| HOLLYWOOD MEDIA CORP Item 1A Risk Factors |
| Risks of Investing in Our Shares Investments in our capital stock are speculative and involve a high degree of risk |
| Investors should carefully consider the following matters, as well as the other information in this Form 10-K If any of these risks or uncertainties actually occur, our business, results of operations, financial condition, or prospects could be substantially harmed, which would adversely affect your investment |
| Additional risks and uncertainties that we do not presently know or that we currently deem immaterial may also impair our business, operating results, financial condition, and prospects |
| We have a history of losses and an accumulated deficit |
| Our operating results could fluctuate significantly on a quarterly and annual basis |
| We have incurred significant losses since we began doing business |
| In the years ended December 31, 2005 and 2004 we had net losses of approximately dlra8dtta9 million and dlra11dtta6 million, respectively |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra265dtta4 million |
| We may incur additional losses while we continue to grow our businesses |
| Our future success will depend on the continued growth in our various businesses, and our ability to generate ticketing, licensing, syndication and advertising revenues |
| In addition, our operating results may fluctuate significantly in the future as a result of a variety of factors, including: • seasonal variations in the demand for Broadway tickets and resulting variations in our revenue from Broadway ticket sales; • our ability to sell advertisements to be displayed on our websites and on our cable TV networks; • seasonal trends in Internet usage and Internet sales and advertising placements; • our ability to enter into or renew strategic relationships and agreements with media organizations, websites and authors; • the amount and timing of our marketing expenditures and other costs relating to the expansion of our operations; • new products, websites or Internet services introduced by us or our competitors; and • technical difficulties, security concerns or system downtime affecting the Internet generally or the operation of our websites in particular |
| As a result, our operating results for any particular period may not accurately predict our future operating results |
| 8 _________________________________________________________________ [65]Table of Contents We may not be able to compete successfully |
| Ticketing Businesses |
| The market for ticketing services and products is intensely competitive and rapidly changing |
| The number of telephone services, online services, wireless services and websites competing for consumers’ attention and spending has proliferated and we expect that competition will continue to intensify |
| We compete, directly and indirectly, for customers, advertisers, members and content providers with the following categories of companies: • telephone services, wireless services and websites targeted to entertainment enthusiasts, moviegoers, theatergoers and other eventgoers, which feature directories of movies, shows, events, showtimes, theater and event locations and related content, and also allow users to purchase tickets; • travel agents and other traditional ticketing organizations, companies, agents and brokers; and • the box office at each of the venues that hold events for which we sell tickets |
| Internet Businesses |
| The market for Internet services and products is intensely competitive and rapidly changing |
| Competition could result in reduced traffic to our websites, price reductions for content that we syndicate and advertising that we offer, a decline in product sales, reduced margins or loss of market share, any of which could cause a material decrease in our revenues |
| We compete, directly and indirectly, for advertisers, viewers, members and content providers with the following categories of companies: • online services or websites targeted to entertainment enthusiasts, particularly moviegoers and theatergoers, such as IMDb |
| com; • publishers and distributors of traditional off-line media, such as television, radio and print, including those targeted to movie enthusiasts, many of which have established or may establish websites, such as Eonline |
| com; • traditional movie and entertainment organizations including the Walt Disney Company and Warner Bros |
| ; • general purpose consumer online services such as AOL, Yahoo!, and MSN, each of which provides access to movie-related information and services; and • web search and retrieval and other online services, such as Google, Yahoo! |
| We believe that the principal competitive factors in attracting and retaining users are the depth, breadth and timeliness of content, the ability to offer compelling and entertaining content and brand recognition |
| Other important factors in attracting and retaining users include ease of use, service quality and cost |
| We believe that the principal competitive factors in attracting and retaining advertisers include the number of users of our website, the demographics of our users, the number of pages of our websites viewed or accessed by our users, price and the creative implementation of advertisement placements and sponsorship promotions |
| There can be no assurance that we will be able to compete favorably with respect to these factors |
| Based on our review of publicly available documents, we believe some of our existing competitors in both our ticketing and Internet businesses, as well as potential new competitors, have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and substantially larger user bases than we do and, therefore, have significantly greater ability to attract advertisers and users |
