. Restrictions on Unvested Shares; Forfeit of Unvested Shares. (a) The Unvested Shares may not be sold, pledged or otherwise transferred until vested (it being agreed that any vested portion of the Shares is not subject to any restrictions in this Agreement). (b) Upon any termination of the Executive's employment with the Company, the Unvested Shares which are not vested as of the time of termination (excluding any Unvested Shares that vest as a result of the termination), shall be forfeited by the Executive, and the Executive shall transfer (and in any event shall be deemed to have transferred) all such forfeited shares back to the Company and such shares shall thereupon be cancelled and void and cease to be outstanding for all purposes. 3. Legend. All certificates representing any Unvested Shares subject to the provisions of this Agreement shall have endorsed thereon the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A VESTING SCHEDULE SET FORTH IN THAT CERTAIN EXTENSION AND AMENDMENT AGREEMENT DATED AS OF MAY 31, 2004, AS AMENDED, BETWEEN THE COMPANY AND THE HOLDER, AND NO PORTION OF THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED PRIOR TO VESTING AS PROVIDED IN SUCH AGREEMENT. 4. Changes in Stock. In the event that as a result of any stock dividend, stock split or other change in the Company's Common Stock, or any merger or sale of all or substantially all of the assets of other acquisition of the Company, the Executive shall in her capacity as owner of Unvested Shares (the "Prior Shares") be entitled to new or additional or different shares or securities, such new or additional or different shares or securities shall thereupon be considered to be Unvested Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to this Agreement. 5. Miscellaneous. (a) The Company shall not be required (i) to transfer on its books any shares of stock of the Company which have been (or purported to be) sold or transferred in violation of this Agreement, or (ii) to treat as owner of such shares any transferee (or purported transferee) of shares transferred (or purported to be transferred) in violation of this Agreement. (b) Except with respect to any shares that are forfeited as provided above, as to which forfeited Shares the Executive shall have no rights, the parties acknowledge and agree that neither this Agreement nor the 2004 Amendment limit or restrict the Executive's rights of a shareholder with respect to any of the Shares (except for the restrictions on transfer of Unvested Shares provided herein and under the 2004 Amendment) including the Executive's right to vote the Shares and to receive any dividends paid to or made with respect to the Shares. (c) The parties agree to execute such further instruments and to take such action as may reasonably be necessary to carry out the purposes and intent of this Agreement. 6. Reaffirmation of Employment Agreement. No provision of this Agreement shall be deemed to enlarge the terms or provisions of the Current Employment Agreement or the rights of the Executive thereunder. Except as expressly provided in this Agreement, all other provisions, terms and benefits set forth in the Current Employment Agreement shall remain in full force and effect. 7. Counterparts. This Agreement may be executed in counterparts, each of which, when executed, shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 8. The changes made by this amendment to the Current Employment Agreement should be given effect from and after May 31, 2004, NUNC PRO TUNC, as if these terms were included in the 2004 Amendment. IN WITNESS WHEREOF, the parties hereto have or have caused their respective duly authorized representatives to execute this Agreement as of the date first written above. COMPANY: HOLLYWOOD MEDIA CORP., a Florida corporation By: /s/ Scott Gomez --------------------------------- Name: Scott Gomez Title: Vice President of Finance and Accounting EXECUTIVE: /s/ Laurie S. Silvers ------------------------------------ Laurie S. Silvers EX-31.1 15 certification311.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, Mitchell Rubenstein, as Chief Executive Officer of Hollywood Media Corp., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hollywood Media Corp. (the registrant); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 By: /s/ Mitchell Rubenstein -------------------------------------------- Mitchell Rubenstein, Chief Executive Officer EX-31.2 16 certification312.txt CERTIFICATION Exhibit 31.2 CERTIFICATION I, Scott Gomez, as Vice President of Finance and Accounting of Hollywood Media Corp., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hollywood Media Corp. (the registrant); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 By:/s/ Scott Gomez -------------------------------------- Scott Gomez, Vice President of Finance and Accounting EX-32.1 17 certification321.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Mitchell Rubenstein, as Chief Executive Officer of Hollywood Media Corp. (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-Q report for the quarter ended September 30, 2004 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 15, 2004 By: /s/ Mitchell Rubenstein -------------------------------------------- Mitchell Rubenstein, Chief Executive Officer EX-32.2 18 certification322.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Scott Gomez, as Vice President of Finance and Accounting (principal financial and accounting officer) of Hollywood Media Corp. (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-Q report for the quarter ended September 30, 2004 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 15, 2004 By: /s/ Scott Gomez -------------------------------------- Scott Gomez, Vice President of Finance and Accounting -----END PRIVACY-ENHANCED MESSAGE-----