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, 2012
¨
|
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the transition period from _________________
to _________________
Commission File No.
1-14332
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 mark 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
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
x
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
¨
|
Accelerated filer
¨
|
Non-accelerated filer
¨
|
Smaller reporting company
x
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
x
As of
November 13, 2012, there were 23,179,066
shares of the registrant’s common stock,
$.01 par value, outstanding.
HOLLYWOOD MEDIA CORP.
Table of Contents
|
|
Page(s)
|
|
|
|
PART I
|
FINANCIAL INFORMATION
|
|
|
|
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011
|
3
|
|
|
|
|
Condensed Consolidated Statements of Operations (unaudited) for the Nine and Three Months ended September 30, 2012 and
2011
|
4
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 2012 and 2011
|
5
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements (unaudited)
|
6-23
|
|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
23-40
|
|
|
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
41
|
|
|
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
41-42
|
|
|
|
PART II
|
OTHER INFORMATION
|
|
|
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
43
|
|
|
|
ITEM 1A.
|
RISK FACTORS
|
43
|
|
|
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
43
|
|
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
43
|
|
|
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
43
|
|
|
|
ITEM 5.
|
OTHER INFORMATION
|
44
|
|
|
|
ITEM 6.
|
EXHIBITS
|
44
|
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,959,801
|
|
|
$
|
3,683,063
|
|
Prepaid expenses
|
|
|
278,632
|
|
|
|
316,430
|
|
Other receivables
|
|
|
32,810
|
|
|
|
-
|
|
Related party receivable
|
|
|
35,735
|
|
|
|
521,497
|
|
Current portion of deferred compensation
|
|
|
430,000
|
|
|
|
430,000
|
|
Current assets of discontinued operations
|
|
|
-
|
|
|
|
566,691
|
|
Total current assets
|
|
|
6,736,978
|
|
|
|
5,517,681
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
214,211
|
|
|
|
283,574
|
|
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED INVESTEES
|
|
|
138,537
|
|
|
|
1,573,325
|
|
INTANGIBLE ASSETS, net
|
|
|
10,791
|
|
|
|
17,116
|
|
GOODWILL
|
|
|
6,200,000
|
|
|
|
9,800,000
|
|
OTHER ASSETS
|
|
|
803,993
|
|
|
|
58,628
|
|
DEFERRED COMPENSATION, less current portion
|
|
|
626,151
|
|
|
|
948,651
|
|
LONG TERM ASSETS OF DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
|
23,814
|
|
TOTAL ASSETS
|
|
$
|
14,730,661
|
|
|
$
|
18,222,789
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
394,531
|
|
|
$
|
387,070
|
|
Accrued expenses and other
|
|
|
919,733
|
|
|
|
646,821
|
|
Deferred revenue
|
|
|
120,194
|
|
|
|
264,228
|
|
Current portion of capital lease obligations
|
|
|
17,345
|
|
|
|
21,829
|
|
Current liabilities of discontinued
operations
|
|
|
-
|
|
|
|
1,130,268
|
|
Total current liabilities
|
|
|
1,451,803
|
|
|
|
2,450,216
|
|
|
|
|
|
|
|
|
|
|
CAPITAL LEASE OBLIGATIONS, less current portion
|
|
|
6,341
|
|
|
|
16,203
|
|
OTHER DEFERRED LIABILITY
|
|
|
26,145
|
|
|
|
42,514
|
|
DEFERRED REVENUE
|
|
|
35,975
|
|
|
|
46,200
|
|
DERIVATIVE LIABILITIES
|
|
|
60,000
|
|
|
|
1,090,000
|
|
LONG TERM LIABILITIES OF DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
|
2,158
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value, 100,000,000 shares authorized;
23,179,066 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
|
|
|
231,791
|
|
|
|
231,791
|
|
Additional paid-in capital
|
|
|
293,616,319
|
|
|
|
293,616,319
|
|
Accumulated deficit
|
|
|
(280,697,713
|
)
|
|
|
(279,272,612
|
)
|
Total shareholders’ equity
|
|
|
13,150,397
|
|
|
|
14,575,498
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
$
|
14,730,661
|
|
|
$
|
18,222,789
|
|
The accompanying notes to condensed consolidated
financial statements
are an integral part of these condensed
consolidated balance sheets.
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(unaudited)
|
|
Nine Months Ended September 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REVENUES
|
|
$
|
429,082
|
|
|
$
|
841,546
|
|
|
$
|
96,035
|
|
|
$
|
152,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Editorial, production, development
and technology
|
|
|
391,503
|
|
|
|
562,042
|
|
|
|
108,727
|
|
|
|
105,140
|
|
Selling, general and administrative
|
|
|
1,839,990
|
|
|
|
2,270,799
|
|
|
|
639,012
|
|
|
|
543,350
|
|
Payroll and benefits
|
|
|
1,619,487
|
|
|
|
2,843,556
|
|
|
|
368,904
|
|
|
|
1,232,765
|
|
Depreciation and amortization
|
|
|
113,032
|
|
|
|
162,653
|
|
|
|
37,868
|
|
|
|
50,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,964,012
|
|
|
|
5,839,050
|
|
|
|
1,154,511
|
|
|
|
1,931,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,534,930
|
)
|
|
|
(4,997,504
|
)
|
|
|
(1,058,476
|
)
|
|
|
(1,778,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSSES) EARNINGS OF UNCONSOLIDATED INVESTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of unconsolidated investees
|
|
|
(141,851
|
)
|
|
|
409,591
|
|
|
|
(159,665
|
)
|
|
|
230,008
|
|
Impairment loss
|
|
|
(3,600,000
|
)
|
|
|
(4,795,783
|
)
|
|
|
(3,600,000
|
)
|
|
|
(4,795,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in losses of unconsolidated investees
|
|
|
(3,741,851
|
)
|
|
|
(4,386,192
|
)
|
|
|
(3,759,665
|
)
|
|
|
(4,565,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
777,411
|
|
|
|
789,660
|
|
|
|
264,400
|
|
|
|
260,381
|
|
Other, net
|
|
|
1,108,312
|
|
|
|
1,630,952
|
|
|
|
1,109,986
|
|
|
|
501,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(5,391,058
|
)
|
|
|
(6,963,084
|
)
|
|
|
(3,443,755
|
)
|
|
|
(5,582,394
|
)
|
Income tax benefit
|
|
|
1,498,482
|
|
|
|
-
|
|
|
|
1,127,612
|
|
|
|
-
|
|
Loss from continuing operations
|
|
|
(3,892,576
|
)
|
|
|
(6,963,084
|
)
|
|
|
(2,316,143
|
)
|
|
|
(5,582,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations, net of income taxes
|
|
|
2,444,891
|
|
|
|
254,842
|
|
|
|
1,839,788
|
|
|
|
155,539
|
|
Income (loss) from discontinued operations
|
|
|
22,584
|
|
|
|
(162,871
|
)
|
|
|
-
|
|
|
|
2,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
2,467,475
|
|
|
|
91,971
|
|
|
|
1,839,788
|
|
|
|
158,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,425,101
|
)
|
|
|
(6,871,113
|
)
|
|
|
(476,355
|
)
|
|
|
(5,424,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
|
|
-
|
|
|
|
(30,027
|
)
|
|
|
-
|
|
|
|
5,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
Hollywood Media Corp.
|
|
$
|
(1,425,101
|
)
|
|
$
|
(6,901,140
|
)
|
|
$
|
(476,355
|
)
|
|
$
|
(5,419,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.24
|
)
|
Discontinued operations
|
|
|
0.11
|
|
|
|
-
|
|
|
|
0.08
|
|
|
|
0.01
|
|
Total basic and diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding
– basic
|
|
|
23,179,066
|
|
|
|
24,790,790
|
|
|
|
23,179,066
|
|
|
|
23,179,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding
– diluted
|
|
|
23,179,066
|
|
|
|
24,790,790
|
|
|
|
23,179,066
|
|
|
|
23,179,066
|
|
The accompanying notes to condensed consolidated
financial statements are an integral part of
these condensed consolidated statements
of operations.
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,425,101
|
)
|
|
$
|
(6,871,113
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
(1,907,475
|
)
|
|
|
(91,971
|
)
|
Income tax benefit
|
|
|
(1,498,482
|
)
|
|
|
-
|
|
Depreciation and amortization
|
|
|
113,032
|
|
|
|
162,653
|
|
Amortization of deferred compensation costs – officers
|
|
|
322,500
|
|
|
|
233,850
|
|
Equity in losses of unconsolidated investees, net of distributions or dividends
|
|
|
324,496
|
|
|
|
641,697
|
|
Loss on disposal of fixed assets
|
|
|
1,387
|
|
|
|
-
|
|
Gain on sale of business
|
|
|
(689,762
|
)
|
|
|
-
|
|
Goodwill impairment
|
|
|
3,600,000
|
|
|
|
4,795,783
|
|
Change in fair value of derivative liabilities
|
|
|
(1,030,000
|
)
|
|
|
(635,112
|
)
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
37,798
|
|
|
|
202,824
|
|
Other receivables
|
|
|
78,701
|
|
|
|
4,695
|
|
Related party receivable
|
|
|
36,500
|
|
|
|
(24,195
|
)
|
Other assets
|
|
|
(41,401
|
)
|
|
|
(40,603
|
)
|
Derivative liability
|
|
|
-
|
|
|
|
(104,888
|
)
|
Accounts payable
|
|
|
7,461
|
|
|
|
(137,882
|
)
|
Accrued expenses and other
|
|
|
272,912
|
|
|
|
26,085
|
|
Deferred revenue
|
|
|
(154,259
|
)
|
|
|
(90,015
|
)
|
Other deferred liability
|
|
|
(16,369
|
)
|
|
|
(25,992
|
)
|
Net cash used in operating activities – continuing operations
|
|
|
(1,968,062
|
)
|
|
|
(1,954,184
|
)
|
Net cash used in operating activities – discontinued
operations
|
|
|
(38,134
|
)
|
|
|
(28,468
|
)
|
Net cash used in operating activities
|
|
|
(2,006,196
|
)
|
|
|
(1,982,652
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(36,222
|
)
|
|
|
(86,367
|
)
|
Acquisition of intangible assets
|
|
|
-
|
|
|
|
(25,300
|
)
|
Net proceeds (expenditures) from sale of assets and
businesses
|
|
|
1,230,500
|
|
|
|
(5,309,122
|
)
|
Net cash provided by (used in) investing activities – continuing operations
|
|
|
1,194,278
|
|
|
|
(5,420,789
|
)
|
Net cash provided by (used in) investing activities
– discontinued operations
|
|
|
3,105,511
|
|
|
|
(8,306
|
)
|
Net cash provided by (used in) investing activities
|
|
|
4,299,789
|
|
|
|
(5,429,095
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments under capital lease obligations
|
|
|
(16,855
|
)
|
|
|
(53,005
|
)
|
Purchase of tendered common stock
|
|
|
-
|
|
|
|
(16,400,000
|
)
|
Net cash used in financing activities – continuing operations
|
|
|
(16,855
|
)
|
|
|
(16,453,005
|
)
|
Net cash used in financing activities – discontinued
operations
|
|
|
-
|
|
|
|
(2,362
|
)
|
Net cash used in financing activities
|
|
|
(16,855
|
)
|
|
|
(16,455,367
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
2,276,738
|
|
|
|
(23,867,114
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
3,683,063
|
|
|
|
29,406,063
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
|
5,959,801
|
|
|
|
5,538,949
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
5,120
|
|
|
$
|
17,546
|
|
Income taxes paid
|
|
$
|
38,508
|
|
|
$
|
130,296
|
|
The accompanying notes to condensed consolidated financial statements
|
are an integral part of these condensed consolidated statements of cash flows.
|
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
(1)
|
BASIS
OF PRESENTATION AND CONSOLIDATION:
|
In the opinion of
management, the accompanying unaudited condensed consolidated financial statements have been prepared by Hollywood Media Corp.
(“Hollywood Media”, “our” or “Company”) 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 of America (“U.S. GAAP”) have been condensed
or omitted pursuant to applicable rules and regulations. However, management believes that the disclosures contained herein are
adequate to make the information presented not misleading. The accompanying financial statements reflect, in the opinion of management,
all material adjustments (which include only normal recurring adjustments) necessary to present fairly Hollywood Media’s
condensed consolidated financial position, results of operations and cash flows. The results of operations for the nine and three
months ended September 30, 2012 and the cash flows for the nine months ended September 30, 2012 are not necessarily indicative
of the results of operations or cash flows for the remainder of 2012. 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, 2011, as amended, as filed with the Securities and Exchange
Commission.
|
(2)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
|
Principles of Consolidation
Hollywood Media’s
consolidated financial statements include the accounts of Hollywood Media and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Hollywood Media’s 50%, 26.2% and 20.65% ownership interests
in NetCo Partners, MovieTickets.com and Project Hollywood LLC, respectively, are accounted for under the equity method of accounting.
On August 28, 2012 Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project
Hollywood in exchange for total consideration of $1,800,000. See Note 9, “Related Party Transactions” to these unaudited
Condensed Consolidated Financial Statements for more information on the assignment of the membership interest of Hollywood Media
in Project Hollywood, LLC.
Loss per Common Share
Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 260,
“Earnings Per
Share”
(ASC 260), requires companies to present basic and diluted earnings per share (“EPS”). Loss per common
share is computed by dividing net loss attributable to Hollywood Media Corp. (the numerator) by the weighted average number of
common shares outstanding (the denominator) for the period presented.
The weighted average
number of common shares issuable upon conversion of convertible securities and upon exercise of outstanding options and warrants
totaled 75,000 shares for each of the nine and three months ended September 30, 2012 and such shares were excluded from the calculation
of basic and diluted loss per share for the nine and three months ended September 30, 2012, because their impact was anti-dilutive
to the loss per share from continuing operations. Unvested shares are not included in the basic calculation until vesting occurs
and are not included in the diluted calculation because they are anti-dilutive. There were no unvested shares as of September
30, 2012 and 2011, respectively.
|
|
For the Nine Months
|
|
|
For the Three Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
23,179,066
|
|
|
|
24,790,790
|
|
|
|
23,179,066
|
|
|
|
23,179,066
|
|
Effect of dilutive unvested restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive weighted average shares outstanding
|
|
|
23,179,066
|
|
|
|
24,790,790
|
|
|
|
23,179,066
|
|
|
|
23,179,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of Common Stock and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other stock-based awards outstanding which are not
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in the calculation of diluted income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share because their impact is anti-dilutive
|
|
|
75,000
|
|
|
|
80,435
|
|
|
|
75,000
|
|
|
|
80,435
|
|
Segment Information
ASC Topic No. 280,
“Segment Reporting”
, establishes standards for reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services,
geographic areas and major customers. ASC Topic No. 280 has been applied to the information appearing in Note 6.
Derivative Instruments
The Company records
derivative instruments at fair value in our accompanying condensed consolidated balance sheets with changes in the fair values
of those instruments reported in earnings in our condensed consolidated results of operations. The Company does not hold any derivative
instruments that reduce risk associated with hedging exposure, accordingly the Company has not designated any of its derivatives
liability financial instruments as hedge instruments.