| In addition, many of these competitors may be able to respond more quickly than us to new or emerging technologies and changes in Internet user requirements and to devote greater resources than us to the development, promotion and sale of their services |
| There can be no assurance that our current or potential competitors will not develop products and services comparable or superior to those developed by us or adapt more quickly than us to new technologies, evolving industry trends or changing Internet user preferences |
| Increased competition could result in price reductions, reduced margins or loss of market share, any of which would result in a decrease in our revenues |
| There can be no assurance that we will be able to compete successfully against current and future competitors, or that competitive pressures faced by us would not impair our ability to expand our operations or grow our revenues |
| Numerous companies and individuals are engaged in the book development business |
| We also compete with a large number of companies that license characters and properties into film, television, books and merchandise |
| Competition in these 9 _________________________________________________________________ [66]Table of Contents businesses is largely based on the number and quality of relationships that we are able to develop with authors and celebrities |
| There can be no assurance that our current or future competitors will not be successful in developing relationships with authors and celebrities with whom we have previously had relationships |
| Our revenues will decrease if we are unable to maintain these relationships or develop new relationships |
| We may not be able to successfully protect our trademarks and proprietary rights |
| Our performance and ability to compete are dependent to a significant degree on our internally developed and licensed content and technology |
| We rely on a combination of copyright, trademark and trade secret laws, confidentiality and nondisclosure agreements with our employees and with third parties and contractual provisions to establish and maintain our proprietary rights |
| There can be no assurance that the steps taken by us to protect our proprietary rights will be adequate, or that third parties will not infringe upon or misappropriate our copyrights, trademarks, service marks and similar proprietary rights |
| In addition, effective copyright and trademark protection may be unenforceable or limited in certain foreign countries |
| In the future, litigation may be necessary to enforce and protect our trademarks, service marks, trade secrets, copyrights and other intellectual property rights |
| Any such litigation would be costly and could divert management’s attention from other more productive activities |
| Adverse determinations in such litigation could result in the loss of certain of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties, or prevent us from selling our services |
| We own trademark registrations in the United States for many of the trademarks that we use, including HOLLYWOODCOM and BROADWAYCOM, and some of our trademarks are registered in select foreign countries |
| We have also filed trademark applications in select foreign countries for the marks HOLLYWOOD MEDIA CORP, HOLLYWOODCOM, and others |
| There can be no assurance that we will be able to secure adequate protection for these names or other trademarks in the United States or in foreign countries |
| If we obtain registration of those trademarks, we may not be able to prevent our competitors from using different trademarks that contain the words “Hollywood” or “Broadway |
| ” Many countries have a “first-to-file” trademark registration system; and thus we may be prevented from registering our marks in certain countries if third parties have previously filed applications to register or have registered the same or similar marks |
| It is possible that our competitors or others will adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion |
| Our inability to protect our HOLLYWOODCOM and BROADWAYCOM marks and other marks adequately could impair our ability to maintain and expand such brands and thus impair our ability to generate revenue from these brands |
| Intellectual Properties Business |
| Hollywood Media has applied for trademark and copyright protection for each of its major intellectual property titles |
| Each of Hollywood Media and NetCo Partners currently has US registered trademarks as well as pending trademark applications in the US related to its respective business, and they also have foreign registered trademarks and pending trademark applications in several foreign jurisdictions |
| As Hollywood Media’s properties are developed, Hollywood Media intends to apply for further trademark and copyright protection in the United States and certain foreign countries |
| Copyright protection in the United States on new publications of works for hire extend for a term of 95 years from the date of initial publication or 120 years from the year of creation, whichever expires first |
| Trademark registration in the United States extends for a period of ten years following the date of registration |
| To maintain the registration, affidavits must be filed between the fifth and sixth years following the registration date affirming that the trademark is still in use in commerce and providing evidence of such use |
| The trademark registration must be renewed prior to the expiration of the ten-year period following the date of registration |
