NovelStem International Corp. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . Market for Common Stock Hollywood Media’s common stock trades on The NASDAQ Global Market under the symbol HOLL. The following table sets forth, for each of the periods indicated, the high and low sales prices per share of Hollywood Media’s common stock as reported by the NASDAQ Global Market based on published financial sources. High Low Year Ended December 31, 2011 First Quarter $ 1.97 $ 1.51 Second Quarter $ 1.79 $ 1.38 Third Quarter $ 1.73 $ 1.31 Fourth Quarter $ 1.49 $ 1.07 Year Ended December 31, 2012 First Quarter $ 1.34 $ 0.94 Second Quarter $ 1.43 $ 0.90 Third Quarter $ 1.51 $ 1.15 Fourth Quarter $ 1.48 $ 1.20 Holders of Common Stock As of March 19, 2013, there were 106 record holders of Hollywood Media’s common stock. Dividend Policy Hollywood Media has never paid cash dividends on its common stock and currently intends to retain any future earnings to finance its operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon Hollywood Media’s earnings, capital requirements and financial condition and such other factors deemed relevant by the Board of Directors. On February 25, 2011, Hollywood Media completed its tender offer and purchased 8 million shares of its common stock at a price of $2.05 per share (less any applicable withholding taxes and without interest). For additional information see Liquidity and Capital Resources in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations. Recent Sales of Unregistered Securities Hollywood Media did not issue any securities during the year ended December 31, 2012, in transactions that were not registered under the Securities Act of 1933. 14 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 under which Hollywood Media may use up to $10 million of its cash to repurchase shares of its outstanding common stock. The stock 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 stock 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 stock 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 that will be purchased or the amount of cash to be utilized for purchases under the stock repurchase program. Repurchased shares will become authorized but unissued shares of Hollywood Media’s common stock. The following table provides information with respect to common stock purchases by Hollywood Media during the fourth quarter of 2012. For additional information relating to the stock repurchase program, see “Liquidity and Capital Resources” in Part II, Item 7 of this Annual Report on Form 10-K. Maximum Total Number of Approximate Shares Purchased Dollar Value of Shares as Part of Publicly that May Yet Be Total Number of Average Price Announced Plans Purchased Under the Period Shares Purchased Paid Per Share or Programs (1) Plans or Programs (1) October 1, 2012 through October 31, 2012 - $ - - $ 2,697,843 November 1, 2012 through November 30, 2012 - $ - - $ 2,697,843 December 1, 2012 through December 31, 2012 16,600 $ 1.48 (2) 16,600 $ 2,673,261 (3) Total 16,600 $ 1.48 (2) 16,600 $ 2,673,261 (3) (1) As stated above, Hollywood Media reported in its Form 8-K report filed on October 4, 2007, that its Board of Directors authorized a stock repurchase program under which Hollywood Media may use up to $10 million of its cash to repurchase shares of its outstanding common stock. The stock 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. The stock 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 that will be purchased or the amount of cash to be utilized for purchases under the stock repurchase program. (2) Includes a broker commission of $508. (3) As of December 31, 2012, calculated by subtracting (i) the total price paid for all shares purchased under the stock repurchase program from inception through December 31, 2012, or $7,326,739, from (ii) the $10 million potential maximum dollar value of repurchases approved under the life of the stock repurchase program. Securities Authorized for Issuance Under Equity Compensation Plans. For information regarding the securities authorized for issuance under our equity compensation plans, please see Item 12 of Part III of this Annual Report on Form 10-K. 15 Performance Graph Not applicable. Item 6. Selected Financial Data . Not applicable. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . The following discussion and analysis should be read in conjunction with Hollywood Media’s Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K. 