Recent Accounting
Pronouncements
In May 2011, the FASB
issued Accounting Standards Update (“ASU”) No. 2011-4,
Fair Value Measurement (Topic 820): Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
. This ASU represents the converged guidance
of the FASB and the IASB ("the Boards") on fair value measurement. The collective efforts of the Boards and their staffs
have resulted in common requirements, including a consistent meaning of the term "fair value." The Boards have concluded
the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements
prepared in accordance with U.S. GAAP and IFRS. The ASU is effective during interim and annual periods beginning after December
15, 2011 and its adoption did not have a material effect on the Company’s condensed consolidated financial statements.
|
(3)
|
DISCONTINUED
OPERATIONS:
|
Sale of Broadway
Ticketing Division to Key Brand Entertainment, Inc.
On December 15, 2010,
Hollywood Media completed the sale of its Broadway Ticketing Division (“the Broadway Sale”) through the sale of all
of the outstanding capital stock of Theatre Direct NY, Inc. (“Theatre Direct”) to Key Brand Entertainment Inc. (“Key
Brand”), as contemplated by the Stock Purchase Agreement, dated as of December 22, 2009, as amended, entered into between
Hollywood Media and Key Brand (“the Purchase Agreement”). There are no material relationships among Hollywood Media
and Key Brand or any of their respective affiliates other than in respect of the Purchase Agreement and the related ancillary
agreements.
Pursuant to the Purchase
Agreement, at the closing of the Broadway Sale, (a) Hollywood Media received (i) $20,530,102 in cash (including $530,102 pursuant
to the estimated working capital adjustment described in the Purchase Agreement), (ii) a $8,500,000 note (“the Loan”)
from Key Brand pursuant to a Second Lien, Security and Pledge Agreement, dated as of December 15, 2010 (the “Credit Agreement”),
pursuant to which Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum, with the loan maturing on
December 15, 2015, which Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries,
and (iii) a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct as of the closing date on a fully
diluted basis at an exercise price of $.01 per share (the “Warrant”), and (b) Key Brand assumed $1,600,000 of liabilities
associated with employment agreements with certain employees of Theatre Direct. In addition, Hollywood Media was entitled to receive
earnout payments (“the Earnout”) of up to $14,000,000, in two $7,000,000 tranches, contingent upon Theatre Direct
and its subsidiaries achieving certain revenue targets during the period from the closing date through the end of the 10
th
full fiscal year following the closing date as set forth in the Purchase Agreement.
In connection with
the Credit Agreement, Hollywood Media, Key Brand and JPMorgan Chase Bank, N.A., as administrative agent for the senior secured
lenders of Key Brand, entered into a Subordination and Intercreditor Agreement, dated December 15, 2010 (the “Intercreditor
Agreement”) which defines the rights and obligations of the senior secured lenders and Hollywood Media as subordinated lender,
including, without limitation, the rights of payment and the subordination of the security interests of Hollywood Media.
Amendment to the Broadway Sale Purchase
Agreement
On April 22, 2012,
the Company entered into Amendment No. 4 (the “Amendment”) to the Purchase Agreement. Pursuant to the Amendment, the
Company consented to the contribution of the “group sales” business (but not the Broadway.com consumer ticketing business)
owned by Key Brand to a newly formed joint venture (the “Group Sales JV”; such contribution, the “Group Sales
Contribution”). The balance of the business sold to Key Brand under the terms of the Purchase Agreement, which included
Broadway.com, remained at Key Brand and Theatre Direct. As part of the Amendment, Key Brand agreed to pay the first $7 million
earnout amount (the “First $7 Million Earnout”) to the Company on or before October 1, 2012 regardless of the actual
revenues of Theatre Direct and its subsidiaries for the fiscal year of Key Brand ending June 30, 2012. The First $7 Million Earnout
amount was paid by Key Brand to the Company on October 1, 2012 and was recorded upon collection of the $7 million received on
October 1, 2012. In addition, the revenue calculation for the second $7 million earnout amount (the “Second $7 Million Earnout”)
was modified to exclude “group sales” (and the revenues of the new joint venture conducting such business) and the
target for the Second $7 Million Earnout was reduced from $150 million to $123 million accordingly. On October 5, 2012, Hollywood
Media received written notice from Key Brand that Theatre Direct achieved the revenue target for the Second $7 Million Earnout
in Key Brand’s fiscal year ended June 30, 2012. Accordingly, pursuant to the Amendment, the Second $7 Million Earnout was
added as of October 1, 2012 to the principal amount of the Loan under the Credit Agreement. Pursuant to the Credit Agreement,
interest at a rate of 12% per annum and principal on such Second $7 Million Earnout amount will be amortized over the term of
the Credit Agreement in equal quarterly installments. As a result of the Second $7 Million Earnout being added to the $8.5 million
principal amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012.
The Company also consented
to certain amendments to the Credit Agreement, including consent to the Group Sales Contribution and to provide for additional
reporting requirements. The Company also agreed to amend the Intercreditor Agreement to provide that, subject to Key Brand’s
compliance with the terms and conditions of its senior secured credit agreement, Key Brand would be permitted to make scheduled
quarterly installment payments of the Second Earnout amounts prior to the maturity of the Credit Agreement, notwithstanding that
the obligations under the Credit Agreement are subordinated to $15 million of Key Brand’s obligations under the senior secured
credit agreement.
Hollywood Media will
record a gain on the earnout upon collection of consideration. The Warrant will be marked to market each reporting period to reflect
changes in fair value. Hollywood Media received payments of $776,333 and $260,667 of interest from Key Brand during the nine and
three months ended September 30, 2012, respectively, and $773,500 and $260,667 in payments of interest from Key Brand during the
nine and three months ended September 30, 2011, respectively, in accordance with the terms of the Loan which was included in “Interest,
net” in the accompanying condensed consolidated statements of operations for the nine and three months ended September 30,
2012 and 2011, respectively.
After the closing
date of the sale of Theatre Direct pursuant to the Purchase Agreement, Hollywood Media delivered on March 14, 2011 to Key Brand
a closing statement setting forth Hollywood Media’s calculation of Theatre Direct’s working capital as of the closing
date determined in the manner described in the Purchase Agreement. Pursuant to the closing statement, Hollywood Media accrued
$3,702,620 as a working capital adjustment as of December 31, 2010 under the agreement which included $530,102 related to the
estimated working capital delivered at closing by Key Brand. The working capital adjustment of $3,734,106 was paid on March 22,
2011 and included $31,486 of interest which is included in “Gain (loss) on sale of discontinued operations, net of income
taxes” in the accompanying condensed consolidated statements of operations for the nine and three months ending September
30, 2011.
Hollywood.com Business
On August 21, 2008,
Hollywood Media entered into a purchase agreement (the “R&S Purchase Agreement”) with R&S Investments, LLC
(“R&S Investments”) for the sale of Hollywood Media’s subsidiaries Hollywood.com, Inc. and Totally Hollywood
TV, LLC (collectively, the “Hollywood.com Business”). R&S Investments is wholly-owned by Mitchell Rubenstein,
Hollywood Media’s Chief Executive Officer and Chairperson of the Board, and Laurie S. Silvers, Hollywood Media’s President,
Secretary and Vice-Chairperson of the Board. Pursuant to the R&S Purchase Agreement, Hollywood Media sold the Hollywood.com
Business to R&S Investments for a potential purchase price of $10,000,000 cash, which included $1,000,000 that was paid to
Hollywood Media at closing and potential earnout payments totaling $9,000,000, of which $1,892,692 had been paid as of September
30, 2012. Hollywood Media recognized $412,684 and $85,926 in earnout gain during the nine and three months ended September 30,
2012, respectively, and $460,037 and $155,538 in earnout gain during the nine and three months ended September 30, 2011, respectively,
which is included in “Income from discontinued operations” in our accompanying condensed consolidated statements of
operations. Hollywood Media does not have a significant continuing involvement in the Hollywood.com Business operations.
Buyout of Obligation of R&S Investments,
LLC to Pay Hollywood.com Earnout
On August 28, 2012,
(1) Hollywood Media and R&S Investments entered into an Agreement (the “R&S Agreement”) regarding the
R&S Purchase Agreement, (2) Hollywood Media, Mr. Rubenstein and Ms. Silvers entered into a letter agreement regarding the
R&S Agreement (the “Rubenstein Silvers Letter Agreement”), and (3) R&S Investments provided Hollywood Media
with a letter regarding a contingent additional payment (the “R&S Letter”). As described below, the R&S
Agreement and the Rubenstein Silvers Letter Agreement and the transactions contemplated by the R&S Agreement and the Rubenstein
Silvers Letter Agreement were approved by a Special Committee of Hollywood Media’s Board of Directors comprised solely of
independent directors (the “Special Committee”).
Pursuant to the R&S
Agreement, in exchange for R&S Investments paying Hollywood Media $2,950,000 in cash (the “Buyout Amount”), which
payment has been made to Hollywood Media, R&S Investments fully satisfied all of its obligation to pay the purchase price
under Section 3.1 of the R&S Purchase Agreement and any additional consideration or earnout payment under Section 3.3 of the
R&S Purchase Agreement, and R&S Investments shall have no further obligations and/or liabilities (and Hollywood Media
shall have no further rights and/or remedies) under Article III of the R&S Purchase Agreement or otherwise.
Pursuant to the Rubenstein
Silvers Letter Agreement, Mr. Rubenstein agreed that, in connection with the transaction consummated under the R&S Agreement
and in addition to the Buyout Amount, the next $280,000 of the MovieTickets.com 5% Interest (as defined in the Amended and Restated
Employment Agreement dated as of December 22, 2008, between Hollywood Media and Mr. Rubenstein, as amended (the “Rubenstein
Employment Agreement”)) that would be distributed by Hollywood Media to Mr. Rubenstein pursuant to the Rubenstein Employment
Agreement will be retained by Hollywood Media (and not paid to Mr. Rubenstein) and is a reduction to “Derivative Liabilities”
in the accompanying condensed consolidated balance sheets.
In addition, pursuant
to the Rubenstein Silvers Letter Agreement, Ms. Silvers agreed that, in connection with the transaction consummated under the
R&S Agreement and in addition to the Buyout Amount, the next $280,000 of the MovieTickets.com 5% Interest (as defined in the
Amended and Restated Employment Agreement dated as of December 22, 2008, between Hollywood Media and Ms. Silvers, as amended (the
“Silvers Employment Agreement”)) that would be distributed by Hollywood Media to Ms. Silvers pursuant to the Silvers
Employment Agreement will be retained by Hollywood Media (and not paid to Ms. Silvers) and is a reduction to “Derivative
Liabilities” in the accompanying condensed consolidated balance sheets.
Pursuant to the R&S
Letter, R&S Investments agreed that in the event of a sale of all the assets of Hollywood.com, LLC to one person or a group
of persons not controlled, directly or indirectly, by Mr. Rubenstein and Ms. Silvers or their heirs, personal representatives
or affiliates prior to August 31, 2015, R&S Investments shall pay to Hollywood Media $3,500,000 or, if less, the amount received
by R&S Investments in connection with such transaction.
The Special Committee
unanimously approved the R&S Agreement and the Rubenstein Silvers Letter Agreement and determined that the transactions contemplated
by the R&S Agreement and the Rubenstein Silvers Letter Agreement were advisable, fair to and in the best interests of Hollywood
Media and its shareholders. In connection with approving the transactions contemplated by the R&S Agreement and the Rubenstein
Silvers Letter Agreement, the Special Committee received a fairness opinion from a firm with experience in valuation work, which
stated that as of August 28, 2012, based upon and subject to (and in reliance on) the assumptions made, matters considered and
limits of such review, in each case as set forth in its opinion, the Buyout Amount which was paid by R&S Investments was fair
from a financial point of view to Hollywood Media.
Sale of Cinemasource UK Limited - Share
Purchase Agreement
On May 1, 2012, the
Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Orchard Advertising Limited
(“Buyer”), pursuant to which the Company sold, and Buyer purchased, the entire issued share capital of Cinemasource
UK Limited (the “Purchased Shares”) which business was part of the Company’s Ad Sales division and included
UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and
WWW.CO.UK
Limited.
Jeffrey Spector, a
director of Buyer, is also (i) a director of all four subsidiaries of Cinemasource UK Limited (UK Theatres Online Limited, Spring
Leisure Limited, Cinemasonline Limited and WWW.CO.UK Limited) and (ii) an employee of one of the subsidiaries of Cinemasource
UK Limited (UK Theatres Online). Janette Erskine, a director of Buyer, is also (i) a director of three subsidiaries of Cinemasource
UK Limited (UK Theatres Online Limited, Spring Leisure Limited and Cinemasonline Limited) and (ii) an employee of one of the subsidiaries
of Cinemasource UK Limited (UK Theatres Online).
Pursuant to the Share
Purchase Agreement, the purchase price for the Purchased Shares is U.S. $250,000, payable in cash in a non-interest bearing loan
in twenty equal quarter-annual installments of $12,500 each over a period of five years. Subject to the terms and conditions of
the Share Purchase Agreement, the first installment of the purchase price was due and was paid to the Company on July 31, 2012
and subsequent installments of the purchase price are due every three calendar months thereafter. The Company imputed interest
at 16.5% per annum on this non-interest bearing loan resulting in a discounted amount of $168,014 which was included in the total
gain on sale attributable to the sale of Cinemasource UK Limited of $649,215. This gain on sale is included in “Income (loss)
from discontinued operations” in our accompanying Condensed Consolidated Statements of Operations.
The current
portion of the discounted amount of the non-interest bearing loan is included in “Other receivables” and the long-term
portion of the non-interest bearing loan is included in “Other assets” in our accompanying condensed consolidated
balance sheets.
The purchase price
for the Purchased Shares is collateralized by a lien on the Purchased Shares (and certain dividends, payments or other derivative
assets received in respect of the Purchased Shares) pursuant to the terms of the share charge deed, dated as of May 1, 2012, between
the Company and Buyer (the “Share Charge Deed”). Except as permitted by the Share Purchase Agreement, the Share Charge
Deed also restricts Buyer from (i) permitting any other lien to exist against the Purchased Shares (and certain dividends, payments
or other derivative assets received in respect of the Purchased Shares), (ii) selling or transferring the Purchased Shares (and
certain dividends, payments or other derivative assets received in respect of the Purchased Shares), and (iii) disposing of the
equity or redemption in respect of the Purchased Shares (and certain dividends, payments or other derivative assets received in
respect of the Purchased Shares). In the event of (i) a transaction whereby any persons or group of persons acting in concert
purchase at least 80% of the Purchased Shares or at least 80% of the issued share capital of each of the subsidiaries of Cinemasource
UK Limited or Buyer, or (ii) a transaction whereby any person or group of persons acting in concert purchase the whole or substantially
the whole of the business and assets of Cinemasource UK Limited and its subsidiaries (each, an “Exit Event”), then
(A) if the proposed purchaser in such Exit Event is a “connected person” to Buyer (as defined in the Share Purchase
Agreement) or if the aggregate consideration payable to Buyer, Cinemasource UK Limited and its subsidiaries, and/or the shareholders
of Buyer in respect of an Exit Event (the “Subsequent Sale Proceeds”) exceeds the balance of the purchase price remaining
to be paid by Buyer to the Company under the Share Purchase Agreement (the “Balance”), then the Balance shall become
immediately payable to the Company or (B) if the proposed purchaser is not a “connected person” to Buyer and the Subsequent
Sale Proceeds are less than the Balance, then Buyer will pay to the Company the amount of the Subsequent Sale Proceeds in lieu
of the Balance, unless the Company demands that the Purchased Shares are transferred back to the Company (and Buyer transfers
the Purchased Shares back to the Company) in satisfaction of the Balance.