| Failure to adequately protect these intellectual property rights could result in adverse consequences for these businesses due to the risks described above |
| 10 _________________________________________________________________ [67]Table of Contents We may become subject to liability for infringement of third-party intellectual property rights |
| There can be no assurance that third parties will not bring copyright or trademark infringement claims against us, or claim that our use of certain technology violates a patent |
| Even if these claims are not meritorious, they could be costly and could divert management’s attention from other more productive activities |
| If it is determined that we have infringed upon or misappropriated a third party’s proprietary rights, there can be no assurance that any necessary licenses or rights could be obtained on terms satisfactory to us, if at all |
| The inability to obtain any required license on satisfactory terms could force us to incur expenses to change the way we operate our businesses |
| If our competitors prepare and file applications that claim trademarks owned or registered by us, we may oppose these applications and have to participate in administrative proceedings to determine priority of right in the trademark, which could result in substantial costs to us, even if the eventual outcome is favorable to us |
| An adverse outcome could require us to license disputed rights from third parties or to cease using such trademarks |
| In addition, inasmuch as we license a portion of our content from third parties, our exposure to copyright infringement or right of privacy or publicity actions may increase; because we must rely upon such third parties for information as to the origin and ownership of such licensed content |
| We generally obtain representations as to the origins, ownership and right to use such licensed content and generally obtain indemnification to cover any breach of any such representations; however, there can be no assurance that such representations will be accurate or that such indemnification will provide adequate compensation for any breach of such representation |
| There can be no assurance that the outcome of any litigation between such licensors and a third party or between us and a third party will not lead to royalty obligations for which we are not indemnified or for which such indemnification is insufficient, or that we will be able to obtain any additional license on commercially reasonable terms if at all |
| We have significantly expanded our data syndication, Internet and ticketing operations over the past six years through our acquisitions of the businesses of hollywood |
| and CinemasOnline, and through the launch of Broadway |
| com (Hollywood Media currently owns 26dtta2prca of the equity of MovieTickets |
| We plan to continue to expand our operations and market presence by entering into joint ventures, acquisitions, business combinations, investments, or other strategic alliances |
| These transactions create risks such as: • problems retaining key technical and managerial personnel; • the availability of financing to make acquisitions; • additional expenses of acquired businesses; and • the inability to maintain relationships with the customers or other business partners of acquired businesses |
| We may not succeed in addressing these risks if we are not able to adequately develop or increase our management, operational and financial resources and systems |
| To the extent that we are unable to identify and successfully integrate future ventures into our operations, our growth strategy may not be successful and our stock price could decrease |
| We are dependent on our ability to develop strategic relationships with media, entertainment and Internet organizations |
| The success of our operations is dependent in part on our ability to enter into and maintain strategic relationships and agreements with media, entertainment and Internet organizations |
| There can be no assurance that we will be able to develop and maintain these strategic relationships and, if we are unable to do so, our financial conditions and results of operations could be adversely impacted |
| In addition, our intellectual property division is dependent on our ability to identify, attract and retain best-selling authors and media celebrities who create our intellectual properties |
| Our ability to enter into 11 _________________________________________________________________ [68]Table of Contents contracts with new authors or renew contracts would be impaired without the services of Dr |
| Martin Greenberg |
| See the risk factor “Our ability to attract qualified personnel and retain certain key personnel is critical to our business” below |
| Our operations could be negatively impacted by systems interruptions |
| The hardware and software used in our Internet and ticketing operations, or that of our affiliates, could be damaged by fire, floods, hurricanes, earthquakes, power loss, telecommunications failures, break-ins and similar events |
| Our websites could also be affected by computer viruses, electronic break-ins or other similar disruptive problems |
| These system problems could negatively affect our business |
| Insurance may not adequately compensate us for any losses that may occur due to any failures or interruptions in systems |
| General Internet traffic interruptions or delays could also harm our business |
| As with Internet websites in general, our websites may experience slower response times or decreased traffic for a variety of reasons |
| Additionally, online service providers have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems |
| To the extent our services are disrupted, we could lose users of our websites and our ticketing and advertising revenues could decline |
| We are subject to additional security risks by doing business over the Internet |
| A significant obstacle to consumer acceptance of electronic commerce over the Internet has been the need for secure transmission of confidential information in transaction processing |
| Internet usage could decline if any well-publicized compromise of security occurred |
| We may incur additional costs to protect against the threat of security breaches or to alleviate problems caused by these breaches |
| If a third person were able to misappropriate our users’ personal information or credit card information, we could be held liable for failure to adequately protect such information and subject to monetary damages to the extent our users suffer financial losses or other harm as a result thereof |
| We may not be able to adapt as technologies and customer expectations continue to evolve |
| To be successful, we must adapt to rapidly changing technologies by continually enhancing our websites and ticketing services and introducing new services to address our customers’ changing expectations |
| We must evaluate and implement new technologies that are available in the marketplace or risk that our customers will not continue using our services |
| Examples of technologies that we continue to implement or evaluate include those related to streaming and downloading of audio and video content on our websites, delivery of content over wireless devices and the convergence of cable television, wireless, satellite and Internet services and delivery systems |
| We could incur substantial costs if we need to modify our services or infrastructure in order to adapt to changes affecting providers of content and services through the Internet |
| Our customer base and thus our revenues could decrease if we cannot adapt to these changes |
| If our suppliers of tickets for Broadway or London’s West End shows did not sell us all the tickets we wish to buy, our financial results may be adversely affected |
| We are one of many licensed ticket agents that purchase and resell tickets for Broadway and London West End shows |
| We obtain the tickets we sell through our arrangements with theatre box offices and we maintain our own inventory of tickets for sale |
| If the box offices changed their policies or methods of ticket sales in a manner that resulted in our inability to buy all the tickets that we wish to buy for resale by our Broadway Ticketing division, then Hollywood Media’s revenues and financial results may be adversely affected |
| If we are not able to maintain a sufficient level of bonding, we may be precluded from purchasing tickets |
| Government regulation of the Internet could impact our business |
| The application of existing laws and regulations to our business relating to issues such as user privacy, pricing, taxation, content, sweepstakes, copyrights, trademarks, advertising, and the characteristics and quality 12 _________________________________________________________________ [69]Table of Contents of our products and services can be unclear |
| We also may be subject to new laws and regulations related to our business |
| Although we endeavor to comply with all applicable laws and regulations and believe that we are in compliance, because of the uncertainty of existing laws and the possibility that new laws may be adopted, there is a risk that we will not be in full compliance |
| Several federal laws could have an impact on our business |
| The Digital Millennium Copyright Act establishes binding rules that clarify and strengthen protection for copyrighted works in digital form, including works used via the Internet and other computer networks |
| The Child Online Protection Act is intended to restrict the distribution of certain materials deemed harmful to children |
| The Children’s Online Privacy Protection Act of 1998 protects the privacy of children using the Internet, by requiring, among other things, (1) that in certain specific instances the operator of a website must obtain parental consent before collecting, using or disclosing personal information from children under the age of 13, (2) the operator of a website to make certain disclosures and notices on the website or online service regarding the collection, use or disclosure of such personal information, and (3) the operator of a website or online service to establish and maintain reasonable procedures to protect the confidentiality, security and integrity of personal information collected from children under the age of 13 |
| Our efforts to comply with these and other laws subject our business to additional costs, and failure to comply could expose our business to liability |
| We are dependent on Mitchell Rubenstein and Laurie S Silvers, our founders |
| Mitchell Rubenstein, our Chairman of the Board and Chief Executive Officer, and Laurie S Silvers, our Vice Chairman, President and Secretary, have been primarily responsible for our organization and development |
| The loss of the services of either of these individuals would hurt our business |
| If either of these individuals were to leave Hollywood Media unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience |
| The employment agreements between Hollywood Media and each of these individuals provide, among other things, that if we terminate either of their agreements without “cause,” we will have also terminated the other’s agreement without “cause |
| ” Our ability to attract qualified personnel and retain certain key personnel is critical to our business |