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 Broadway Sale 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 5, “Discontinued Operations” 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 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 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. We are beginning a reorientation process of this business from print to digital distribution. · 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 LLC (“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 and the change in Hollywood Media’s equity interest in Project Hollywood, see Note 18, “Related Party Transactions” in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 16 Year ended December 31, 2012 (“fiscal 2012”) as compared to the year ended December 31, 2011 (“fiscal 2011”). The results of continuing operations include application of accounting principles to reflect the discontinued operations resulting from the sale of the Cinemasource UK Limited Business in fiscal 2012. In addition, Hollywood Media sold the Broadway Ticketing Business in fiscal 2010 and the Hollywood.com Business in fiscal 2008. The sales of the Cinemasource UK Limited, Broadway Ticketing and Hollywood.com are described below. 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. As of the closing of the transactions contemplated by the Share Purchase Agreement, (1) Jeffrey Spector, a director of Buyer, was 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) and (2) Janette Erskine, a director of Buyer, was 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. Hollywood Media received such payments in accordance with the payment terms. 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 “Gain on sale of discontinued operations, net of income taxes” in our accompanying Consolidated Statements of Operations. The current portion of the discounted amount of the non-interest bearing loan is included in “Note receivable, current” and the long-term portion of the non-interest bearing loan is included in “Note receivable, less current portion” in our accompanying 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 of 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. 17 Sale of Broadway Ticketing Business Unit 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 from Key Brand pursuant to a Second Lien Credit, Security and Pledge Agreement, dated as of December 15, 2010 (the “Credit Agreement”), under which Hollywood Media made a $8,500,000 loan to Key Brand (the “Loan”), which Loan accrued interest at a rate of 12% per annum, matured on December 15, 2015 and was 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 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 “JPM Intercreditor Agreement”) which defined 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 March 14, 2011, Hollywood Media delivered to Key Brand a closing statement setting forth Hollywood Media’s calculation of Theatre Direct’s working capital as of the closing date of the Broadway Sale determined in the manner described in the Purchase Agreement. Pursuant to such closing statement, Hollywood Media accrued $3,702,620 as a working capital adjustment as of December 31, 2010 under the Purchase 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 on sale of discontinued operations, net of income taxes” in the accompanying consolidated statements of operations for the year ending December 31, 2011. April 2012 Amendments to the Broadway Sale Purchase Agreement, the Credit Agreement and the JPM Intercreditor Agreement On April 22, 2012, Hollywood Media entered into Amendment No. 4 to the Purchase Agreement (the “Fourth Purchase Agreement Amendment”). Pursuant to the Fourth Purchase Agreement Amendment, Hollywood Media 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 Fourth Purchase Agreement Amendment, Key Brand agreed to pay the first $7,000,000 earnout amount (the “First $7 Million Earnout”) to Hollywood Media 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 Hollywood Media on October 1, 2012 and was recorded upon collection of the $7,000,000 received on October 1, 2012. In addition, the revenue calculation for the second $7,000,000 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 revenue target for the Second $7 Million Earnout was reduced from $150,000,000 to $123,000,000 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 Fourth Purchase Agreement Amendment, the Second $7 Million Earnout was added as of October 5, 2012 to the principal amount of the Loan under the Credit Agreement. As of October 5, 2012, pursuant to the Credit Agreement, interest at a rate of 12% per annum and principal on such Second $7 Million Earnout amount was 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 principal amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15,500,000 as of October 5, 2012. 