Item 1A. Risk Factors
Item 1A. Risk Factors .
Risks of Investing in Our Shares
Investments in our
common 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 Annual Report on 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 may also impair our business, operating results, financial condition, and prospects.
We have a history
of losses in our continuing operations.
We had a loss from
continuing operations before income taxes of approximately $4.4 million and $6.9 million in 2012 and 2011, respectively .
We may incur additional losses in the future.
5
Because Theatre
Direct represented a substantial portion of our business, following the Broadway Sale our business is substantially different.
Theatre Direct, which
owned our Broadway Ticketing Business, represented a substantial portion of our business until its sale in December 2010 (the
“Broadway Sale”). As a result, our operating results for any particular period may not accurately predict our future
operating results. Summarized results of our discontinued operations, which include the Broadway Ticketing Business, for 2011
and 2012 are set forth in the notes to our financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Our results of operation
and financial condition may be materially adversely effected if (i) our ability to receive any dividends and any other distributions
from MovieTickets.com is inhibited in any way, (ii) our ability to receive the payments under the Credit Agreement in connection
with the Broadway Sale is inhibited in any way, or (iii) our ability to exercise or put the Warrant issued to us in connection
with the Broadway Sale is inhibited in any way.
We may not receive
the payments due under the Credit Agreement in the Broadway Sale transaction.
Pursuant to the Intercreditor
Agreement, Key Brand’s obligations under the Credit Agreement are subordinated to up to $15 million of certain senior indebtedness
of Key Brand and our ability to exercise remedies upon a default under the Credit Agreement are subject to certain limitations.
There can be no assurance that Hollywood Media will receive all of the payments due under the Credit Agreement. The financial
condition and performance of Key Brand and/or its subsidiaries and the ability of Key Brand and/or its subsidiaries to satisfy
the covenants and obligations in the Credit Agreement (or any other applicable financing agreements) could adversely affect Key
Brand’s ability to satisfy its obligations under the Credit Agreement.
Key Brand’s
financial performance and condition will impact Key Brand’s ability to satisfy its obligations under the Credit Agreement
and the Purchase Agreement.
Key Brand’s
financial performance and condition will impact Key Brand’s ability to finance and grow its business, which would impact
its ability to satisfy its obligations under the Credit Agreement and the Purchase Agreement. There can be no assurances that
Key Brand will satisfy any or all of these obligations.
We are unable
to compete with Theatre Direct for 7 years from the date of closing of the transactions contemplated by the Purchase Agreement.
We have agreed that
Hollywood Media will not, and will cause its affiliates (as defined in the Purchase Agreement) not to, directly or indirectly,
own, manage, engage in, operate, control, work for or participate in the ownership, management, operation or control of, any business,
whether in corporate, proprietorship or partnership form or otherwise, engaged in the sales of tickets to live musical, live theatrical
or other live entertainment performances in the City of New York, New York or that otherwise competes with the business of Theatre
Direct and its subsidiaries as it exists as of the closing date, subject to certain exceptions, including that there are no restrictions
on the sale of advertisements (including online advertising). Accordingly, subject to these exceptions, the non-competition agreement
restricts our ability to engage in any business which competes with Theatre Direct for 7 years from the date of closing of the
transactions contemplated by the Purchase Agreement.
There can be
no assurance that the fair value of the Warrant will ever be realized.
After estimating future
cash flows adjusted for risk factors, we determined that the fair value of the Warrant issued to us in connection with the Broadway
Sale was $700,000 as of December 31, 2012. The Warrant will be marked to market each reporting period to reflect changes in fair
value.
The valuation methodologies
used to determine fair value can be subject to significant subjectivity, and the fair value of the Warrant established pursuant
to such methodologies may never be realized.
See Note 7, “Fair
Value of Financial Instruments and Concentration of Credit Risk” in the Notes to the Consolidated Financial Statements contained
in Part II, Item 8 of this Annual Report on Form 10-K for information on the methodologies used to determine fair value.
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For as long
as we remain a public company, we will continue to incur the expenses of complying with public company reporting requirements.
Our reporting obligations
as a U.S. public company were not affected as a result of completing the Broadway Sale. For as long as we remain a public company,
we have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act, which includes the
filing with the SEC of periodic reports, proxy statements and other documents relating to our business, financial conditions and
other matters, even though compliance with such reporting requirements is economically burdensome.
Following the
Broadway Sale, we may be deemed an Investment Company and subjected to related restrictions under the Investment Company Act of
1940.