Pursuant to ASC Topic
No. 360,
“Accounting for the Impairment or Disposal of Long-Lived Assets”
ASC 360, the Company’s condensed
consolidated financial statements have been reclassified for all periods presented to reflect the operations, assets and liabilities
of Cinemasource UK Limited as discontinued operations. The sale of Cinemasource UK Limited qualifies for discontinued operations
treatment under ASC 360. The assets and liabilities of such operations have been reclassified as current or long term “Assets
of discontinued operations” and current and long term “Liabilities of discontinued operations” in the accompanying
December 31, 2011 consolidated balance sheet, and consist of the following:
|
|
December 31, 2011
|
|
|
|
|
|
Current assets
|
|
$
|
566,691
|
|
Property and equipment, net
|
|
|
23,814
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
590,505
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
1,130,268
|
|
Long-term liabilities
|
|
|
2,158
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
1,132,426
|
|
Results from Discontinued Operations
The net income from
discontinued operations has been classified in the accompanying condensed consolidated statements of operations as “Income
(loss) from discontinued operations” and includes the gain on sale of the Hollywood.com Business and the gain on sale of
Cinemasource UK Limited Business. Summarized results of discontinued operations include the operating gain from the Hollywood.com
Business and the operating gain from the Cinemasource UK Limited Business and through their respective dates of disposition, for
the nine and three months ended September 30, 2012 and 2011.
|
|
Nine Months Ended September 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues:
|
|
$
|
701,857
|
|
|
$
|
2,105,767
|
|
|
$
|
-
|
|
|
$
|
708,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
|
3,943,373
|
|
|
|
254,842
|
|
|
|
2,967,402
|
|
|
|
155,539
|
|
Income tax expense
|
|
|
(1,498,482
|
)
|
|
|
-
|
|
|
|
(1,127,614
|
)
|
|
|
-
|
|
Gain on sale of discontinued operations, net of income
taxes
|
|
|
2,444,891
|
|
|
|
254,842
|
|
|
|
1,839,788
|
|
|
|
155,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
22,584
|
|
|
|
(162,871
|
)
|
|
|
-
|
|
|
|
2,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued Operations
|
|
$
|
2,467,475
|
|
|
$
|
91,971
|
|
|
$
|
1,839,788
|
|
|
$
|
158,058
|
|
|
(4)
|
PURCHASE
OF COMMON STOCK TENDERED:
|
On February 25, 2011,
Hollywood Media announced the final results of a tender offer to purchase up to 8,000,000 shares of its common stock at a price
of $2.05 per share (less any applicable withholding taxes and without interest) which tender offer expired on February 18, 2011.
Hollywood Media accepted 8,000,000 shares for purchase for a total cost of approximately $16,400,000. The number of shares properly
tendered was 24,157,429. Accordingly, payment was made for approximately 33% of the tendered shares, and the rest of the tendered
shares were withdrawn from the tender offer. Immediately following the purchase of the tendered shares, Hollywood Media had 23,179,066
shares of common stock outstanding. During the nine and three months ended September 30, 2012, respectively, Hollywood Media did
not repurchase shares of its common stock.
|
(5)
|
FAIR
VALUE MEASUREMENTS:
|
The carrying amounts
of cash and cash equivalents, receivables and accounts payable, approximate their fair values due to the short-term maturities
of these instruments. The carrying value of notes payable and the non-interest bearing loan receivable with imputed interest at
16.5%, per annum, approximate fair value because the interest rates approximate the market rates.
Financial instruments
that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents.
The Company’s cash management and investment policies restrict investments to low risk, highly-liquid securities, and the
Company performs periodic evaluations of the credit standing of the financial institutions with which it deals. The Company generally
does not require collateral when granting credit.
Fair value is the
price that would be received to sell an asset or paid to transfer a liability in the Company’s principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the
exit price. In accordance with ASC Topic 820,
Fair Value Measurements and Disclosures
(“ASC 820”),
the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed
based on market data obtained from sources independent of the Company and the Company’s own assumptions about market participant
assumptions developed based on the best information available in the circumstances.
The levels of fair
value hierarchy are:
Level 1: Quoted
prices in active markets for identical assets and liabilities at the measurement date.
Level 2: Observable
inputs other than quoted prices included in Level 1, such as (i) quoted prices for similar assets and liabilities in active
markets, (ii) quoted prices for identical or similar assets and liabilities in markets that are not active, and (iii) other inputs
that are observable or can be corroborated by observable market data.
Level 3: Unobservable
inputs for which there is little or no market data available.
Within this level
of the hierarchy, fair value is based upon the lowest level of any input that is significant to the fair value measurement. However,
the determination of what constitutes “observable” requires significant judgment by the Company. The Company
considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable,
not proprietary, and provided by independent sources that are actively involved in the relevant market. In contrast,
the Company considers unobservable data to be data that reflects the Company’s assumptions of what market participants would
use in pricing the asset or liability developed based on the best information available in the circumstances.
Compensation Liabilities
On December 29, 2009,
the Company and Mitchell Rubenstein and Laurie S. Silvers entered into amended and restated employment agreements which include
a compensation arrangement that includes the right for
each to receive 5% of all of the distributions
that the Company receives from its interest in MovieTickets.com which includes 5% to each of all proceeds received by the Company
from either dividends or from the sale of all or any portion of MovieTickets.com. In connection with the buyout of the obligation
of R&S Investments, LLC to pay to Hollywood Media the Hollywood.com earnout under the R&S Purchase Agreement, the Rubenstein
Silvers Letter Agreement reduced the amount of distributions payable to Mr. Rubenstein and Ms. Silvers. See Note 3, “Discontinued
Operations” to these unaudited Condensed Consolidated Financial Statements for more information regarding these transactions.
The fair value of this liability, which was initially measured on March 15, 2011, the date that the compensation arrangement was
effective, is recorded in “Derivative Liabilities”, with any changes in the fair value recorded in “Other, net”
in the accompanying
condensed
consolidated statements of operations.
See Note 3, “Discontinued Operations” to these unaudited Condensed Consolidated Financial Statements for information
on the Buyout Amount and its reduction of the derivative liability. At September 30, 2012, the fair value of the derivative liability
was $60,000.
Warrant
In conjunction with
the Broadway Sale, the Company received a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct,
which can only be exercised upon a Conversion Event, as defined, and which also contains a put option that allows the Company,
after the seventh anniversary of the issue date, to put the warrant to Key Brand for the greater of (i) fair market value of the
shares and (ii) $1.0 million. The warrant is revalued on a recurring basis. After estimating future cash flows adjusted
for risk factors it was determined that the fair value was not material at September 30, 2012.
Certain assets such
as long-lived assets and goodwill are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are
not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances such as impairment
review. In those circumstances, fair value measurements are principally based upon unobservable inputs (Level 3 of the fair value
hierarchy) using the Company’s own assumptions in determining fair value.
The following table
presents the Company’s derivative liabilities and warrant on a recurring basis and the Company’s goodwill on a non-recurring
basis within the fair value hierarchy utilized to measure fair value as of September 30, 2012:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – September 30, 2012
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant – September 30, 2012
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill – September 30, 2012
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
6,200,000
|
|
There were no transfers between the levels
of the fair value hierarchy during the quarter ended September 30, 2012.
The following table presents a reconciliation
of the compensation derivative liabilities measured at fair value on a recurring basis using significant unobservable input (Level
3) from December 31, 2011 to September 30, 2012:
|
|
Compensation
|
|
|
|
derivative
|
|
|
|
liabilities
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
1,090,000
|
|
Change in fair value included in earnings
|
|
|
(470,000
|
)
|
Change in Fair Value Resulting from R&S
|
|
|
|
|
Agreement Waivers included in Income from
|
|
|
|
|
Discontinued Operations
|
|
|
(560,000
|
)
|
Balance at September 30, 2012
|
|
$
|
60,000
|
|
Hollywood Media’s
reportable segments are Ad Sales, Intellectual Properties, and Other.
The Ad Sales segment
consists of Hollywood Media’s investment in MovieTickets.com. Prior to the sale of Cinemasource UK Limited on May 1, 2012
(which business included UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW.CO.UK Limited), the
Ad Sales segment also sold advertising on plasma TV displays throughout the U.K. and Ireland, on lobby display posters, movie
brochure booklets and ticket wallets distributed in cinemas, live theater and other entertainment venues in the U.K. and Ireland.
See Note 3, “Discontinued Operations” to these unaudited Condensed Consolidated Financial Statements for information
on the sale of Cinemasource UK Limited.
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 Tekno Books, a book development business.
The Other segment
is comprised of payroll and benefits for corporate and administrative personnel as well as other corporate-wide expenses such
as legal fees, audit fees, proxy costs, insurance, centralized information technology, and includes consulting fees and other
fees and costs relating to compliance with the provisions of the Sarbanes-Oxley Act of 2002 that require Hollywood Media to make
an assessment of and report on internal control over financial reporting. This segment also includes Hollywood Media’s investment
in Project Hollywood. On August 28, 2012 Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership
interest in Project Hollywood in exchange for total consideration of $1,800,000. See Note 9, “Related Party Transactions”
to these unaudited Condensed Consolidated Financial Statements for more information on the assignment of Hollywood Media’s
membership interest in Project Hollywood, LLC.
There are no intersegment
sales or transfers.
As of September 30,
2012, the Ad Sales segment consists of the Company’s investment in MovieTickets.com. As the Company accounts for its investment
in MovieTickets.com under the equity method of accounting, there are no net revenues, operating income (loss), capital expenditures
or depreciation and amortization expense to report for the Ad Sales segment. The following table illustrates the financial information
regarding Hollywood Media’s reportable segments.
|
|
Nine Months Ended September 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Properties
|
|
$
|
429,082
|
|
|
$
|
841,546
|
|
|
$
|
96,035
|
|
|
$
|
152,424
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
429,082
|
|
|
$
|
841,546
|
|
|
$
|
96,035
|
|
|
$
|
152,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Properties
|
|
$
|
(78,896
|
)
|
|
$
|
65,091
|
|
|
$
|
(55,515
|
)
|
|
$
|
(9,934
|
)
|
Other
|
|
|
(3,456,034
|
)
|
|
|
(5,062,595
|
)
|
|
|
(1,002,961
|
)
|
|
|
(1,768,911
|
)
|
|
|
$
|
(3,534,930
|
)
|
|
$
|
(4,997,504
|
)
|
|
$
|
(1,058,476
|
)
|
|
$
|
(1,778,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Properties
|
|
$
|
-
|
|
|
$
|
6,140
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other
|
|
|
36,222
|
|
|
|
80,227
|
|
|
|
-
|
|
|
|
21,867
|
|
|
|
$
|
36,222
|
|
|
$
|
86,367
|
|
|
$
|
-
|
|
|
$
|
21,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Properties
|
|
$
|
3,336
|
|
|
$
|
1,318
|
|
|
$
|
1,112
|
|
|
$
|
991
|
|
Other
|
|
|
109,696
|
|
|
|
161,335
|
|
|
|
36,756
|
|
|
|
49,023
|
|
|
|
$
|
113,032
|
|
|
$
|
162,653
|
|
|
$
|
37,868
|
|
|
$
|
50,014
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
|
|
Segment Assets:
|
|
|
|
|
|
|
|
|
Ad Sales (1)
|
|
$
|
6,197,998
|
|
|
$
|
10,017,175
|
|
Intellectual Properties
|
|
|
957,709
|
|
|
|
1,201,695
|
|
Other (1)
|
|
|
7,574,954
|
|
|
|
7,003,919
|
|
|
|
$
|
14,730,661
|
|
|
$
|
18,222,789
|
|
|
(1)
|
December 31, 2011 segment
assets have been adjusted for the reclassification of assets
related to Cinemasource UK Limited of $590,507 from the
Ad Sales segment to the Other segment.
|
During the three months
ended September 30, 2012, due to a deterioration in the Ad Sales Division and its prospects over the next twelve months, we performed
an interim impairment test of goodwill in connection with the preparation of our financial statements for the three months ended
September 30, 2012.
For purposes of testing
goodwill for potential impairment, we estimated the fair value of the applicable reporting unit to which all goodwill is allocated
using generally accepted valuation methodologies, including market and income based approaches, and relevant data available through
and as of November 14, 2012. The market approach is a valuation method in which fair value is estimated based on observed market
prices of publicly traded guideline companies. Under the market approach, the valuation process is essentially that
of comparison and correlation between the subject company and other similar companies. The income approach is a method in which
fair value is estimated based on the cash flows that an asset could be expected to generate over its useful life, including residual
value cash flows. These cash flows are then discounted to their present value equivalents using a rate of return that accounts
for the relative risk of not realizing the estimated annual cash flows and for the time value of money. The key inputs
to the discounted cash flow model were our historical and estimated future revenues and the discount rate, among others.
During the three months
ended September 30, 2012, as a result of this testing, it was determined that the future cash flow of this (or assets comprised
by this) business unit is likely impaired, and the risk associated with previously expected cash flows has increased. Accordingly,
we concluded that goodwill was impaired and we recorded a non-cash goodwill impairment charge of $3,600,000 in the third quarter
of 2012. This charge, representing approximately 58% of the previous carrying value is included in the impairment loss
line item in “Earnings (Losses) of Unconsolidated Investees” in our condensed consolidated statement of operations
for the three and nine months ended September 30, 2012. The perceived increased uncertainty and risk associated with expected
cash flows are based in part upon the dispute discussed at Note 7, “Certain Commitments and Contingencies” in these
unaudited Condensed Consolidated Financial Statements.
|
(7)
|
CERTAIN
COMMITMENTS AND CONTINGENCIES:
|
Litigation
On October 27, 2011,
the Company, together with National Amusements Inc., filed a lawsuit against AMC Entertainment Inc. (“AMC”) (Case
No. 50 2011 CA 016684) in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida relating to MovieTickets.com.
On February 8, 2012, MovieTickets.com, Inc. joined the lawsuit against AMC and an amended complaint was filed. MovieTickets.com
is an online movie ticketing service in which Hollywood Media, National Amusements, Inc. and AMC each own a 26.2% equity interest.
The amended complaint
alleges that AMC has breached and continues to breach the MovieTickets.com Joint Venture Agreement, which obligates AMC to exclusively
provide its ticket inventory to MovieTickets.com, and has breached its contractual and common law duties of good faith, fair dealing,
and loyalty with respect to MovieTickets.com and its joint venturers, Hollywood Media and National Amusements, Inc., as a result
of various actions by AMC. The amended complaint contends that when AMC’s demands for greater control and a larger share
of MovieTickets.com were not met, AMC breached and continues to breach the MovieTickets.com Joint Venture Agreement, which obligates
AMC to exclusively provide its ticket inventory to MovieTickets.com. The amended complaint further specifies breaches by AMC of
its contractual and common law duties of good faith, fair dealing, and loyalty and violations of Florida’s Deceptive and
Unfair Trade Practices Act. Among other things, the plaintiffs allege in the amended complaint that AMC used its inside position
with MovieTickets.com and access to MovieTickets.com’s proprietary information in order to advance AMC’s own goals
in contravention of its duty of loyalty to the joint venture and to the detriment of MovieTickets.com.