18 Hollywood Media recorded the Second $7 Million Earnout at a fair value of $4,500,000, which reflects a $2,500,000 discount. Hollywood Media will amortize the $2,500,000 discount under the effective interest method. Amortization under the effective interest method will be included in "Accretion of discount, net of allowance for uncollectability" in the accompanying consolidated statements of operations contained in Part II, Item 8 of this Annual Report on Form 10-K. On December 31, 2012, Hollywood Media received a scheduled payment under the Loan in the amount of $1,002,128, which included a principal payment of $538,462, an interest payment of $203,000 on the Second $7 Million Earnout and $260,666 of interest on the $8.5 million portion of the Loan. The principal payment of $538,462, combined with accretion of discount of $288,585, reduced the value of the Second $7 Million Earnout from $4,500,000 to $4,250,123. Accretion of discount, net of the reversal of previously recorded allowance for bad debt, was $1,429,315 on the $8.5 million portion of the Loan during the three months ended December 31, 2012. In addition, during the nine months ended September 30, 2012, Hollywood Media received scheduled interest payments under the $8.5 million portion of the Loan of $776,333. Hollywood Media received payments of $1,034,167 of interest from Key Brand in accordance with the terms of the loan during the year ended December 31, 2011 which was included in "Interest, net" in the accompanying consolidated statement of operations contained in Part II, Item 8 of this Annual Report on Form 10-K. On April 22, 2012, Hollywood Media entered into Amendment No. 1 to the Credit Agreement (the “First Credit Agreement Amendment”). Pursuant to the First Credit Agreement Amendment, Hollywood Media consented to certain amendments to the Credit Agreement, including consent to the Group Sales Contribution and to provide for additional reporting requirements. Hollywood Media also agreed to amend the JPM Intercreditor Agreement to provide that, subject to Key Brand’s compliance with the terms and conditions of Key Brand’s senior secured credit agreement, Key Brand would be permitted to make scheduled quarterly installment payments of the Second $7 Million Earnout prior to the maturity of the Credit Agreement, notwithstanding that the obligations under the Credit Agreement were subordinated to $15,000,000 of Key Brand’s obligations under Key Brand’s senior secured credit agreement. December 2012 Amendments to the Credit Agreement and the Warrant and New Intercreditor Agreement On December 31, 2012, Hollywood Media entered into Amendment No. 2 to the Credit Agreement (the “Second Credit Agreement Amendment”). Pursuant to the Second Credit Agreement Amendment, (i) effective as of December 31, 2012, the interest rate on the Loan was increased from 12% per annum to 13% per annum, (ii) the maturity date of the Loan was shortened from December 15, 2015 to June 30, 2015, (iii) Hollywood Media consented to Key Brand amending and restating Key Brand’s senior secured credit agreement to replace Key Brand’s prior senior lender, JPMorgan Chase Bank, N.A., with Key Brand’s new senior lender, Terido LLP (with the terms and conditions of such senior secured credit agreement remaining substantially the same), (iv) subject to the terms and conditions of the Terido Intercreditor Agreement described below, the net proceeds from any indebtedness incurred by Key Brand that is not otherwise permitted under Key Brand’s amended and restated senior secured credit agreement (other than from the proceeds of a refinancing of such amended and restated senior secured credit agreement) will be used to prepay the Loan, (v) the prior consent of Hollywood Media is required for any amendment to Key Brand’s amended and restated senior secured credit agreement that would be adverse to Hollywood Media in any material respect, and (vi) Key Brand will provide Hollywood Media with additional and more frequent financial reporting. Except as described in this paragraph, the terms and conditions of the Credit Agreement and the Loan remain substantially the same. 19 In connection with the Second Credit Agreement Amendment and Key Brand’s amended and restated senior secured credit agreement, Hollywood Media and Key Brand entered into that certain Subordination and Intercreditor Agreement, dated December 31, 2012 (the “Terido Intercreditor Agreement ”), with Terido LLP, as administrative agent for the senior secured lenders of Key Brand, 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. The terms and conditions of the Terido Intercreditor Agreement are substantially similar to the terms and conditions of the prior JPM Intercreditor Agreement. On December 31, 2012, in connection with the Second Credit Agreement Amendment, the Warrant was amended to (i) shorten the earliest date that Hollywood Media can put the Warrant to Theatre Direct from December 16, 2017 to June 30, 2015, (ii) increase the minimum price that Hollywood Media can put the Warrant to Theatre Direct from $1,000,000 to $3,000,000, and (iii) increase the minimum price that Theatre Direct can redeem the Warrant from Hollywood Media from $1,000,000 to $3,000,000. Except as described in the preceding sentence, the terms and conditions of the Warrant remain substantially the same. The Warrant is marked to market each reporting period to reflect changes in fair value. The fair value of the Warrant at December 31, 2012 was $700,000. In connection with the Second Credit Agreement Amendment, the Terido Intercreditor Agreement and the amendment to the Warrant described above, Key Brand paid Hollywood Media an amendment fee of $50,000 and reimbursed Hollywood Media for all out-of-pocket costs and expenses incurred in documenting such agreements. For additional information about this transaction, see Note 5 “Discontinued Operations” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K. Sale of Hollywood.com Business 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 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 August 2012. Hollywood Media recognized $412,684 and $729,351 in earnout gain during the years ended December 31, 2012 and 2011, respectively, which is included in “Gain on sale of discontinued operations, net of income taxes” in our accompanying consolidated statements of operations. Hollywood Media does not have a significant continuing involvement in the Hollywood.com Business operations. 