The regulatory scope
of the Investment Company Act of 1940, as amended (the "Investment Company Act"), which was enacted principally for
the purpose of regulating vehicles for pooled investments in securities, extends generally to companies engaged primarily in the
business of investing, reinvesting, owning, holding or trading in securities. The Investment Company Act may, however, also be
deemed to be applicable to a company that does not intend to be characterized as an investment company but that, nevertheless,
engages in activities that may be deemed to be within the definitional scope of certain provisions of the Investment Company Act.
We believe that our anticipated principal activities following the Broadway Sale, which include operating the Intellectual Properties
Division, in which we now own 100%, will not subject us to regulation under the Investment Company Act. Nevertheless, there can
be no assurance that we will not be deemed to be an investment company. If we are deemed to be an investment company, we may become
subject to certain restrictions relating to our activities, including restrictions on the nature of our investments and the issuance
of securities. In addition, the Investment Company Act imposes certain requirements on companies deemed to be within its regulatory
scope, including registration as an investment company, adoption of a specific form of corporate structure and compliance with
certain reporting, record keeping, voting, proxy, disclosure and other rules and regulations. In the event of the characterization
of Hollywood Media as an investment company, our inability to satisfy such regulatory requirements, whether on a timely basis
or at all, would, under certain circumstances, have a material adverse effect on Hollywood Media.
Because our
business is smaller following the Broadway Sale, there is a possibility that our common stock may be delisted from the NASDAQ
Global Market if we fail to satisfy the continued listing standards of that market.
Our business is now
smaller as a result of the Broadway Sale, and therefore we may fail to satisfy the continued listing standards of the NASDAQ Global
Market. In the event that we are unable to satisfy the continued listing standards of the NASDAQ Global Market, our common stock
may be delisted from that market. In order to continue to be listed on the NASDAQ Global Market, we must meet the bid price and
total shareholders requirements as set forth in NASDAQ Listing Rule 5450(a) and at least one of the three standards in NASDAQ
Listing Rule 5450(b). Pursuant to NASDAQ Listing Rule 5450(a), the bid price of our common stock cannot fall below $1.00 per share
for 30 consecutive business days and we must have at least 400 total shareholders (including both holders of beneficial interest
and holders of record). We believe that if we continue to qualify for listing on the NASDAQ Global Market, we will satisfy the
Equity Standard under NASDAQ Listing Rule 5450(b), which requires (i) stockholders’ equity of at least $10 million, (ii)
at least 750,000 publicly held shares (total shares outstanding, less any shares held directly or indirectly by officers, directors
or any person who is the beneficial owner of more than 10% of the total shares outstanding of the company), (iii) market value
of publicly held shares of at least $5 million, and (iv) at least two registered and active market makers.
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If we are delisted
from the NASDAQ Global Market, we may apply to transfer our common stock listing to the NASDAQ Capital Market. However, our application
may not be granted if we do not satisfy the applicable listing requirements for the NASDAQ Capital Market at the time of the application.
Even if we successfully transfer our common stock listing to the NASDAQ Capital Market, but are unable to satisfy the minimum
bid price requirement of $1.00 per share or any of the other continued listing standards of the NASDAQ Capital Market, our common
stock could be delisted from the NASDAQ Capital Market. If our common stock were delisted from the NASDAQ Stock Market, we may
apply to transfer our common stock listing to the NYSE MKT. However, our application may not be granted if we do not satisfy the
applicable listing requirements for NYSE MKT at the time of the application. If our common stock were to be delisted from the
NASDAQ Global Market and we could not satisfy the listing standards of the NASDAQ Capital Market or the NYSE MKT, trading of our
common stock most likely would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted
securities. Such trading could reduce the market liquidity of our common stock. As a result, an investor would find it more difficult
to dispose of, or obtain accurate quotations for the price of, our common stock.
If our common stock
is delisted from the NASDAQ Global Market and we could not satisfy the listing standards of the NASDAQ Capital Market or the NYSE
MKT and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements
of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with
any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities
exchange or quoted on the NASDAQ Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions).
Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies
restrict the ability of shareholders to borrow against or “margin” low-priced stocks, and declines in the stock price
below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low-priced stocks
generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the
common stock can result in an individual shareholder paying transaction costs that represent a higher percentage of total share
value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase
our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers
from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of
investors to trade our common stock.
There can be
no assurance that any disposition or other strategic transaction will occur or, if one is undertaken, of its potential terms or
timing.
From time to time
we explore potential transactions that may help us to realize the full value of our assets in the interest of our shareholders.
There can be no assurance that any transaction will occur or, if one is undertaken, of its potential terms or timing. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” below .