Hollywood Media and
the other plaintiffs have asked for a jury trial and are seeking unspecified consequential damages and have reserved the right
to seek punitive damages. Hollywood Media and the other plaintiffs also are seeking a declaratory judgment that
AMC is obligated to make available on MovieTickets.com’s website AMC’s ticket inventory for sale on an exclusive basis
and to honor its’ contractual and common law fiduciary duties of good faith and loyalty. Discovery is proceeding.
Hollywood Media is
from time to time party to various other legal proceedings, including matters arising in the ordinary course of business.
Currently, the Company is unaware of any actual or threatened litigation against it.
Hollywood Media owns
26.2% of the equity in MovieTickets.com, Inc. as of September 30, 2012 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 ownership of
MovieTickets.com income or loss as “Equity (losses) in earnings of unconsolidated investees” in the accompanying condensed
consolidated balance sheets.
Hollywood Media recorded
its 26.2% share of net loss or $252,855 and $180,740 under “Earnings (Losses) of Unconsolidated Investees” in the
accompanying unaudited condensed consolidated statement of operations for the nine and three months ended September 30, 2012,
respectively. Hollywood Media did not record $23,903 of its share of losses from MovieTickets.com for the nine and three months
ended September 30, 2012 respectively, because accumulated dividends and net losses from 2012 and prior years exceeded the Company’s
investment in MovieTickets.com as of September 30, 2012. The Company recorded $409,232 and $230,164 in earnings of unconsolidated
investees for the nine and three months ended September 30, 2011, respectively. On July 18, 2011 MovieTickets.com declared a dividend
of $4,000,000. Hollywood Media received its 26.2% pro rata share of such dividend, amounting to $1,048,875 on July 19, 2011, which
reduced the Company’s investment in MovieTickets.com as the dividend did not exceed the amount of the Company’s investment.
Hollywood Media distributed, on July 19, 2011, $52,444 of such dividend distribution, representing 5% of Hollywood Media’s
share of the dividends, to each of Mr. Rubenstein and Ms. Silvers in accordance with their amended and restated employment agreements
dated December 23, 2009. Other than the July 18, 2011 dividend discussed above, there were no dividends declared or received during
the nine and three months ended September 30, 2012 or during the year ended December 31, 2011. For a description of the amended
and restated employment agreements with Mr. Rubenstein and Ms. Silvers, see Note 9, “Related Party Transactions” to
these unaudited condensed consolidated financial statements.
|
(9)
|
RELATED
PARTY TRANSACTIONS:
|
Project Hollywood LLC
On October 27, 2011,
following Project Hollywood LLC’s acquisition of all of the membership interests of Baseline LLC, Hollywood Media acquired
a 21.74% ownership interest in Project Hollywood LLC for $1.25 million, which was contributed to Project Hollywood LLC and which
was based on the same per membership unit price paid by Baseline Holdings for its 78.26% ownership interest in Project Hollywood
LLC. The funds contributed were used for working capital and other capital needs of the Baseline StudioSystems business.
Project Hollywood
entered into two agreements with the two former senior executives of Baseline StudioSystems to manage the business on a day-to-day
basis, as of December 1, 2011. Under those agreements, the managers will each receive 7.5% of Project Hollywood LLC’s membership
units subject to a three year vesting schedule (at a rate of 2.5% per annum) and the obtaining of certain performance-based EBITDA
hurdles each year. Under that vesting schedule, Hollywood Media’s ownership in Project Hollywood was reduced to 20.65% at
June 30, 2012.
Distributions of
$176,866 and $182,617 from Project Hollywood to Hollywood Media reduced Hollywood Media’s investment in Project Hollywood
during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively.
On August 28, 2012,
Hollywood Media entered into an Assignment and Assumption of Membership Interest and Waiver (the “Assignment”) with
Baseline Holdings LLC (“Baseline Holdings”), Project Hollywood LLC, Mitchell Rubenstein and Laurie S. Silvers. Baseline
Holdings is wholly-owned by Mr. Rubenstein, Hollywood Media’s Chief Executive Officer and Chairperson of the Board, and
Ms. Silvers, Hollywood Media’s President, Secretary and Vice-Chairperson of the Board. As described below, the Assignment
and the transactions contemplated by the Assignment were approved by a Special Committee of Hollywood Media’s Board of Directors
comprised solely of independent directors (the “Special Committee”).
Pursuant to the Assignment,
Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange
for total consideration of $1,800,000 (the “Project Hollywood Purchase Price”). The Project Hollywood Purchase Price
has been paid as follows: (1) $1,230,500 in cash (which has been paid by Baseline Holdings to Hollywood Media), (2) Mr.
Rubenstein waived his right to receive any future principal and interest owed by Key Brand to Hollywood Media pursuant to the
Loan (as of August 28, 2012, Mr. Rubenstein had the right to receive 4.76% of the principal, or $404,600, and interest
on account of the Loan), and (3) Ms. Silvers waived her right to receive any future principal and interest owed by Key Brand
to Hollywood Media pursuant to the Loan (as of August 28, 2012, Ms. Silvers has the right to receive 1.94% of the principal,
or $164,900, and interest on account of the Loan). Hollywood Media recorded the fair value of the waivers by Mr. Rubenstein and
Ms. Silvers in the long term portion of “Other Assets” in the accompanying condensed consolidated balance sheets.
Hollywood Media acquired its membership interest in Project Hollywood on October 27, 2011 for $1,250,000.
As a result of the
waivers of Mr. Rubenstein and Ms. Silvers described in the preceding paragraph, after August 28, 2012, Hollywood Media will retain
all payments of principal and interest made by Key Brand under the Loan. As of August 28, 2012 and September 30, 2012, the principal
balance due under the Loan was $8,500,000. As of October 1, 2012, the principal balance due under the Loan increased to $15,500,000
as a result of the achievement of the revenue threshold for the Second $7 Million Earnout in the Purchase Agreement.
The Special Committee
unanimously approved the Assignment and determined that the transactions contemplated by the Assignment were advisable, fair to
and in the best interests of Hollywood Media and its shareholders. In connection with approving the transactions contemplated
by the Assignment, the Special Committee received a fairness opinion from a firm with experience in valuation work, which stated
that as of August 28, 2012, based upon and subject to (and in reliance on) the assumptions made, matters considered and limits
of such review, in each case as set forth in its opinion, the Project Hollywood Purchase Price was fair from a financial point
of view to Hollywood Media.
R&S Investments
Hollywood Media recorded
$412,684 and $85,926 in earnout gain from R&S Investments, LLC during the nine and three months ending September 30, 2012,
respectively, which is included in “Income (loss) from discontinued operations” recorded in the accompanying condensed
consolidated statement of operations. As of September 30, 2012, the Company has $35,735 included in “Related party receivable”
in our accompanying condensed consolidated balance sheets which consisted of $35,371 in expense reimbursements from R&S Investments,
LLC and $364 for an expense reimbursement receivable from MovieTickets.com.
Pursuant to the R&S
Agreement dated August 28, 2012, in exchange for the Buyout Amount, which payment has been made to Hollywood Media, R&S Investments
fully satisfied all of its obligation to pay the purchase price under Section 3.1 of the R&S Purchase Agreement and any additional
consideration or earnout payment under Section 3.3 of the R&S Purchase Agreement, and R&S Investments shall have no further
obligations and/or liabilities (and Hollywood Media shall have no further rights and/or remedies) under Article III of the R&S
Purchase Agreement or otherwise. Accordingly, the earnout receivable from R&S Investments, LLC was $0 as of September 30,
2012. See Note 3, “Discontinued Operations” to these unaudited Condensed Consolidated Financial Statements for more
information on the Buyout Amount and this transaction.
Hollywood Media recorded
$460,037 and $155,538 in earnout gain from R&S Investments, LLC during the nine and three months ending September 30, 2011
respectively, which is included in “Income (loss) from discontinued operations” recorded in the accompanying condensed
consolidated statement of operations. As of December 31, 2011, the Company has $521,497 included in “Related party receivable”
in our accompanying consolidated balance sheets which consisted of $371,353 in earnout receivable, $105,561 in distributions receivable
from Project Hollywood, $36,106 in expense reimbursements from R&S Investments, $5,904 for an expense reimbursement receivable
from MovieTickets.com and $2,573 for a combined receivable from Mr. Rubenstein and Ms. Silvers.
R&S Investments, LLC Indemnification
On November 5, 2010,
Hollywood.com, LLC, a former subsidiary of the Company, was sued for copyright infringement for the alleged display of unlicensed
celebrity photographs on the hollywood.com website, which is owned by Hollywood.com, LLC. Certain of the celebrity photographs
at issue were posted during the time that Hollywood Media. owned Hollywood.com. Because Hollywood Media owned Hollywood.com during
part of the time that the alleged display of unlicensed celebrity photographs on the hollywood.com website occurred, the possibility
exists that Hollywood Media could be subject to claims relating to this matter and other similar claims. To address the potential
risks to Hollywood Media associated with any such claims, in February 2011, Hollywood Media entered into an indemnification agreement
with R&S Investments, LLC, whereby R&S Investments, LLC agreed to indemnify and hold Hollywood Media harmless from any
and all potential liabilities and claims against Hollywood Media arising from any such claims in exchange for a one-time cash
payment by Hollywood Media to R&S Investments, LLC of $350,000. The indemnification agreement was approved on behalf of Hollywood
Media by a Special Committee of Hollywood Media’s Board of Directors comprised solely of independent Directors.
Amended and Restated Employment Agreements
of Mr. Rubenstein and Ms. Silvers
On December 23, 2009,
(i) Hollywood Media and Mitchell Rubenstein entered into an amendment to his amended and restated employment agreement (“Rubenstein
Employment Agreement”) and (ii) Hollywood Media and Laurie S. Silvers entered into an amendment to her amended and restated
employment agreement (“Silvers Employment Agreement”) (hereafter, collectively referred to as “Amendments to
Employment Agreements). The Amendments to Employment Agreements provided for, among other things, the following:
|
•
|
|
For a period of ninety days after the closing of the sale of Theatre
Direct, Mr. Rubenstein’s and Ms. Silvers’ compensation continued in accordance with then existing terms.
|
|
•
|
|
After this ninety-day period, Mr. Rubenstein and Ms. Silvers base salaries
were each reduced to a nominal amount of $1 per year plus each is entitled to five percent (5%) of the sum of (i) any distributions
and other proceeds Hollywood Media receives after such ninety-day period in connection with its ownership interest in MovieTickets.com,
Inc. and (ii) certain other amounts that may be received by Hollywood Media from MovieTickets.com, Inc. ((i) and (ii) are
referred to herein as the “5% Distribution”). Upon a sale of Hollywood Media’s interest in MovieTickets.com,
Inc., Mr. Rubenstein and Ms. Silvers would each also receive 5% of the proceeds received by Hollywood Media in such sale.
Should the employment agreements be terminated by Hollywood Media without “cause”, by death or by Mr. Rubenstein
and/or Ms. Silvers, as applicable, for “good reason” the 5% Distributions and 5% of proceeds upon sale are due
to Mr. Rubenstein and Ms. Silvers or their heirs regardless of whether or not Mr. Rubenstein and/or Ms. Silvers continue in
the employment of the Company.
|
|
|
|
|
|
•
|
|
A deferment by Mr. Rubenstein and Ms. Silvers of $812,501 and $332,189,
respectively otherwise due to them as change of control payments upon the consummation of the sale of Theatre Direct (referred
to herein as the “Deferred Change in Control Payments”).
|
On August 28, 2012,
(1) Hollywood Media and R&S Investments, LLC (“R&S Investments”) entered into an Agreement (the “R&S
Agreement”) regarding the Purchase Agreement dated as of August 21, 2008 between Hollywood Media and R&S Investments,
as amended (the “R&S Purchase Agreement”) and (2) Hollywood Media, Mr. Rubenstein and Ms. Silvers entered into
a letter agreement regarding the R&S Agreement (the “Rubenstein Silvers Letter Agreement”). R&S Investments
is wholly-owned by Mr. Rubenstein and Ms. Silvers. See Note 3, “Discontinued Operations” to these unaudited Condensed
Consolidated Financial Statements.
Pursuant to the R&S
Agreement, in exchange for R&S Investments paying Hollywood Media $2,950,000 in cash (the “Buyout Amount”), which
payment has been made to Hollywood Media, R&S Investments fully satisfied all of its obligation to pay the purchase price
under Section 3.1 of the R&S Purchase Agreement and any additional consideration or earnout payment under Section 3.3 of the
R&S Purchase Agreement, and R&S Investments shall have no further obligations and/or liabilities (and Hollywood Media
shall have no further rights and/or remedies) under Article III of the R&S Purchase Agreement or otherwise.
Pursuant to the Rubenstein
Silvers Letter Agreement, Mr. Rubenstein agreed that that, in connection with the transaction consummated under the R&S Agreement
and in addition to the Buyout Amount, the next $280,000 of the 5% Distribution that would be distributed by Hollywood Media to
Mr. Rubenstein pursuant to his amended employment agreement will be retained by Hollywood Media (and not paid to Mr. Rubenstein)
and is a reduction to “Derivative Liabilities” in the accompanying condensed consolidated balance sheets.
In addition, pursuant
to the Rubenstein Silvers Letter Agreement, Ms. Silvers agreed that, in connection with the transaction consummated under the
R&S Agreement and in addition to the Buyout Amount, the next $280,000 of the 5% Distribution that would be distributed by
Hollywood Media to Ms. Silvers pursuant to her amended employment agreement will be retained by Hollywood Media (and not paid
to Ms. Silvers) and is a reduction to “Derivative Liabilities” in the accompanying condensed consolidated balance
sheets.
Regardless of whether
Mr. Rubenstein or Ms. Silvers continued to provide services to Hollywood Media after the first anniversary of the sale of Theatre
Direct, one-half of the Deferred Change in Control Payments were to be paid to Mr. Rubenstein and/or Ms. Silvers, as applicable,
upon the receipt by Hollywood Media of payments pursuant to the $8.5 million credit agreement (the “Credit Agreement”)
entered into in connection with the sale of Theatre Direct, on a pro rata basis, and one-half of such payments were be paid to
Mr. Rubenstein and/or Ms. Silvers, as applicable, upon the receipt by Hollywood Media of payments under the first $7 million tranche
of the earnout in connection with the sale of Theatre Direct, on a pro rata basis.
On August 28, 2012,
Hollywood Media entered into an Assignment and Assumption of Membership Interest and Waiver (the “Assignment”) with
Baseline Holdings LLC (“Baseline Holdings”), Project Hollywood LLC (“Project Hollywood”), Mr. Rubenstein
and Ms. Silvers. Baseline Holdings is wholly-owned by Mr. Rubenstein and Ms. Silvers.