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”). 20 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 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 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 $3,500,000 or, if less, the amount received by R&S Investments in connection with such transaction. The Special Committee unanimously approved the R&S Agreement and the Rubenstein Silvers Letter Agreement and determined that the transactions contemplated by the R&S Agreement and the Rubenstein Silvers Letter Agreement were advisable, fair to and in the best interests of Hollywood Media and its shareholders. In connection with approving the transactions contemplated by the R&S Agreement and the Rubenstein Silvers Letter Agreement, the Special Committee received a fairness opinion from a firm with experience in valuation work, which stated that as of August 28, 2012, based upon and subject to (and in reliance on) the assumptions made, matters considered and limits of such review, in each case as set forth in its opinion, the Buyout Amount which was paid by R&S Investments was fair from a financial point of view to Hollywood Media. For additional information about this transaction, see Note 5 “Discontinued Operations” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K. Results of Continuing Operations The following tables summarize changes in Hollywood Media’s revenue and operating expense from continuing operations by reportable segment for the years ended December 31, 2012 and 2011. For additional financial information regarding Hollywood Media’s reportable segments, see Note 16 “Segment Reporting” in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K. 21 Net Revenues Analysis Net Revenues 2011 to 2011 to (in millions) 2012 2012 2012 2011 Change ($) Change (%) Intellectual Properties $ 0.6 $ 1.1 $ (0.5 ) (45 )% Other - - - TOTALS $ 0.6 $ 1.1 $ (0.5 ) (45 )% Operating Expense Analysis Operating Expenses 2011 to 2011 to (in millions) 2012 2012 2012 2011 Change ($) Change (%) Intellectual Properties $ 0.8 $ 0.9 $ (0.1 ) (11 )% Other 5.5 6.0 (0.5 ) (8 )% TOTALS $ 6.3 $ 6.9 $ (0.6 ) (9 )% Comparison of Percentage Changes in Net Revenues and Operating Expenses 2011 to 2012 2011 to 2012 Revenues % Operating Expenses % Increase/(Decrease) in - Intellectual Properties (45 )% (11 )% Other - (8 )% TOTALS (45 )% (9 )% Note Regarding Known Material Trends, Uncertainties and Opportunities Impacting Hollywood Media Hollywood Media expects to have continuing losses in the near term. Notwithstanding these losses, as described below under “Liquidity and Capital Resources,” Hollywood Media expects that it will be able to satisfy its near term liquidity obligations. Other than the normal seasonal variance described under “Inflation and Seasonality,” Hollywood Media does not expect that there will be a significant variance in its earnings or its cash flows in the near term and accordingly does not expect its trend of losses to accelerate. The United States and global economic downturn, which could adversely affect business and personal discretionary spending is an uncertainty along with other factors that can have or are reasonably likely to have a material impact on Hollywood Media’s revenues, earnings and liquidity. Net Revenues Total net revenues for fiscal 2012 were $0.6 million compared to $1.1 million for fiscal 2011. Net revenues decreased $0.5 million, or 45% in fiscal 2012 from fiscal 2011. The decrease in net revenues for fiscal 2012 as compared to fiscal 2011 is the result of decreases in Intellectual Property revenue. The decrease in net revenues in fiscal 2012 as compared to fiscal 2011 was attributable to the timing of the delivery of manuscripts. The Intellectual Properties division generates revenues from several different activities including book development and licensing, and intellectual property licensing. 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 “Equity in Earnings of Unconsolidated Investees” below. 