| Our future operating results depend substantially upon the continued service of our executive officers and key personnel |
| Our future operating results will also depend in significant part upon our ability to attract and retain qualified management, technical, marketing, sales and support personnel |
| Competition for qualified personnel in our industry is intense, and we cannot ensure success in attracting or retaining qualified personnel |
| In addition, there may be only a limited number of persons with the requisite skills to serve in these positions |
| Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees |
| Our intellectual property business could be harmed by the loss of the services of Dr |
| Martin H Greenberg, who has been primarily responsible for developing relationships with the best-selling authors who create our intellectual properties |
| Greenberg owns the remaining 49prca interest in Tekno Books through which we operate our intellectual properties division |
| Many of the authors with whom we have relationships are bound to multiple book contracts and our ability to renew these contracts or enter into contracts with new authors would be impaired without the services of Dr |
| We may be liable for the content we make available on the Internet |
| There is risk that we could become subject to various types of legal claims relating to the content we make available on our websites or the downloading and distribution of such content, or the content we license for books, including claims such as defamation, invasion of privacy and copyright infringement |
| Although we 13 _________________________________________________________________ [70]Table of Contents carry liability insurance that covers some types of claims to a limited extent, our insurance may not cover all potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed |
| Any costs or imposition of liability that is not covered by insurance or in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition |
| We have authorized but unissued preferred stock, which could affect rights of holders of common stock |
| Our articles of incorporation authorize the issuance of preferred stock with designations, rights and preferences determined from time to time by our board of directors |
| Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock |
| In addition, the preferred stock could be issued as a method of discouraging a takeover attempt |
| Although we do not intend to issue any preferred stock at this time, we may do so in the future |
| Our articles of incorporation, shareholders’ rights plan and Florida law may discourage takeover attempts |
| Certain provisions of our articles of incorporation and our shareholders’ rights plan may discourage takeover attempts and may make it more difficult to change or remove management |
| Our articles of incorporation authorize the issuance of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our Board of Directors |
| Under our shareholder’s rights plan adopted in 1996, our Board of Directors declared a dividend of one right for each share of common stock |
| If certain events, such as a takeover bid not approved by our Board, occur, the rights will then entitle most holders to purchase at a specified price, shares of a series of our preferred stock with special voting, dividend and other rights |
| In addition, Florida has enacted legislation that may deter or frustrate takeovers of Florida corporations, such as our company |
| The Florida “control share acquisitions” statute provides that shares acquired in a “control share acquisition” (which excludes transactions approved by our board of directors) will not have voting rights unless the voting rights are approved by a majority of the corporation’s disinterested shareholders |
| A “control share acquisition” is an acquisition, in whatever form, of voting power in any of the following ranges: (a) at least 20prca but less than 33-1/3prca of all voting power; (b) at least 33-1/3prca but less than a majority of all voting power; or (c) a majority or more of all voting power |
| The state of Florida “affiliated transactions” statute requires approval by disinterested directors or supermajority approval by disinterested shareholders of certain specified transactions between a public corporation and holders of more than 10prca of the outstanding voting shares of the corporation (or their affiliates) |
| The trading price of our common stock has and may continue to fluctuate significantly |
| During the 24 months ended December 31, 2005, the trading price for our common stock on the Nasdaq Stock Market ranged from dlra2dtta31 to dlra5dtta69 per share |
| Our stock price may fluctuate in response to a number of events and factors, such as our quarterly operating results, announcements of new products or services, announcements of mergers, acquisitions, strategic alliances, or divestitures and other factors, including similar announcements by other companies that investors may consider to be comparable to us |
| In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of the companies |
| These broad market and industry fluctuations may cause the market price of our stock to decrease, regardless of our operating performance |
| 14 _________________________________________________________________ [71]Table of Contents Future sales of our common stock in the public market could adversely affect our stock price and our ability to raise funds in new stock offerings |
| Future sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect prevailing market prices of our common stock and could impair our ability to raise capital through future offerings of equity securities |