Pursuant to the Assignment,
Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange
for total consideration of $1,800,000 (the “Project Hollywood Purchase Price”). The Project Hollywood Purchase Price
was paid as follows: (1) $1,230,500 in cash (which was paid by Baseline Holdings to Hollywood Media), (2) Mr. Rubenstein waived
his right to receive any future principal and interest owed to Hollywood Media pursuant to the Loan under the Credit Agreement
(as of August 28, 2012, Mr. Rubenstein had the right to receive 4.76% of the principal, or $404,600, and interest on
account of the Loan under the Credit Agreement), and (3) Ms. Silvers waived her right to receive any future principal and interest
owed to Hollywood Media under the Loan under the Credit Agreement (as of August 28, 2012, Ms. Silvers has the right to receive
1.94% of the principal, or $164,900, and interest on account of the Loan under the Credit Agreement). Hollywood Media had acquired
its membership interest in Project Hollywood on October 27, 2011 for $1,250,000. Hollywood Media recorded the fair value of the
waivers by Mr. Rubenstein and Ms. Silvers in the long term portion of “Other Assets” in the accompanying condensed
consolidated balance sheets.
On October 1, 2012,
Hollywood Media received the first $7 million tranche of the earnout pursuant to the Broadway Sale. As a result, in connection
with the Deferred Change in Control Payments due to Mr. Rubenstein and Ms. Silvers in connection with the Broadway Sale, on October
5, 2012, Mr. Rubenstein received $405,300 of such earnout payment and Ms. Silvers received $165,200 of such earnout payment.
From time to time
the Company’s Compensation Committee may award discretionary bonuses to Mr. Rubenstein and Ms. Silvers based on their service
or performance to the Company. Mr. Rubenstein and Ms. Silvers received no bonuses during the three months ended September 30,
2012. Mr. Rubenstein received a bonus of $225,000 and Ms. Silvers received a bonus of $200,000 during the three months ended June
30, 2012. Bonuses are included in “Payroll and benefits” in the accompanying unaudited condensed consolidated statements
of operations. Mr. Rubenstein and Ms. Silvers have notified the Compensation Committee that each of them plans to voluntarily
waive the first $225,000 (in the case of Mr. Rubenstein) and the first $200,000 (in the case of Ms. Silvers) of the 5% Distribution
each of them would be entitled to receive of the 5% Distribution.
The First $7 Million
Earnout was paid by Key Brand to the Company on October 1, 2012 and was recorded upon collection of the $7 million received on
October 1, 2012. In addition, the revenue calculation for the “Second Earnout” was modified to exclude “group
sales” (and the revenues of the new joint venture conducting such business) and the target for the Second $7 Million Earnout
was reduced from $150 million to $123 million accordingly. On October 5, 2012, Hollywood Media received written notice from Key
Brand that Theatre Direct achieved the revenue target for the Second $7 Million Earnout in Key Brand’s fiscal year ended
June 30, 2012. Accordingly, pursuant to the Amendment, the Second $7 Million Earnout of $7 million was added as of October 1,
2012 to the principal amount of the Loan under the Credit Agreement. Pursuant to the Credit Agreement, interest at a rate of 12%
per annum and principal on such Second $7 Million Earnout will be amortized over the term of the Credit Agreement in equal quarterly
installments through the maturity date of the Loan on December 15, 2015. As a result of the Second $7 Million Earnout being added
to the $8.5 million principal amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5
million as of October 1, 2012.
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
Cautionary Note Regarding Forward-Looking Statements
Certain statements
in this Quarterly Report on 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”, “our”, or “Company”) 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 Quarterly Report on Form 10-Q or that are otherwise made by or on behalf of Hollywood Media. 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:
|
·
|
our
continuing operating
losses;
|
|
·
|
negative
cash flows and
accumulated deficit;
|
|
·
|
our
ability to develop
and maintain strategic
relationships;
|
|
·
|
MovieTickets.com
Inc.’s ability
to compete with
the other online
movie ticketing
service and the
outcome of, and
potential impact
of matters relating
to, the lawsuit
filed by Hollywood
Media, National
Amusements Inc.
and MovieTickets.com,
Inc. against AMC
Entertainment Inc.
relating to MovieTickets.com
(for more information
about such lawsuit,
see Note 7 “Certain
Commitments and
Contingencies”
in the Notes to
the Condensed Consolidated
Financial Statements
included in Part
I, Item 1 of this
Quarterly Report
on Form 10-Q);
|
|
·
|
our
ability to maintain
and obtain sufficient
capital to finance
our operations;
|
|
·
|
our
ability to realize
anticipated cost
efficiencies;
|
|
·
|
adverse
economic factors
such as recession,
war, terrorism,
international incidents
or labor strikes
and disputes;
|
|
·
|
our
ability to design,
implement and maintain
effective internal
controls;
|
|
·
|
dependence
on our founders;
|
|
·
|
the
unpredictability
of our stock price;
|
|
·
|
the
possibility of
our common stock
being delisted
from the NASDAQ
Global Market and
not qualifying
for trading on
another exchange
or market (such
as the NASDAQ Capital
Market, the NYSE
Amex (formerly
the American Stock
Exchange) or the
over-the-counter
market);
|
|
·
|
the
possibility of
not receiving payments
from Key Brand
Entertainment Inc.
in connection with
the sale of our
Broadway Ticketing
business pursuant
to that certain
Second Lien Credit
Security Pledge
Agreement dated
as of December
15, 2010, entered
into by Theatre
Direct NY, Inc.,
Key Brand Entertainment
Inc., and Hollywood
Media (the “Credit
Agreement”);
|
|
·
|
the
impact of the death
of Tekno Books’
former Chief Executive
Partner, Dr. Martin
Greenberg, on the
ability of Tekno
Books to maintain
relationships it
has with certain
authors and publishers;
|
|
·
|
the
timing and amount
of the payments
we receive pursuant
to the Credit Agreement;
and
|
|
·
|
our
ability to exercise
or put our warrant
to purchase 5%
of the outstanding
shares of common
stock of Theatre
Direct NY, Inc.
issued to us by
Theatre Direct
NY, Inc. pursuant
to that certain
Stock Purchase
Agreement, dated
as of December
22, 2009, entered
into between Hollywood
Media and Key Brand
Entertainment Inc.
(as amended, the
“Purchase
Agreement”).
|
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, 2011,
as amended, and in other filings made by Hollywood Media with the Securities and Exchange Commission.
These factors are
not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any
of our forward-looking statements. Other factors, including unknown or unpredictable ones, also could have material adverse effects
on our future results.
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 Quarterly Report on 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 Quarterly Report on Form 10-Q, except as required by law. 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
we nor any other person assumes responsibility for the accuracy and completeness of such statements.
Overview
Until December 15,
2010, Hollywood Media was comprised of various businesses focusing primarily on online ticket sales, deriving revenue primarily
from Broadway, Off-Broadway and London’s West End ticket sales to individuals and groups, as well as advertising and book
development license fees and royalties. Our Broadway Ticketing business was comprised of Broadway.com, 1-800-BROADWAY, Theatre
Direct and Theatre.com. On December 15, 2010, we completed the sale of our Broadway Ticketing Business through the sale of all
of the outstanding capital stock of Theatre Direct to Key Brand, as contemplated by the Purchase Agreement. Following this sale,
our business segments for our continuing operations are as follows:
|
●
|
Ad Sales
–
includes Hollywood Media’s 26.2% equity interest
in MovieTickets.com. Prior to the sale of Cinemasource
UK Limited on May 1, 2012 (which business included
UK Theatres Online Limited, Spring Leisure Limited,
Cinemasonline Limited and WWW.CO.UK Limited), the
Ad Sales segment also sold advertising on plasma TV
displays throughout the U.K. and Ireland, on lobby
display posters, movie brochure booklets and ticket
wallets distributed in cinemas, live theater and other
entertainment venues in the U.K. and Ireland. See
Note 3, “Discontinued Operations” in the
Notes to the Condensed Consolidated Financial Statements
included in Part I, Item I of this Quarterly Report
on Form 10-Q for information on the sale of Cinemasource
UK Limited.
|
|
·
|
Intellectual
Properties
–
owns or controls
the exclusive rights
to certain intellectual
properties created
by best-selling
authors and media
celebrities, which
it licenses for
book and other
media. This segment
also includes our
wholly-owned subsidiary,
Tekno Books, a
book development
business, and this
segment does not
include our 50%
interest in NetCo
Partners, for purposes
of this discussion
and analysis.
|
|
·
|
Other
– is
comprised of payroll
and benefits for
corporate and administrative
personnel as well
as other corporate-wide
expenses, such
as legal fees,
audit fees, proxy
costs, insurance,
centralized information
technology, and
includes consulting
and other fees
and costs relating
to compliance with
the provisions
of the Sarbanes-Oxley
Act of 2002 that
require Hollywood
Media to assess
and report on internal
control over financial
reporting, and
related development
of controls. Until
August 28, 2012,
this segment also
included Hollywood
Media’s equity
interest in Project
Hollywood (which
was reduced from
21.74% of the total
equity in Project
Hollywood to 20.65%
of the total equity
in Project Hollywood
at June 30, 2012),
which in turn owns
Baseline. On August
28, 2012 Hollywood
Media assigned
Baseline Holdings
all of Hollywood
Media’s membership
interest in Project
Hollywood in exchange
for certain consideration.
For additional
information on
the assignment
of Hollywood Media’s
interest in Project
Hollywood, LLC
and the change
in Hollywood Media’s
equity interest
in Project Hollywood,
see Note 9, “Related
Party Transactions”
in the Notes to
the Condensed Consolidated
Financial Statements
included in Part
I, Item I of this
Quarterly Report
on Form 10-Q.
|
Results of Operations
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 Part 1, Item 1 of this Quarterly Report on Form 10-Q.
The Ad Sales segment
currently consists of the Company’s investment in MovieTickets.com. As the Company accounts for its investment in MovieTickets.com
under the equity method of accounting, there are no net revenues, operating income (loss), capital expenditures or depreciation
and amortization expense to report for the Ad Sales segment. The following table summarizes Hollywood Media’s revenues,
operating expenses and operating income (loss) from continuing operations by reportable segment for the nine months ended September
30, 2012 (“Y3-12”) and 2011 (“Y3-11”) and the three months ended September 30, 2012 (“Q3-12”)
and 2011 (“Q3-11”), respectively:
|
|
Intellectual
|
|
|
|
|
|
|
|
|
|
Properties
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Y3-12
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
429,082
|
|
|
$
|
-
|
|
|
$
|
429,082
|
|
Operating Expenses
|
|
|
507,978
|
|
|
|
3,456,034
|
|
|
|
3,964,012
|
|
Operating Loss
|
|
$
|
(78,896
|
)
|
|
$
|
(3,456,034
|
)
|
|
$
|
(3,534,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Y3-11
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
841,546
|
|
|
$
|
-
|
|
|
$
|
841,546
|
|
Operating Expenses
|
|
|
776,455
|
|
|
|
5,062,595
|
|
|
|
5,839,050
|
|
Operating Income (Loss)
|
|
$
|
65,091
|
|
|
$
|
(5,062,595
|
)
|
|
$
|
(4,997,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3-12
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
96,035
|
|
|
$
|
-
|
|
|
$
|
96,035
|
|
Operating Expenses
|
|
|
151,550
|
|
|
|
1,002,961
|
|
|
|
1,154,511
|
|
Operating Loss
|
|
$
|
(55,515
|
)
|
|
$
|
(1,002,961
|
)
|
|
$
|
(1,058,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3-11
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
152,424
|
|
|
$
|
-
|
|
|
$
|
152,424
|
|
Operating Expenses
|
|
|
162,358
|
|
|
|
1,768,911
|
|
|
|
1,931,269
|
|
Operating Loss
|
|
$
|
(9,934
|
)
|
|
$
|
(1,768,911
|
)
|
|
$
|
(1,778,845
|
)
|
Results of Discontinued Operations
Sale of Broadway Ticketing Division
to Key Brand Entertainment, Inc.
On December 15, 2010,
Hollywood Media Corp. (“Hollywood Media”) completed the sale of its Broadway Ticketing Division (“the Broadway
Sale”) through the sale of all of the outstanding capital stock of Theatre Direct NY, Inc. (“Theatre Direct”)
to Key Brand Entertainment Inc. (“Key Brand”), as contemplated by the Stock Purchase Agreement, dated as of December
22, 2009, as amended, entered into between Hollywood Media and Key Brand (“the Purchase Agreement”). There are no
material relationships among Hollywood Media and Key Brand or any of their respective affiliates other than in respect of the
Purchase Agreement and the related ancillary agreements.
Pursuant to the Purchase
Agreement, at the closing of the Broadway Sale, (a) Hollywood Media received (i) $20,530,102 in cash (including $530,102 pursuant
to the estimated working capital adjustment described in the Purchase Agreement), (ii) a $8,500,000 note (“the Loan”)
from Key Brand pursuant to a Second Lien, Security and Pledge Agreement, dated as of December 15, 2010 (the “Credit Agreement”),
pursuant to which Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum, with the loan maturing on
December 15, 2015, which Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries,
and (iii) a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct as of the closing date on a fully
diluted basis at an exercise price of $.01 per share (the “Warrant”), and (b) Key Brand assumed $1,600,000 of liabilities
associated with employment agreements with certain employees of Theatre Direct. In addition, Hollywood Media was entitled to receive
earnout payments (“the Earnout”) of up to $14,000,000, in two $7,000,000 tranches, contingent upon Theatre Direct
and its subsidiaries achieving certain revenue targets during the period from the closing date through the end of the 10
th
full fiscal year following the closing date as set forth in the Purchase Agreement.
On April 22, 2012,
the Company entered into Amendment No. 4 (the "Amendment") to the Purchase Agreement. Pursuant to the Amendment, the
Company consented to the contribution of the “group sales” business (but not the Broadway.com consumer ticketing business)
owned by Key Brand to a newly formed joint venture (the “Group Sales JV”; such contribution, the “Group Sales
Contribution”). The balance of the business sold to Key Brand under the terms of the Purchase Agreement, which included
Broadway.com, remained at Key Brand and Theatre Direct. As part of the Amendment, Key Brand agreed to pay the first $7 million
earnout amount (the “First $7 Million Earnout”) to the Company on or before October 1, 2012 regardless of the actual
revenues of Theatre Direct and its subsidiaries for the fiscal year of Key Brand ending June 30, 2012. The First Earnout amount
of $7 million was paid by Key Brand to the Company on October 1, 2012. In addition, the revenue calculation for the second $7
million earnout amount (the “Second $7 Million Earnout”) was modified to exclude “group sales” (and the
revenues of the new joint venture conduction such business) and the target for the Second Earnout was reduced from $150 million
to $123 million accordingly. On October 5, 2012, Hollywood Media received written notice from Key Brand that Theatre Direct achieved
the revenue target for the Second $7 Million Earnout in Key Brand’s fiscal year ended June 30, 2012. Accordingly, pursuant
to the Amendment, the Second $7 Million Earnout was added as of October 1, 2012 to the principal amount of the Loan under the
Credit Agreement. Pursuant to the Credit Agreement, interest at a rate of 12% per annum and principal on such Second $7 Million
Earnout will be amortized over the term of the Credit Agreement in equal quarterly installments through the maturity date of the
Loan on December 15, 2015. As a result of the Second $7 Million Earnout being added to the $8.5 million principal amount of the
Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012. See
Note 3, “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part
I, Item I of this Quarterly Report on Form 10-Q for information regarding revisions to the earnout payments. The Warrant will
be marked to market each reporting period to reflect the changes in fair value.