22 Equity in Earnings of Unconsolidated Investees Equity in earnings (losses) of unconsolidated investees consists of the following: For the years ended December 31, 2012 2011 (in millions) (in millions) NetCo Partners (a) $ - $ - MovieTickets.com (b) (0.3 ) 0.4 Project Hollywood LLC(c) 0.2 0.1 $ (0.1 ) $ 0.5 (a) NetCo Partners 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 owns 50% of NetCo Partners and accounts for its investment under the equity method. Hollywood Media’s 50% share of income of NetCo Partners was de minimus for fiscal 2012 and 2011. (b) MovieTickets.com Hollywood Media owns 26.2% of the total equity in the MovieTickets.com joint venture. Hollywood Media records its investment in MovieTickets.com under the equity method of accounting, recognizing its percentage interest in MovieTickets.com’s income or loss as equity in earnings of unconsolidated investees. Under applicable accounting principles, Hollywood Media recorded a $0.3 million loss and $0.4 million in income from its investment in MovieTickets.com for fiscal 2012 and 2011, respectively. Hollywood Media did not record $33,034 of its share of losses from MovieTickets.com for fiscal 2012 because accumulated dividends and net losses from 2012 and prior years exceeded the Company’s investment in MovieTickets.com as of December 31, 2012. During 2012 and 2011 the Company determined that $3.6 million and $4.8 million, respectively of the goodwill associated with MovieTickets.com should be written down and accordingly, recorded impairment losses of $3.6 million and $4.8 million, respectively. See Note 13, “Investments in and Advances to Equity Method Unconsolidated Investees” in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K for additional information about the impairment losses of $3.6 million and $4.8 million. 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. 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. MovieTickets.com is one of the leading destinations for the purchase of movie tickets through the Internet. Hollywood Media launched the MovieTickets.com website in May 2000 with several major movie theater exhibitors. The MovieTickets.com website allows users to purchase movie tickets and retrieve them at “will call” windows or kiosks at theaters or the user can print at home for theatres with that capacity. The website generates revenues primarily from service fees charged to users for the purchase of tickets, the sale of advertising and the sale of research data. Service fees on ticket sales were introduced in November 2000. See Item 1 – Business, and Note 13, “Investments in and Advances to Equity Method Unconsolidated Investees” in the Notes to Consolidated Financial Statements for additional information about MovieTickets.com. 23 (c) Project Hollywood LLC On October 27, 2011, Hollywood Media acquired 21.74% of the total equity in Project Hollywood, which owns Baseline StudioSystems for $1,250,000. 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 18, “Related Party Transactions” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K for more information on the assignment of the membership interest of Hollywood Media in Project Hollywood, LLC. Prior to this assignment, Project Hollywood LLC was not consolidated in these financial statements, and Hollywood Media recorded its share of the earnings of Project Hollywood LLC as “equity in earnings of unconsolidated investees” in the accompanying consolidated financial statements. Under applicable accounting principles, Hollywood Media recorded $0.1 million in income from its investment in Project Hollywood for fiscal 2011. This does not include the gain on the Assignment which was approximately $0.7 million recorded in “Other, net” in the Consolidated Statements of Operations contained in Part II, Item 8 of this Annual Report on Form 10-K. 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 for fiscal 2012 were essentially unchanged at $0.6 million as compared to $0.7 million for fiscal 2011. Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist of occupancy costs, professional legal and consulting service fees, telecommunications costs, general insurance costs and selling and marketing costs (such as advertising, marketing, promotional, business development, public relations, and commissions due to other parties). The SG&A expenses for fiscal 2012 were essentially unchanged at $2.9 million compared to $2.8 million for fiscal 2011. SG&A expenses include legal fees of approximately $0.8 million in fiscal 2012. Payroll and Benefits. Payroll and benefits expenses consist of payroll and benefits including any other types of compensation benefits as well as human resources and administrative functions. Payroll and benefits expenses for fiscal 2012 were $2.7 million as compared to $3.2 million for 2011, a decrease of $0.5 million or 16%. On October 1, 2012, Hollywood Media received the first $7 million tranche of the earnout pursuant to the Broadway Sale. As a result, pursuant to existing employment agreements, Mr. Rubenstein received $405,300 of such earnout payment and Ms. Silvers received $165,200 of such earnout payment on October 5, 2012 which were recorded as payroll expense in the fourth quarter of fiscal 2012. Following such payments, Hollywood Media has no further obligation to Mr. Rubenstein and Ms. Silvers in connection