We may not be
able to compete successfully in the e-books development business .
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 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.
Intellectual Properties
Business . Hollywood Media has applied for trademark and copyright protection for its major intellectual property titles. Each
of Hollywood Media and NetCo Partners currently has U.S. registered trademarks as well as pending trademark applications in the
U.S. 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.
8
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.
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 are dependent
on developing and maintaining strategic relationships .
The success of our
operations is dependent in part on MovieTickets.com’s ability to enter into and maintain strategic relationships and agreements
with exhibitors and Tekno Books’ ability to develop and execute book projects with authors. There can be no assurance such
relationships with exhibitors, authors and others will be developed and maintained or renewed and, if unable to do so, our financial
condition and results of operations could be adversely impacted.
Our
operations could be negatively impacted by systems interruptions.
The hardware and software
used in the MovieTickets.com business 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 us. General Internet traffic interruptions or delays
could also harm the MovieTickets.com business. To the extent MovieTickets.com’s services are disrupted, MovieTickets.com
could lose users of its website.
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Government
regulation could impact our business.
The
application of existing laws and regulations to the MovieTickets.com business relating to issues such as user privacy, pricing,
taxation, content, sweepstakes, copyrights, trademarks, advertising, and the characteristics and quality of our products and services
can be unclear.
Several
federal laws could have an impact on the MovieTickets.com 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.
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 these individuals without “cause” or either of these individuals resign for “good
reason”, the other individual will have the right to resign for “good reason”.
The death of
the Tekno Books Chief Executive Partner, Dr. Greenberg in June 2011 could have an adverse effect on the ability of Tekno Books
to maintain its relationships with authors and publishers.
Tekno Books had been
dependent on Dr. Martin Greenberg, the former Chief Executive Partner of Tekno Books, for the continued development and maintenance
of strategic business relationships, including many of its relationships with authors and publishers. The death of
Dr. Greenberg in June 2011 could have an adverse effect on the ability to develop and maintain these relationships.
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. Shares of preferred stock are also subject to
potential issuance under the terms of our shareholders' rights plan described below.
Our articles
of incorporation, bylaws, shareholders’ rights plan and Florida law may discourage takeover attempts.
Certain provisions
of our articles of incorporation, bylaws 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. Our
bylaws include provisions requiring shareholders to provide specified advance notice to Hollywood Media of director nominations
or proposed business to be transacted at shareholder meetings, in order for a shareholder to make a director nomination or propose
meeting business. If certain events, such as a takeover bid not approved by our Board, occur, our shareholder’s rights plan
will then entitle certain holders of our common stock to purchase at a specified price, shares of a series of our preferred stock
with special voting, dividend and other rights.
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In addition, Florida’s
“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 20% but less than 33-1/3% of all voting power;
(b) at least 33-1/3% but less than a majority of all voting power; or (c) a majority or more of all voting power.
Florida’s “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 10% of the outstanding voting shares of
the corporation (or their affiliates).
Our stock price is volatile .
The trading price
of our common stock has and may continue to fluctuate significantly. During the 24 months ended December 31, 2012, the trading
price for our common stock on the NASDAQ Global Market ranged from $0.90 to $1.97 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 has 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.
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 may also 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 operations and there can be no assurance that additional financing will be available on favorable
terms.
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. 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 debt would increase our interest expense and other debt service
obligations and could result in the imposition of covenants that restrict our operational and financial flexibility. See Part
II, Item 7 of this Annual Report on Form 10-K– Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
11
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.
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. Many of these risks are beyond our control and are
driven by factors that we cannot predict. 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.
The outcome of, and potential impact
of matters relating to, the lawsuit filed by Hollywood Media, National Amusements Inc. and MovieTickets.com against AMC Entertainment
Inc. could have a material adverse effect on the value of Hollywood Media’s interest in MovieTickets.com.
As reported in Part
I, Item 3 of this Annual Report on Form 10-K, Hollywood Media, National Amusements Inc. and MovieTickets.com filed a lawsuit against
AMC Entertainment Inc. (“AMC”) alleging, among other things, 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.
Hollywood Media and
the other plaintiffs 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 to the MovieTickets.com Joint Venture and its joint venturers, Hollywood Media and National Amusements,
Inc.
If the lawsuit against
AMC is unsuccessful, it could have a material adverse effect on the value of Hollywood Media’s interest in MovieTickets.com.
Item 1B. Unresolved Staff
Comments .
At the time of filing
of this Annual Report on Form 10-K, there are no unresolved comments for disclosure under this Item 1B.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.