| We may issue additional shares of common stock in connection with future financings, acquisitions or other transactions, or pursuant to outstanding stock options, warrants and other convertible securities, and we plan to issue additional stock options and stock grants from time to time to our employees and directors |
| We are generally unable to estimate or predict the amount, timing or nature of future issuances or public sales of our common stock |
| Sales of substantial amounts of our common stock in the public market could cause the market price for our common stock to decrease |
| In addition, a decline in the price of our common stock would likely impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities |
| We may require additional capital to finance our growth or operations and there can be no assurance that additional financing will be available on favorable terms |
| We have required substantial financing to fund our acquisitions, growth and operations since our inception, and we may require additional financing in the future |
| Our long-term financial success depends on our ability to generate sufficient revenue and cash flow to offset operating expenses |
| To the extent we do not generate sufficient revenues and cash flow to offset expenses we will require further financing to fund our ongoing operations |
| We cannot assure you that any additional financing will be available or if available, that it will be on favorable terms |
| The terms of any financing that we enter into will vary depending on many factors including, among other things, our then current financial condition, the market price of our common stock, and other characteristics and terms of our capital structure including outstanding options and warrants |
| We may seek to raise additional capital through public or private offerings of equity securities or debt financings |
| Our issuance of additional equity securities could cause dilution to holders of our common stock and may adversely affect the market price of our common stock |
| The incurrence of additional debt could increase our interest expense and other debt service obligations and could result in the imposition of covenants that restrict our operational and financial flexibility |
| Changes in securities laws and regulations may increase our costs |
| The Sarbanes-Oxley Act of 2002 and the SEC rules promulgated thereunder have imposed increased demands upon and required ongoing changes in some of our operational systems and processes, corporate governance, and compliance and disclosure processes, and the Nasdaq Stock Market has implemented changes in its requirements for companies that are Nasdaq-listed |
| These developments have resulted in, and future changes in such rules may result in, increases in our expenses for information systems, auditing and consulting fees, legal compliance and financial reporting costs |
| These developments could also make it more difficult for us to attract and retain qualified members of our board of directors or executive officers |
| We have identified a material weakness in our evaluation of internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002; failure to achieve and maintain effective internal controls could have a material adverse effect on our business and stock price |
| As reported in this Form 10-K under the caption “Item 9A — Controls and Procedures”, Hollywood Media’s management has identified a material weakness in internal controls and concluded that Hollywood Media’s internal control over financial reporting and disclosure controls were not effective |
| As described in Item 9A of this Form 10-K, we are in the process of remediating this weakness |
| Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price |
| 15 _________________________________________________________________ [72]Table of Contents We are exposed to market risk related to changes in interest rates and fluctuations in foreign currency exchange rates |
| Market risk is the risk of loss arising from adverse changes in our assets or liabilities that might occur due to changes in market rates and prices, such as interest or foreign currency exchange rates, as well as other relevant market rate or price changes |
| We have an investment in a subsidiary in the United Kingdom that sells our services and pays for products and services in British pounds |
| A decrease in the British foreign currency relative to the US dollar could adversely impact our margins |
| As the assets, liabilities and transactions of our United Kingdom subsidiary are denominated in British pounds, the results and financial condition are subject to translation adjustments upon their conversion into US dollars for our financial reporting purposes |
| A large decline in this foreign currency relative to the US dollar might have a material adverse affect on Hollywood Media’s results of operations or financial condition |
| For additional discussion of market risk, see “Item 7A — Quantitative And Qualitative Disclosures About Market Risk” below |
| Other economic factors may adversely affect our future results or the market price of our stock (such as recession, war, terrorism) |
| We operate in a rapidly changing economic and technological environment that presents numerous risks |
| Economic recession, war, terrorism, international incidents, labor strikes and disputes, and other negative economic conditions may cause damage or disruption to our facilities, information systems, vendors, employees, customers and/or website traffic, which could adversely impact our revenues and results of operations, and stock price |