with the Broadway Sale. Also included in payroll expense for fiscal 2012 is non-cash amortization of deferred compensation in the amount of $430,000, of which $107,500 was included in the fourth quarter of fiscal 2012. The decrease in payroll and benefits in fiscal 2012 as compared to 2011 was primarily due to a decrease in executive payroll of $0.1 million, a decrease in payroll of the accounting department of approximately $0.1 million and a combined decrease in payroll of human resources, administration, MIS and legal of approximately $0.3 million. Depreciation and Amortization. Depreciation and amortization expense consists of depreciation of property and equipment, furniture and fixtures, web site development, leasehold improvements, equipment under capital leases and amortization of intangibles. Depreciation and amortization expense was $0.1 million for fiscal 2012 as compared to $0.2 million for fiscal 2011. Depreciation and amortization decreased $0.1 million or 50% in fiscal 2012 from fiscal 2011. The decrease in depreciation and amortization expense from fiscal 2011 to 2012 is due to reduced leasehold improvements amortization because of a change in location of the corporate office to a smaller and less expensive rental space and the balance is due to fixed assets becoming fully depreciated during or prior to Q1-11. 24 Interest, net. Interest, net was $1.2 million income for fiscal 2012 as compared to $1.0 million income for fiscal 2011. The increase of $0.2 million or 20% in Interest, net in fiscal 2012 as compared to fiscal 2011 was primarily attributable to interest received on the second $7 million earnout. Interest, net is attributable to the Note Receivable due to Hollywood Media from Key Brand Entertainment Inc., the purchaser of the Broadway Ticketing Division. The note has an interest rate of 13% per annum (changed from 12% per annum as of December 31, 2012) and matures on June 30, 2015. For additional information, see Note 5 “Discontinued Operations” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K. Accretion of Discount, net of allowance for uncollectability Accretion of discount, net was $1.7 million for fiscal 2012. The $1.7 million balance in Accretion of Discount, net in 2012 was primarily attributable to the accretion of the discount on the Loan from the Broadway Sale, net of the reversal of previously recorded allowance for bad debt. Other, net. Other, net was $2.1 million for fiscal 2012 as compared to $2.0 million for fiscal 2011. The $2.1 million balance in Other, net in 2012 was primarily attributable to the assignment of Project Hollywood which resulted in a $0.7 million gain and the increase in the fair value of the Warrant by $0.7 million. The $2.0 million balance in Other, net in 2011 was primarily attributable to $1.5 million in proceeds from key-man life insurance resulting from Dr. Greenberg’s death as well as the change in the fair value of derivative liabilities of $0.6 million. Income Tax Benefit. The benefit for fiscal 2012 of $5.3 million was fully offset by the income tax expense recognized in the “Gain on sale of discontinued operations, net of income taxes” in the Consolidated Statements of Operations contained in Part II, Item 8 of this Annual Report on Form 10-K. Net Income (Loss). Hollywood Media’s net income for fiscal 2012 was $10.4 million as compared to a net loss for fiscal 2011 of $6.9 million. The net income for fiscal 2012 was primarily due to a non-cash goodwill impairment charge of $3.6 million, offset by the pre-tax gain on sale of $12.2 million from the Broadway Sale, $2.3 million from the sale of the Hollywood.com Earnout, accretion of the discount of $1.7 million of the Note Receivable from Key Brand, and $1.2 million interest income received from the Note Receivable from the Broadway Sale. The net loss for fiscal 2011 was primarily due to a non-cash goodwill impairment charge of $4.8 million, offset by the $1.5 million in proceeds received from the key-man life insurance resulting from Dr. Greenberg’s death. LIQUIDITY AND CAPITAL RESOURCES Cash Balance at Year End; Sources and Uses of Cash Hollywood Media’s cash and cash equivalents were $11.4 million at December 31, 2012 as compared to $3.7 million at December 31, 2011. Our net working capital (defined as current assets less current liabilities) was $12.0 million at December 31, 2012 and $3.1 million at December 31, 2011. 