After the closing
date of the sale of Theatre Direct pursuant to the Purchase Agreement, Hollywood Media delivered on March 14, 2011 to Key Brand
a closing statement setting forth Hollywood Media’s calculation of Theatre Direct’s working capital as of the closing
date determined in the manner described in the Purchase Agreement. Pursuant to the closing statement, Hollywood Media accrued
$3,702,620 as a working capital adjustment as of December 31, 2010 under the agreement which included $530,102 related to the
estimated working capital delivered at closing by Key Brand. This working capital adjustment of $3,734,106 was paid on March 22,
2011 and included $31,486 of interest which is included in “Gain on sale of discontinued operations, net of income taxes”
in the accompanying condensed consolidated statements of operations for the nine months ending September 31, 2011.
For additional information about this transaction,
see Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part
I, Item I of this Quarterly Report on Form 10-Q.
Sale by Minority Interest in Project Hollywood LLC (which
owns the Baseline StudioSystems business)
On August 28, 2012,
Hollywood Media entered into an Assignment and Assumption of Membership Interest and Waiver (the “Assignment”) with
Baseline Holdings LLC (“Baseline Holdings”), Project Hollywood LLC, Mitchell Rubenstein and Laurie S. Silvers. Baseline
Holdings is wholly-owned by Mr. Rubenstein and Ms. Silvers. As described below, the Assignment and the transactions contemplated
by the Assignment were approved by a Special Committee of Hollywood Media’s Board of Directors comprised solely of independent
directors (the “Special Committee”).
Pursuant to the Assignment,
Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange
for total consideration of $1,800,000 (the “Project Hollywood Purchase Price”). The Project Hollywood Purchase Price
has been paid as follows: (1) $1,230,500 in cash (which has been paid by Baseline Holdings to Hollywood Media), (2) Mr.
Rubenstein waived his right to receive any future principal and interest owed by Key Brand to Hollywood Media pursuant to the
Loan (as of August 28, 2012, Mr. Rubenstein had the right to receive 4.76% of the principal, or $404,600, and interest
on account of the Loan), and (3) Ms. Silvers waived her right to receive any future principal and interest owed by Key Brand
to Hollywood Media pursuant to the Loan (as of August 28, 2012, Ms. Silvers has the right to receive 1.94% of the principal,
or $164,900, and interest on account of the Loan). Hollywood Media recorded the fair value of the waivers by Mr. Rubenstein and
Ms. Silvers in the long term portion of “Other Assets” in the accompanying condensed consolidated balance sheets included
in Part I, Item I of this Quarterly Report on Form 10-Q. Hollywood Media acquired its membership interest in Project Hollywood
on October 27, 2011 for $1,250,000.
As a result of the
waivers of Mr. Rubenstein and Ms. Silvers described in the preceding paragraph, after August 28, 2012, Hollywood Media will retain
all payments of principal and interest made by Key Brand under the Loan. As of August 28 and September 30, 2012, the principal
balance due under the Loan was $8,500,000.
The Special Committee
unanimously approved the Assignment and determined that the transactions contemplated by the Assignment were advisable, fair to
and in the best interests of Hollywood Media and its shareholders. In connection with approving the transactions contemplated
by the Assignment, the Special Committee received a fairness opinion from a firm with experience in valuation work, which stated
that as of August 28, 2012, based upon and subject to (and in reliance on) the assumptions made, matters considered and limits
of such review, in each case as set forth in its opinion, the Project Hollywood Purchase Price was fair from a financial point
of view to Hollywood Media. As of October 1, 2012, the Principal Balance due under the Loan increased to $15,500,000 as a result
of the achievement of the revenue threshold for the Second $7 Million Earnout in the Purchase Agreement.
Sale of Hollywood.com Business Unit
to R&S Investments, LLC
On August 21, 2008,
Hollywood Media entered into a purchase agreement (the “R&S Purchase Agreement”) with R&S Investments, LLC
(“R&S Investments”) for the sale of the Hollywood.com Business. R&S Investments is wholly-owned by Mr. Rubenstein,
Hollywood Media’s Chief Executive Officer and Chairperson of the Board, and Ms. Silvers, Hollywood Media’s President,
Secretary and Vice-Chairperson of the Board. Pursuant to the R&S Purchase Agreement, Hollywood Media sold the Hollywood.com
Business to R&S Investments for a potential purchase price of $10.0 million, which includes $1.0 million in cash which was
paid to Hollywood Media at closing and potential earnout payments totaling $9.0 million, of which $1,892,629 has been paid as
of September 30, 2012.
During the nine and three months ending September 30, 2012, Hollywood Media recorded $412,684 and
$85,926 respectively, in earnout income under the R&S Purchase Agreement. The Hollywood.com Business included the Hollywood.com
website and related URLs and celebrity fan websites and Hollywood.com Television, a free video on demand service distributed pursuant
to annual affiliation agreements with certain cable operators.
For additional information about this transaction, see
Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Item
I, Part I of this Quarterly Report on Form 10-Q.
Buyout of Obligation of R&S Investments, LLC to Pay
Hollywood.com Earnout
On August 28, 2012,
(1) Hollywood Media and R&S Investments entered into an Agreement (the “R&S Agreement”) regarding the
R&S Purchase Agreement, (2) Hollywood Media, Mr. Rubenstein and Ms. Silvers entered into a letter agreement regarding the
R&S Agreement (the “Rubenstein Silvers Letter Agreement”), and (3) R&S Investments provided Hollywood Media
with a letter regarding a contingent additional payment (the “R&S Letter”). As described below, the R&S Agreement
and the Rubenstein Silvers Letter Agreement and the transactions contemplated by the R&S Agreement and the Rubenstein Silvers
Letter Agreement were approved by a Special Committee of Hollywood Media’s Board of Directors comprised solely of independent
directors (the “Special Committee”).
Pursuant to
the R&S Agreement, in exchange for R&S Investments paying Hollywood Media $2,950,000 in cash (the “Buyout Amount”),
which payment has been made to Hollywood Media, R&S Investments fully satisfied all of its obligation to pay the purchase
price under Section 3.1 of the R&S Purchase Agreement and any additional consideration or earnout payment under Section 3.3
of the R&S Purchase Agreement, and R&S Investments shall have no further obligations and/or liabilities (and Hollywood
Media shall have no further rights and/or remedies) under Article III of the R&S Purchase Agreement or otherwise.
Pursuant to the Rubenstein
Silvers Letter Agreement, Mr. Rubenstein agreed that that, in connection with the transaction consummated under the R&S Agreement
and in addition to the Buyout Amount, the next $280,000 of the MovieTickets.com 5% Interest (as defined in the Amended and Restated
Employment Agreement dated as of December 22, 2008, between Hollywood Media and Mr. Rubenstein, as amended (the “Rubenstein
Employment Agreement”)) that would be distributed by Hollywood Media to Mr. Rubenstein pursuant to the Rubenstein Employment
Agreement will be retained by Hollywood Media (and not paid to Mr. Rubenstein) and is a reduction to “Derivative Liabilities”
in the accompanying condensed consolidated balance sheets included in Part I, Item I of this Quarterly Report on Form 10-Q.
In addition, pursuant
to the Rubenstein Silvers Letter Agreement, Ms. Silvers agreed that, in connection with the transaction consummated under the
R&S Agreement and in addition to the Buyout Amount, the next $280,000 of the MovieTickets.com 5% Interest (as defined in the
Amended and Restated Employment Agreement dated as of December 22, 2008, between Hollywood Media and Ms. Silvers, as amended (the
“Silvers Employment Agreement”)) that would be distributed by Hollywood Media to Ms. Silvers pursuant to the Silvers
Employment Agreement will be retained by Hollywood Media (and not paid to Ms. Silvers) and is a reduction to “Derivative
Liabilities” in the accompanying condensed consolidated balance sheets included in Part I, Item I of this Quarterly Report
on Form 10-Q.
Pursuant to the R&S
Letter, R&S Investments agreed that in the event of a sale of all the assets of Hollywood.com, LLC to one person or a group
of persons not controlled, directly or indirectly, by Mr. Rubenstein and Ms. Silvers or their heirs, personal representatives
or affiliates prior to August 31, 2015, R&S Investments shall pay to Hollywood Media $3,500,000 or, if less, the amount received
by R&S Investments in connection with such transaction.
The Special Committee
unanimously approved the R&S Agreement and the Rubenstein Silvers Letter Agreement and determined that the transactions contemplated
by the R&S Agreement and the Rubenstein Silvers Letter Agreement were advisable, fair to and in the best interests of Hollywood
Media and its shareholders. In connection with approving the transactions contemplated by the R&S Agreement and the Rubenstein
Silvers Letter Agreement, the Special Committee received a fairness opinion from a firm with experience in valuation work, which
stated that as of August 28, 2012, based upon and subject to (and in reliance on) the assumptions made, matters considered and
limits of such review, in each case as set forth in its opinion, the Buyout Amount which was paid by R&S Investments was fair
from a financial point of view to Hollywood Media.
Sale of Cinemasource UK Limited –
Share Purchase Agreement
On May 1, 2012, the
Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Orchard Advertising Limited
(“Buyer”), pursuant to which the Company sold, and Buyer purchased, the entire issued share capital of Cinemasource
UK Limited (the “Purchased Shares”) which business was part of the Company’s Ad Sales division and included
UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and
WWW.CO.UK
Limited.
Pursuant to the Share
Purchase Agreement, the purchase price for the Purchased Shares is U.S. $250,000, payable in cash in a non-interest bearing loan
in twenty equal quarter-annual installments of $12,500 each over a period of five years. Subject to the terms and conditions of
the Share Purchase Agreement, the first installment of the purchase price was due and was paid to the Company on July 31, 2012
and subsequent installments of the purchase price are due every three calendar months thereafter. The Company imputed interest
at 16.5% per annum on this $250,000 non-interest bearing loan resulting in a discounted amount of $168,014 which was included
in the total gain on sale attributable to the sale of Cinemasource UK Limited of $649,215. This gain on sale is included in “Income
from Discontinued Operations” in the Condensed Consolidated Statement of Operations included in Item I, Part I of this quarterly
report on Form 10-Q.
The discounted amount of the non-interest bearing loan is included in “Other Assets”
in the condensed consolidated balance sheets included in Item I, Part I of this quarterly report on Form 10-Q.
NET REVENUES
Total
net revenues were $429,082 for Y3-12 as compared to $841,546 for Y3-11, a decrease of $412,464 or 49% and $96,035 for Q3-12 as
compared to $152,424 for Q3-11, a decrease of $56,389 or 37%. The decrease in net revenue in Y3-12 as compared to Y3-11 and Q3-12
as compared to Q3-11 is the result of a decrease in Intellectual Property revenue.
The decrease in Intellectual
Properties net revenues in Y3-12 as compared to Y3-11 and Q3-12 as compared to Q3-11 was attributable to the timing of the delivery
of manuscripts and the beginning of a reorientation of the focus of this business to digital distribution from print. The Intellectual
Properties division generates revenues from several different activities including intellectual property licensing and book development.
Revenues vary quarter to quarter depending on the timing of delivery of manuscripts to the publishers. Revenues are recognized
when the earnings process is complete and the ultimate collection of such revenues is no longer subject to contingencies. This
division does not include NetCo Partners, which is reported separately; see “Earnings (Losses) of Unconsolidated Investees”
below.
EARNINGS (LOSSES) OF UNCONSOLIDATED
INVESTEES
Earnings (losses) of unconsolidated investees
consisted of the following:
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetCo Partners (a)
|
|
$
|
(436
|
)
|
|
$
|
358
|
|
|
$
|
(152
|
)
|
|
$
|
43
|
|
MovieTickets.com (b)
|
|
|
(3,852,855
|
)
|
|
|
(4,386,550
|
)
|
|
|
(3,780,740
|
)
|
|
|
(4,565,818
|
)
|
Project Hollywood (c)
|
|
|
111,440
|
|
|
|
-
|
|
|
|
21,227
|
|
|
|
-
|
|
|
|
$
|
(3,741,851
|
)
|
|
$
|
(4,386,192
|
)
|
|
$
|
(3,759,665
|
)
|
|
$
|
(4,565,775
|
)
|
(a) NetCo
Partners
Hollywood Media owns
50% of NetCo Partners as of September 30, 2012 and accounts for its investment under the equity method. NetCo Partners owns
NetForce
and is primarily engaged in the development and licensing of
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’s 50% share of income of NetCo Partners was essentially $0 for Y3-12 and Y3-11 as well as Q3-12 and Q3-11.
(b) MovieTickets.com
Hollywood Media owns
26.2% of the equity in MovieTickets.com, Inc. as of September 30, 2012 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 ownership of
MovieTickets.com income or loss as “Equity in earnings of unconsolidated investees” in the accompanying condensed
consolidated statements of operations. Under applicable accounting principles, Hollywood Media recorded $252,855 and $180,740
in loss from its investment in MovieTickets.com for the nine and three months ended September 30, 2012, respectively. Hollywood
Media did not record $23,903 of its share of losses from MovieTickets.com for the nine and three months ended September 30, 2012
because accumulated dividends and net losses from 2012 and prior years exceed the Company’s investment in MovieTickets.com
as of September 30, 2012. Hollywood Media recorded $4,386,550 and $4,565,818 in loss from its investment in MovieTickets.com for
the nine and three months ended September 30, 2011, respectively. During Y3-11, the Company determined that goodwill associated
with the assets of the Ad Sales Segment was impaired and accordingly recorded a non-cash goodwill impairment charge of $4,795,783.
During Y3-12, the Company determined that goodwill associated with the
assets of the Ad Sales Segment was impaired and accordingly recorded a non-cash goodwill impairment charge of $3,600,000.
For additional information see Note 6 – Segment Reporting in the Notes to Condensed Consolidated Financial Statements included
in Item I, Part I of this quarterly report on Form 10-Q
.
The
MovieTickets.com web site generates revenues primarily from service fees charged to users for the purchase of movie tickets online,
the sale of advertising and research fees. On July 18, 2011 MovieTickets.com declared a dividend of $4,000,000. Hollywood Media
received its 26.2% pro rata share of such dividend, amounting to $1,048,875 on July 19, 2011, which reduced the Company’s
investment in MovieTickets.com as the dividend did not exceed the amount of the Company’s investment. Hollywood Media distributed
on, July 19, 2011, $52,444 of such dividend distribution, representing 5% of Hollywood Media’s share of the dividends, to
each of Mr. Rubenstein and Ms. Silvers in accordance with their amended and restated employment agreements dated December 23,
2009, as amended. Other than the July 18, 2011 dividend discussed above, there were no dividends declared by MovieTickets.com
or received from MovieTickets.com during the nine and three months ended September 30, 2012 and September 30, 2011, respectively.