25 Net cash used in operating activities from continuing operations during fiscal 2012 was $3.9 million, an increase of 50% compared to net cash used in operating activities from continuing operations during 2011 of $2.6 million. Net cash used in operating activities during 2012 was primarily attributable to the following: (1) net income of $10,409,564 and (2) $1,240,000 of interest received on the Loan. These items were partially offset by: (1) $3,600,000 non-cash goodwill impairment charge (2) legal fees of $800,000 (3) $430,000 non-cash amortization expense of deferred compensation costs, (4) $136,443 depreciation and amortization (5) cash provided which included cash received of $7,000,000 on the First $7,000,000 Earnout, $2,950,000 of cash received on the sale of the Hollywood.com earnout and $1,230,500 of cash received on the sale of Project Hollywood. By comparison, net cash used in operating activities during 2011 was $2,595,494. C ash usage in 2011 was primarily attributable to the loss from continuing operations and the need for staffing during the Broadway Ticketing post-sale transition period. As described in Note 5, “Discontinued Operations” in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, on October 1, 2012, following the end of the third quarter period, Hollywood Media received 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 5, 2012, which $7 million amount is to be amortized with interest at 12% per annum over the period October 5, 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 5, 2012. On December 31, 2012, the interest rate was increased to 13% per annum and the maturity date was moved up to June 15, 2015. The Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries. Hollywood Media recorded the Second $7 Million Earnout at a fair value of $4,500,000, which reflects a $2,500,000 discount. Hollywood Media will amortize the $2,500,000 discount under the effective interest method. Amortization under the effective interest method will be included in "Accretion of discount, net of allowance for uncollectability" in the accompanying consolidated statements of operations contained in Part II, Item 8 of this Annual Report on Form 10-K. On December 31, 2012, Hollywood Media received a scheduled payment under the Loan in the amount of $1,002,128, which included a principal payment of $538,462, an interest payment of $203,000 on the Second $7 Million Earnout and $260,666 of interest on the $8.5 million portion of the Loan. The principal payment of $538,462, combined with interest accretion of $288,585, reduced the value of the Second $7 Million Earnout from $4,500,000 to $4,250,123. Accretion of discount, net of the reversal of previously recorded allowance for bad debt, was $1,429,315 on the $8.5 million portion of the Loan during the three months ended December 31, 2012. In addition, during the nine months ended September 30, 2012, Hollywood Media received scheduled interest payments under the $8.5 million portion of the Loan of $776,333. Hollywood Media received payments of $1,034,167 of interest from Key Brand in accordance with the terms of the Loan during the year ended December 31, 2011 which was included in "Interest, net" in the accompanying consolidated statement of operations contained in Part II, Item 8 of this Annual Report on Form 10-K. Principal and interest payments on the $7,000,000 portion of the Loan (from the Second Earnout) are expected to be approximately $3,300,000 in 2013. In addition, interest payments on the original $8,500,000 portion of the Loan are expected to be approximately $1,120,000 in 2013. Net cash provided by investing activities during fiscal 2012 was $11.7 million, primarily attributable to: (1) $7,000,000 cash received in connection with the First $7 Million Earnout; (2) $1,230,500 cash received in connection with the assignment and assumption of Hollywood Media’s membership interest in Project Hollywood; (3) $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. Net cash used in investing activities during fiscal 2011 was $6.6 million, primarily used to pay Key Brand a working capital adjustment of $3.7 million in connection with the sale of the Broadway Ticketing Business, a payment of $1.7 million in payroll related bonuses which became due as a result of the Broadway Sale in fiscal 2010 pursuant to employment agreements, and a $1.25 million payment for the acquisition of 21.74% of the equity of Project Hollywood. 26 Net cash used in financing activities during fiscal 2012 was $0.1 million, which cash usage was primarily attributable to Hollywood Media's stock buy-back of 16,600 shares of Hollywood Media's common stock and payments under capital leases. Net cash used in financing activities during fiscal 2011 was $16.5 million, which cash usage was primarily for the purchase of common stock tendered to and purchased by Hollywood Media in Hollywood Media’s tender offer. See Note 6, “Purchase of Common Stock Tendered” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K. In connection with 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 revenue 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 5, 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 5, 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 5, 2012. On December 31, 2012, the interest rate was increased to 13% per annum and the maturity date was moved up to June 30, 2015. Hollywood Media recorded the Second $7 Million Earnout at a fair value of $4,500,000, which reflects a $2,500,000 discount. Hollywood Media will allocate amounts received under the quarterly principal payments received on the Second $7 Million Earnout to principal and accretion of discount in order to fully amortize the $2,500,000 discount under the effective interest method. Amortization of the $2,500,000 discount, under the effective interest method, will be included in "Accretion of discount, net of allowance for uncollectability" in the Consolidated Statements of Operations contained in Part II, Item 8 of this Annual Report on Form 10-K. 27 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. 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 5 “Discontinued Operations” in the Notes to Consolidated Financial Statements included in Part I, Item II, Item 8 of this Annual Report on Form 10-K. 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 and have been timely paid. 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 December 31, 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 “Gain on Sale of Discontinued Operations, net of income taxes” in the Consolidated Statement of Operations contained in Part II, Item 8 of this Annual Report on Form 10-K. The discounted amount of the non-interest bearing loan is included in “Notes Receivable” in the Consolidated Balance Sheets contained in Part II, Item 8 of this Annual Report on Form 10-K. For additional information about the sale of CinemaSource UK Limited to Orchard Advertising, see Note 5 “Discontinued Operations” in the Notes to the Consolidated Statement of Operations contained in Part II, Item 8 of this Annual Report on Form 10-K. 28 Purchase of Common Stock Tendered On February 25, 2011, Hollywood Media announced the final results of a tender offer to purchase up to 8 million 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 million 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. Capital Expenditures Our capital expenditures during each of 2012 and 2011 were $83,959 and $97,433, respectively. We currently anticipate capital expenditures in 2013 of approximately $75,000, including various systems 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 under which Hollywood Media may use up to $10 million of its cash to repurchase shares of its outstanding common stock. During the fourth quarter of 2012, 16,600 shares of Hollywood Media’s common stock were purchased under the repurchase program for a total cost of $24,582. In addition, during the first quarter of 2013, 510,700 shares of Hollywood Media’s common stock were repurchased under the repurchase program for a total cost of $749,966. 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. Repurchased shares will become authorized but unissued shares of Hollywood Media’s common stock. Off-Balance Sheet Arrangements As of December 31, 2012 and December 31, 2011, 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 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 4 of Item 303 regarding “off-balance sheet arrangements.” Critical Accounting Estimates We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our 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. 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 Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K. 29 Derivative Instruments The Company records derivative instruments at fair value in our accompanying consolidated balance sheet with changes in the fair values of those instruments reported in earnings in our 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. Impairment of Goodwill Under the Financial Accounting Standards Board ("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 a total impairment loss of $3.6 million for the year ended December 31, 2012. During the three months ended September 30, 2011, the Company determined that $4.8 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 a total impairment loss of $4.8 million for the year ended December 31, 2011. For additional information see Note 13 - “Investments in and Advances to Equity Method Unconsolidated Investees” in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K. At December 31, 2012 the Company is not aware of any additional items or events that would cause us to adjust the recorded value of Hollywood Media’s goodwill for impairment further. Future changes in estimates used to conduct the impairment review, including revenue projections or comparable market data and transactions 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 December 31, 2012 and December 31, 2011 met or exceeded the book value of that reporting unit. 30 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. 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 and NetCo Partners both experience fluctuations in their respective revenue streams, earnings and cash flow as a result of the amount of time that is expended in the creation and development of the intellectual properties and their respective licensing agreements. The recognition of licensing revenue is typically triggered by specific contractual events which occur at different points in time rather than on a regular periodic basis. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . Not applicable. 31