(c) Project
Hollywood LLC
On August 28, 2012
Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange
for total consideration of $1.8 million. Prior to that assignment, Hollywood Media owned 20.65% of the total equity in Project
Hollywood LLC (“Project Hollywood”). Hollywood Media’s equity ownership in Project Hollywood was reduced from
21.74% of the total equity in Project Hollywood to 20.65% of the total equity in Project Hollywood at June 30, 2012. Hollywood
Media did not own any equity in Project Hollywood as of September 30, 2011 Hollywood Media’s initial interest in Project
Hollywood was acquired on October 27, 2011. Hollywood Media recorded its investment in Project Hollywood under the equity method
of accounting, recognizing its percentage interest in Project Hollywood’s income or loss as earnings of unconsolidated investees.
Under applicable accounting principles, Hollywood Media recorded $111,440 and $21,227 in income from its investment in Project
Hollywood for the nine and three months ended September 30, 2012, respectively. There were $182,617 and $5,435 of distributions
during the nine and three months ended September 30, 2012, respectively. For additional information about Hollywood Media’s
assignment of its membership interest in Project Hollywood LLC and the change in Hollywood Media’s equity interest in Project
Hollywood, see Note 9, “Related Party Transactions” in the Notes to the Condensed Consolidated Financial Statements
included in Part I, Item I of this Quarterly Report on Form 10-Q.
OPERATING EXPENSES
Editorial, Production,
Development and Technology.
Editorial, production,
development and technology costs include fees and royalties paid to authors and co-editors for the Intellectual Properties segment.
Editorial, production, development and technology costs were $391,503 for Y3-12 as compared to $562,042 for Y3-11, a decrease
of $170,539 or 30%, and $108,727 for Q3-12 as compared to $105,140 for Q3-11, an increase of $3,587 or 3%. As a percentage of
revenues, these costs were 91% and 67% for Y3-12 and Y3-11 respectively, and 113% and 69% for Q3-12 and Q3-11, respectively. The
decrease in Y3-12 as compared to Y3-11was due primarily to a decrease in payments to writers and co-editors.
Selling, General
and Administrative.
Selling, general and
administrative (SG&A) expenses consist of occupancy costs, professional, legal and consulting service fees, telecommunications
costs, provision for doubtful accounts receivable, general insurance costs and selling and marketing costs (such as advertising,
marketing, promotional, business development, public relations, and commissions due to advertising agencies, advertising
representative firms and other parties). SG&A expenses for Y3-12 were $1,839,990 compared to $2,270,799 for Y3-11, a decrease
of $430,809 or 19%. SG&A expenses for Q3-12 were $639,012 compared to $543,350 for Q3-11, an increase of $95,662 or 18%. The
increase in SG&A expenses for Q3-12 as compared to Q3-11 was due to increased legal expenses.
The decrease in SG&A
expenses in Y3-12 as compared to Y3-11 was due primarily to the following: legal expense decreased by approximately $96,000, a
$100,000 decrease in office-related expenses attributable to the Company’s continuing effort to reduce costs and expenses,
an $85,000 decrease in insurance costs and a $77,000 decrease in shareholder relations expense. For additional information,
see Note 9 – Related Party Transactions in the Notes to Condensed Consolidated Financial Statements included in Part I,
of this Quarterly Report on Form 10-Q.
Payroll and Benefits.
Payroll and benefits
expenses include payroll and benefits and other types of compensation expense as well as human resources and administrative functions.
Payroll and benefits
expenses for Y3-12 were $1,619,487 compared to $2,843,556 for Y3-11, a decrease of $1,224,069 or 43%. Payroll and benefits expenses
for Q3-12 were $368,904 compared to $1,232,765 for Q3-11, a decrease of $863,861 or 70%.
The decrease in payroll
and benefits expense in Y3-12 as compared to Y3-11 was primarily due to a decrease in executive payroll of $771,000, a decrease
in payroll of the accounting department of approximately $59,000, a combined decrease in payroll of human resources, administration,
MIS and legal of approximately $298,000 and a reduction in the Intellectual Properties division payroll of $73,000. The decrease
in payroll and benefits expenses in Q3-12 as compared to Q3-11 was primarily due to a decrease in executive payroll of $800,000.
Depreciation and
amortization.
Depreciation and amortization
expense consists of depreciation of property and equipment, furniture and fixtures, leasehold improvements, and equipment under
capital leases and amortization of intangible assets. Depreciation and amortization expense was $113,032 for Y3-12 and $162,653
for Y3-11, and $37,868 for Q3-12 and $50,014 for Q3-11.
The decrease in depreciation
and amortization expense of $49,621 or 31% in Y3-12 from Y3-11 was primarily due to reduced leasehold improvements depreciation
amortization because of a change in location of the corporate office to a less expensive rental space and the balance is due to
fixed assets becoming fully depreciated during or prior to Q1-11.
The decrease in depreciation
and amortization expense of $12,146 or 24% in Q3-12 from Q3-11 was primarily due to reduced leasehold improvements depreciation
amortization because of a change in location of the corporate office to a less expensive rental space and the balance is due to
fixed assets becoming fully depreciated during or prior to Q1-11.
Interest, net.
Interest, net was
$777,411 of income for Y3-12 as compared to $789,660 of income for Y3-11. Interest, net was $264,400 of income for Q3-12 as compared
to $260,381 of income for Q3-11. Interest, net primarily consists of the interest on the $8,500,000 note received by Hollywood
Media from the purchaser of the Broadway Ticketing Division in the amount of $776,333. The note has an interest rate of 12% per
annum, is paid quarterly and matures on December 15, 2015. For additional information, see Note 3 - Discontinued Operations in
the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.
As described in Note
3, “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Item I, Part
I of this Quarterly Report on Form 10-Q, Hollywood Media received from Key Brand in connection with the Broadway Sale the First
$7 Million Earnout payment in cash and an additional $7 million representing the Second $7 Million Earnout payment which was added
to the Loan under the Credit Agreement. As a result of the Second $7 Million Earnout amount being added to the $8.5 million principal
amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012.
Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum on the Loan, with the Loan maturing on December
15, 2015. The Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries subordinated
to a $15 million loan to JP Morgan. The Second Earnout amount of $7 million added to the Loan (from the Second $7 Million Earnout)
as of October 1, 2012 is to be amortized in equal quarter annual installments with interest at 12% per annum through maturity
on December 15, 2015. Interest will begin on the $7 million portion of the Loan starting October 1, 2012 with the first principal
and interest payments on this $7 million portion to be received on December 31, 2012 in the amount of approximately $750,000 consisting
of principal of $538,000 and interest of $215,000. Principal and interest payments on the $7,000,000 portion of the Loan (from
the Second Earnout) are expected to be approximately $2,840,000 in 2013. In addition, interest payments on the original $8,500,000
portion of the Loan are expected to be approximately $1,030,000 in 2013.
Income from Discontinued
Operations.
Income from discontinued
operations was $2,467,475 for Y3-12 compared to $91,971 for Y3-11, an increase of $2,375,504. Income from discontinued operations
for Q3-12 was $1,839,788 compared to $158,058 for Q3-11, an increase of $1,681,730.
The increase in discontinued
operations in Y3-12 as compared to Y3-11 and Q3-12 as compared to Q3-11 was primarily due to the receipt by Hollywood Media of
the Buyout Amount, the earnout gain from R&S Investments, and the gain on sale in connection with the assignment of Hollywood
Media’s membership interest in Project Hollywood.
LIQUIDITY AND CAPITAL RESOURCES
Hollywood Media’s
cash and cash equivalents were $5,959,801 at September 30, 2012 as compared to $3,683,063 at December 31, 2011. Hollywood Media’s
net working capital (defined as current assets less current liabilities) was $5,285,175 at September 30, 2012 as compared to $3,067,465
at December 31, 2011.
Net cash used in operating
activities during Y3-12 was $2,006,196, which was primarily attributable to a $3,600,000 non-cash goodwill impairment charge partially
offset by the following: (1) $322,500 non-cash amortization expense of deferred compensation costs, (2) $113,032 depreciation
and amortization, (3) $776,333 of interest on the $8,500,000 note received from Key Brands, and (4) working capital of $221,343.
By comparison, net cash used in operating activities during Y3-11 was $1,982,652.
As described in Note
3, “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Item I, Part
I of this Quarterly Report on Form 10-Q, Hollywood Media received on October 1, 2012, following the end of the third quarter period,
from Key Brand in connection with the Broadway Sale the First $7 Million Earnout payment in cash. Further, an additional $7 million
representing the Second $7 Million Earnout payment was added to the Loan under the Credit Agreement as of October 1, 2012, which
$7 million amount is to be amortized with interest at 12% per annum over the period October 1, 2012 through December 15, 2015
in equal quarter-annual installments. As a result of the Second $7 Million Earnout being added to the $8.5 million principal amount
of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012.
Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum on the Loan, with the Loan maturing on December
15, 2015. The Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries. Interest
will begin on the $7,000,000 portion of the Loan (from the Second Earnout) starting October 1, 2012 with the first principal and
interest payments on this $7,000,000 portion to be received on December 31, 2012 in the amount of approximately $750,000 consisting
of principal of $538,000 and interest of $215,000. Principal and interest payments on the $7,000,000 portion of the Loan (from
the Second Earnout) are expected to be approximately $2,840,000 in 2013. In addition, interest payments on the original $8,500,000
portion of the Loan are expected to be approximately $1,030,000 in 2013.
Net cash used in operating
activities during Y3-11 was $1,982,652, which was primarily attributable to: (1) a net loss of $6,871,113, (2) a gain of $1,132,500
on life insurance recognized on the death of Dr. Martin Greenburg, the former Chief Executive Partner of Tekno Books (3) a non-cash
change in the value of the derivative liability in the amount of $635,112, (4) $641,697 non-cash equity in losses of unconsolidated
subsidiaries, and (5) working capital used of $189,971. These items were partially offset by the following: (1) $4,795,783 non-cash
goodwill impairment charge, (2) $233,850 amortization expense of deferred compensation costs, (3) $162,653 depreciation and amortization,
and (4) $773,500 of interest received on the $8,500,000 note received from Key Brands.
Net cash provided
by investing activities during Y3-12 was $4,299,789 primarily attributable to: (1) $1,230,500 cash received in connection with
the assignment and assumption of Hollywood Media’s membership interest in Project Hollywood; (2) $2,950,000 cash received
in connection with the Buyout Amount from R&S Investments, and (3) Hollywood.com earnout payments of $155,000 paid to the
Company. By comparison, net cash used in investing activities during Y3-11 was $5,429,095 primarily used to pay Key Brand a working
capital adjustment of $3,734,106 in connection with the sale of the Broadway Ticketing business and for payments of $1,740,040
in payroll related bonuses including change of control payments contractually due as a result of the Broadway Sale in Q4-10.
Net cash used in financing
activities during Y3-12 was $16,855, for repayments under capital lease obligations. By comparison, net cash used in financing
activities during Y3-11 was $16,455,367, which cash usage was primarily for the purchase of common stock tendered in the amount
of $16,400,000. For additional information about the purchase of common stock tendered, see Note 4 – “Purchase of
Common Stock Tendered” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I, of this
Quarterly Report on Form 10-Q.
Sale of Broadway Ticketing Division
to Key Brand Entertainment, Inc.
On December 15, 2010,
as contemplated by the Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand
Entertainment Inc. (as amended, the “Purchase Agreement”), Hollywood Media completed the sale of Hollywood Media’s
Broadway Ticketing Division (the “Broadway Sale”), through the sale of all of the outstanding capital stock of Theatre
Direct NY, Inc. (“Theatre Direct”) to Key Brand Entertainment Inc. (“Key Brand”). Pursuant to the Purchase
Agreement, at the closing of the Broadway Sale:
|
·
|
Hollywood
Media received
$20.5 million in
cash (including
$0.5 million pursuant
to the estimated
working capital
adjustment described
in the Purchase
Agreement);
|
|
·
|
Hollywood
Media, Theatre
Direct and Key
Brand entered into
that certain Second
Lien Credit, Security
and Pledge Agreement,
dated as of December
15, 2010 (the “Credit
Agreement”)
pursuant to which
Key Brand is obligated
to pay to the Company
$8.5 million at
an interest rate
of 12% per annum,
which obligation
matures on December
15, 2015 and is
secured on a second
lien basis by all
stock and assets
of Theatre Direct
and its subsidiaries;
|
|
·
|
Theatre
Direct issued the
Company a warrant
to purchase 5%
of the outstanding
shares of common
stock of Theatre
Direct as of the
closing date on
a fully diluted
basis at an exercise
price of $.01 per
share (the “Warrant”);
|
|
·
|
Key
Brand assumed $1.6
million of liabilities
associated with
employment agreements
with certain employees
of Theatre Direct;
and
|
|
·
|
Hollywood
Media was entitled
to receive earnout
payments of up
to $14 million,
in two $7 million
tranches, contingent
upon Theatre Direct
and its subsidiaries
achieving certain
revenue targets
during the period
from the closing
date through the
end of the tenth
full fiscal year
of Theatre Direct
following the closing
date as set forth
in the Purchase
Agreement.
|
|
·
|
In
connection with
the Credit Agreement,
Hollywood Media,
Key Brand and JPMorgan
Chase Bank, N.A.,
as administrative
agent for the senior
secured lenders
of Key Brand, entered
into a Subordination
and Intercreditor
Agreement, dated
December 15, 2010
(the “Intercreditor
Agreement”)
which defines the
rights and obligations
of the senior secured
lenders and Hollywood
Media as subordinated
lender, including,
without limitation,
the rights of payment
and the subordination
of the security
interests of Hollywood
Media.
|
|
·
|
On
April 22, 2012,
the Company entered
into Amendment
No. 4 (the “Amendment”)
to the Purchase
Agreement. Pursuant
to the Amendment,
the Company consented
to the contribution
of the “group
sales” business
(but not the Broadway.com
consumer ticketing
business) owned
by Key Brand to
a newly formed
joint venture (the
“Group Sales
JV”; such
contribution, the
“Group Sales
Contribution”).
The balance of
the business sold
to Key Brand under
the terms of the
Purchase Agreement,
which included
Broadway.com, remained
at Key Brand and
Theatre Direct.
As part of the
Amendment, Key
Brand agreed to
pay the first $7
million earnout
amount (the “First
$7 Million Earnout”)
to the Company
on or before October
1, 2012 regardless
of the actual revenues
of Theatre Direct
and its subsidiaries
for the fiscal
year of Key Brand
ending June 30,
2012. The First
$7 Million Earnout
was paid by Key
Brand to the Company
on October 1, 2012
and was recorded
upon collection
of the $7 million
received on October
1, 2012. In addition,
the revenue calculation
for the second
$7 million earnout
amount (the “Second
$7 Million Earnout”)
was modified to
exclude “group
sales” (and
the revenues of
the new joint venture
conducting such
business) and the
target for the
Second Earnout
was reduced from
$150 million to
$123 million accordingly.
On October 5, 2012,
Hollywood Media
received written
notice from Key
Brand that Theatre
Direct achieved
the revenue target
for the Second
$7 Million Earnout
in Key Brand’s
fiscal year ended
June 30, 2012.
Accordingly, pursuant
to the Amendment,
the Second $7 Million
Earnout was added
as of October 1,
2012 to the principal
amount of the Loan
under the Credit
Agreement. Pursuant
to the Credit Agreement,
interest at a rate
of 12% per annum
and principal on
such Second $7
Million Earnout
will be amortized
over the term of
the Credit Agreement
in equal quarterly
installments, which
amortization period
commenced on October
1, 2012 and ends
on the maturity
date of the Loan
which is December
15, 2015. As a
result of the Second
$7 Million Earnout
being added to
the $8.5 million
principal amount
of the Loan, the
principal amount
of the Loan due
Hollywood Media
by Key Brand was
$15.5 million as
of October 1, 2012.
|
The Company also consented
to certain amendments to the Credit Agreement, including consent to the Group Sales Contribution and to provide for additional
reporting requirements. The Company and Key Brand’s other lender, JPMorgan Chase Bank, N.A., also agreed to amend the Intercreditor
Agreement to provide that, subject to Key Brand’s compliance with the terms and conditions of its senior secured credit
agreement, Key Brand would be permitted to make scheduled quarterly installment payments to Hollywood Media of the Second Earnout
amounts prior to the maturity of the Credit Agreement.
For additional information
about the sale of the Broadway Ticketing Business, see Note 3 “Discontinued Operations” in the Notes to the Condensed
Consolidated Financial Statements included in Part I, Item I, of this Quarterly Report on Form 10-Q.
Sale of Hollywood.com Business Unit to R&S Investments,
LLC
On August 21,
2008, Hollywood Media entered into and simultaneously closed on a definitive purchase agreement with R&S Investments, LLC,
pursuant to which R&S Investments acquired the Hollywood.com Business for a potential purchase price of $10.0 million,
which included $1.0 million in cash that was paid to Hollywood Media at closing and potential earnout payments of up to $9.0
million. Since August 21, 2008, $1,892,692 in earnout payments were paid to Hollywood Media. Hollywood Media also received $2,950,000
in connection with the buy-out of the Hollywood.com earnout by R&S Investments. For additional information about the Hollywood.com
business transactions and the purchase of the Hollywood.com earnout by R&S Investments, see Note 3 “Discontinued Operations”
in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.
Sale of CinemaSource UK Limited to
Orchard Advertising
On May 1, 2012, the
Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Orchard Advertising Limited
(“Buyer”), pursuant to which the Company sold, and Buyer purchased, the entire issued share capital of Cinemasource
UK Limited (the “Purchased Shares”) which business was part of the Company’s Ad Sales division and included
UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW.CO.UK Limited.
Pursuant to the Share
Purchase Agreement, the purchase price for the Purchased Shares is U.S. $250,000, payable in cash in a non-interest bearing note
in twenty equal quarter-annual installments of $12,500 each over a period of five years. Subject to the terms and conditions of
the Share Purchase Agreement, the first installment of the purchase price was due and was paid to the Company on July 31, 2012
and subsequent installments of the purchase price are due every three calendar months thereafter. The Company imputed interest
at 16.5%, per annum, on this $250,000 non-interest bearing loan resulting in a discounted amount of $168,014 which was included
in the total gain on sale attributable to the sale of Cinemasource UK Limited of $649,215. As of September 30, 2012, the Company
has received all payments on the $250,000 non-interest bearing loan in accordance with the payment terms. This gain on sale is
included in “Income from Discontinued Operations” in the Condensed Consolidated Statement of Operations included in
Item I, Part I of this quarterly report on Form 10-Q. The discounted amount of the non-interest bearing loan is included in “Other
Assets” in the condensed consolidated balance sheets included in Item I, Part I of this quarterly report on Form 10-Q.
For additional information
about the sale of CinemaSource UK Limited to Orchard Advertising, see Note 3 “Discontinued Operations” in the Notes
to the Condensed Consolidated Financial Statements included in Part I, Item I, of this Quarterly Report on Form 10-Q.
Purchase of Common Stock Tendered
On February 25, 2011,
Hollywood Media announced the final result of a tender offer to purchase up to 8,000,000 shares of its common stock at a price
of $2.05 per share (less any applicable withholding taxes and without interest) which expired on February 18, 2011. Hollywood
Media accepted 8,000,000 shares for purchase for a total cost of approximately $16.4 million. The number of shares properly tendered
and not withdrawn was 24,157,429. Accordingly, payment was made for approximately 33% of the tendered shares, and the rest of
the tendered shares were withdrawn from the tender offer. Immediately following the purchase of the tendered shares, Hollywood
Media had approximately 23,179,066 shares outstanding. For additional information about the purchase of common stock tendered,
see Note 4 – “Purchase of Common Stock Tendered” in the Notes to the Condensed Consolidated Financial Statements
included in Part I, Item I, of this Quarterly Report on Form 10-Q.
Capital Expenditures
Hollywood Media’s
capital expenditures during the nine and three months ended September 30, 2012 were $36,222 and zero respectively. We currently
anticipate that additional capital expenditures during 2012 will total approximately $15,000 including various system and equipment
upgrades.
Authorization of Stock Repurchase Program
Hollywood Media previously
reported in its current report on Form 8-K filed with the SEC on October 4, 2007, that its Board of Directors authorized a stock
repurchase program (the “Repurchase Program”) under which Hollywood Media may use up to $10.0 million of its cash
to repurchase shares of its outstanding common stock. During the third quarter of 2012, no shares of Hollywood Media’s common
stock were repurchased under the Repurchase Program.
Pursuant to the Repurchase
Program, Hollywood Media is authorized to purchase shares of its common stock from time to time on the open market or in negotiated
transactions. The purchases are to be funded from available cash and cash equivalents, and the timing and amount of any shares
repurchased will be determined by Hollywood Media’s management based on its evaluation of financial and market conditions,
legal requirements and other factors. The Repurchase Program has no time limit and may be suspended for periods or discontinued
at any time, and there is no guarantee as to the number of shares or the amount of cash to be utilized for repurchases. Shares
repurchased under the Repurchase Program will become authorized but unissued shares of Hollywood Media’s common stock. For
additional information regarding the Repurchase Program, see Part II, Item 2 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
At September 30, 2012,
we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes of the sort contemplated by paragraph (a) (4) of Item 303 of SEC Regulation
S-K. As such, management believes that we currently do not have any disclosures to make of the sort contemplated by paragraph
(a) (4) of Item 303 of SEC Regulation S-K regarding “off-balance sheet arrangements.”
Critical Accounting Estimates
In response to the
SEC’s 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 our condensed consolidated financial statements. The preparation of our condensed
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
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 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.
Derivative Instruments
The Company records
derivative instruments at fair value in our accompanying condensed consolidated balance sheets with changes in the fair values
of those instruments reported in earnings in our condensed consolidated results of operations. The Company does not hold any derivative
instruments that reduce risk associated with hedging exposure, accordingly the Company has not designated any of its derivatives
liability financial instruments as hedge instruments. For additional information about our significant accounting policies, including
the critical accounting policies discussed below, see Note 2 – Summary of Significant Accounting Policies in the Notes to
Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and Note 2 to the
Consolidated Financial Statements included in Part II, Item 8 in our Annual Report on Form 10-K for the year ended December 31,
2011, as amended.
Impairment
of Goodwill
Under FASB Accounting
Standard Codification Topic No. 350,
“Intangibles – Goodwill and Other”
(ASC 350), 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 involves 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 exceeds the implied value.
In September 2011,
the FASB issued ASU No. 2011-08,
“Testing for Goodwill Impairment (Topic 350),”
(“ASU 2011-08”).
ASU 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment
test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of
a reporting period is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity
has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill
impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011 and its early adoption by the Company
during the quarter ended September 30, 2011 did not have a material effect on the Company’s consolidated financial statements.
During
the three months ended September 30, 2012, the Company determined that $3.6 million of the goodwill associated with its Ad Sales
division should be written down after it was determined that the future cash flow of these assets is likely impaired, and the
risk associated with previously expected cash flows has increased and accordingly recorded an impairment loss of $3.6 million. For
additional Information see Note 6 - Segment Reporting in the Notes to Condensed Consolidated Financial Statements included in
included in Item I, Part I of this quarterly report on Form 10-Q
. At
September 30, 2012 we are not aware of any additional items or events that would cause us to adjust the recorded value of Hollywood
Media’s goodwill further. The goodwill recorded in the accompanying consolidated balance sheets as of September
30, 2012 and December 31, 2011 was $6,200,000 and $9,800,000, respectively. At September 30, 2012 and December 31,
2011 goodwill represented 44% and 54%, respectively, of total assets. Future changes in estimates used to conduct
the impairment review, including revenue projections or market 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. In
order to evaluate the sensitivity of the fair value calculations of our reporting units on the impairment calculation, we applied
a hypothetical decrease to the fair values of each reporting unit. The Company believes that the fair value of its
remaining reporting unit that contains goodwill at September 30, 2012 and December 31, 2011 met or exceeded the book value
of that reporting unit.
The Company believes
that the disparity between the book value of its assets as compared to the market capitalization of its business is in large part
a consequence of market conditions, including perceived risks in the debt markets, the Company’s industry and the broader
economy. While the Company believes that some of these risks are unique to specific companies, some represent global industry
risks. The Company believes that there is no fundamental change in our underlying business model or prospects for our Company.
The Company has evaluated the impairment of its goodwill, giving consideration to these risks, and their impact upon the respective
reporting units’ fair values, and has reported impairments where it deems appropriate. The Company believes that the fair
value of its remaining reporting unit that contains goodwill at September 30, 2012 and December 31, 2011 exceeded the book value
of those units.
Inflation and Seasonality
Although we cannot
accurately determine the precise effects of inflation, we do not believe inflation has a material effect on revenue or results
of operations. We consider our business to be somewhat seasonal and expect net revenues to be generally higher during the second
and fourth quarters of each fiscal year for our Tekno Books book licensing business as a result of the general publishing industry
practice of paying royalties semi-annually. In addition, although not seasonal, our Intellectual Properties division experiences
fluctuations in its revenue stream, 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 its 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not required.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
An evaluation was
performed under the supervision and with the participation of Hollywood Media’s management, including the Chief Executive
Officer (principal executive officer) and the Chief Financial Officer and Chief Accounting Officer (principal financial and accounting
officer), of the effectiveness of Hollywood Media’s disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation and
the material weakness described below, Hollywood Media’s management, including the Chief Executive Officer and Chief Financial
Officer and Chief Accounting Officer, have concluded that Hollywood Media’s disclosure controls and procedures were not
effective, as of September 30, 2012, to ensure that information required to be disclosed by Hollywood Media in reports that it
files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to Hollywood Media’s
management, including the Chief Executive Officer and Chief Financial Officer and Chief Accounting Officer, to allow timely decisions
regarding required disclosure.
As previously reported
in Hollywood Media’s Annual Report on Form 10-K for the year ended December 31, 2011, as amended, which was filed with the
Securities and Exchange Commission on April 16, 2012 and was amended on April 30, 2012, management assessed the effectiveness
of Hollywood Media’s internal control over financial reporting as of December 31, 2011 and included its Report on Internal
Control Over Financial Reporting in such Annual Report on Form 10-K for the year ended December 31, 2011, as amended. The Report
on Internal Control over Financial Reporting concluded the following deficiencies in the Company’s CinemasOnline and Intellectual
Properties businesses constitute material weaknesses in the Company’s internal control over financial reporting:
Identified
insufficient internal controls over the advertising sales process within its U.K. based CinemasOnline business, including inadequate
systems to allow for processing of advertising sales and deferred advertising sales; and deferred tax assets and insufficient
internal controls over its disbursements of funds and recording of related assets and expenses in the CinemasOnline business
.
See Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part
I, Item I of this Quarterly Report on Form 10-Q for information on the Company’s sale of CinemasOnline on May 1, 2012.
Identified insufficient
internal controls over the book development and book licensing process within its Intellectual Properties Division, including
inadequate systems to allow for processing of book development and book licensing revenue and deferred revenue; and insufficient
internal controls over its disbursements of funds and recording of related assets and expenses in the Intellectual Properties
Division.
A material weakness
in internal control over financial reporting is a control deficiency (within the meaning of the Public Company Accounting Oversight
Board Auditing Standard No. 5), or a combination of control deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected. As of September 30, 2012, Hollywood
Media had not remediated these material weaknesses.
Changes in Internal Control over Financial
Reporting
There have been no
changes in Hollywood Media’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably
likely to materially affect, Hollywood Media’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Not required.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
Hollywood Media did
not issue any securities during the quarter ended September 30, 2012, in transactions that were not registered under the Securities
Act of 1933.
Issuer Repurchases of Equity Securities
Hollywood Media reported
in its Form 8-K report filed on October 4, 2007 that its Board of Directors authorized a stock repurchase program (the “Repurchase
Program”) under which Hollywood Media Corp. may use up to $10.0 million of its cash to repurchase shares of its outstanding
common stock. The Repurchase Program was approved by Hollywood Media’s Board of Directors on September 28, 2007 and was
initially announced via press release on October 1, 2007.
Pursuant to the Repurchase
Program, Hollywood Media is authorized to purchase shares of its common stock from time to time on the open market or in negotiated
transactions. The purchases are to be funded from available cash and cash equivalents, and the timing and amount of any shares
repurchased will be determined by Hollywood Media’s management based on its evaluation of financial and market conditions,
legal requirements and other factors. The Repurchase Program has no time limit and may be suspended for periods or discontinued
at any time, and there is no guarantee as to the number of shares or the amount of cash to be utilized for repurchases. Shares
repurchased under the Repurchase Program will become authorized but unissued shares of Hollywood Media’s common stock.
During the third quarter
of 2012, no shares of Hollywood Media common stock were purchased under the Repurchase Program. As of September 30, 2012,
the maximum approximate dollar value of shares that may have been purchased under the Repurchase Program was $2,697,843 (calculated
by subtracting (i) the total price paid for all shares purchased under the Repurchase Program from inception through September
30, 2012 or $7,302,157 from (ii) the $10,000,000 potential maximum dollar value of repurchases approved under the life of the
Repurchase Program).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Quarterly
Report on Form 10-Q:
Exhibit
Number
|
|
Description
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer (principal executive officer) pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer and Chief Accounting Officer (principal financial
and accounting officer) pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer (principal executive officer) pursuant to 18 U.S.C.
1350.
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer and Chief Accounting Officer (principal financial
and accounting officer) pursuant to 18 U.S.C. 1350.
|
|
|
|
101**+
|
|
The following financial information
from Hollywood Media Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in
XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited)
and December 31, 2011, (ii) Condensed Consolidated Statements of Operations (unaudited) for the nine and three months
ended September 30, 2012 and 2011, (iii) Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2012 and 2011, and (iv) the Notes to Condensed Consolidated Financial Statements (unaudited).
|
**
Pursuant
to Rule 406T of Regulation S-T, these interactive data files are not deemed part of a registration statement or prospectus for
purposes of Section 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities
Exchange Act of 1934, and otherwise are not subject to liability under these sections.
+
Submitted
electronically with this Quarterly Report on Form 10-Q.
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.
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|
HOLLYWOOD MEDIA CORP.
|
Date: November 19, 2012
|
By:
|
/s/ Mitchell Rubenstein
|
|
|
Mitchell Rubenstein, Chairman of the Board and Chief Executive Officer (Principal executive officer)
|
Date: November 19, 2012
|
By:
|
/s/ Tammy G. Hedge
|
|
|
Tammy G. Hedge, Chief Financial Officer
and Chief Accounting Officer (Principal financial and
accounting officer)
|
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