# NovelStem International Corp.: Form 10-Q for the period ended Sep 30, 2012

- Company: [NovelStem International Corp.](/companies/nstm.md) (CIK 912544)
- Form: 10-Q
- Filed: 2012-11-19
- Accepted by EDGAR: Nov 19, 2012, 16:32 ET
- Period: 2012-09-30
- Accession: 0001144204-12-063883
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/912544/000114420412063883/v325544_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/912544/000114420412063883/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $96.0k | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2012-01-01 to 2012-09-30 | $429.1k | us-gaap:SalesRevenueNet |
| Selling, general and administrative | 3 months, 2012-07-01 to 2012-09-30 | $639.0k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-01-01 to 2012-09-30 | $1.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-01-01 to 2012-09-30 | −$3.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | −$1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-01 to 2012-09-30 | −$1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | −$476.4k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2012-01-01 to 2012-09-30 | −$1.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-07-01 to 2012-09-30 | −$0.02 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2012-01-01 to 2012-09-30 | −$0.06 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted shares (weighted) | 3 months, 2012-07-01 to 2012-09-30 | 23,179,066 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-01-01 to 2012-09-30 | 23,179,066 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-01-01 to 2012-09-30 | −$2.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2012-01-01 to 2012-09-30 | $36.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-09-30 | $6.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-09-30 | $6.7m | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $14.7m | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $1.5m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2012-09-30 | $13.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 64,682 characters.

### Cautionary Note Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q or that are otherwise made by us or on our behalf about our financial condition, results of operations and business constitute “forward-looking statements,” within the meaning of federal securities laws. Hollywood Media Corp. (“Hollywood Media”, “our”, or “Company”) cautions readers that certain important factors may affect Hollywood Media’s actual results, levels of activity, performance or achievements and could cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements anticipated, expressed or implied by any forward-looking statements that may be deemed to have been made in this Quarterly Report on Form 10-Q or that are otherwise made by or on behalf of Hollywood Media. Without limiting the generality of the foregoing, “forward-looking statements” are typically phrased using words such as “may,” “will,” “should,” “expect,” “plans,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “pro forma” or “continue” or the negative variations thereof or similar expressions or comparable terminology. Factors that may affect Hollywood Media’s results and the market price of our common stock include, but are not limited to:

- our continuing operating losses;
- negative cash flows and accumulated deficit;
- our ability to develop and maintain strategic relationships;
- MovieTickets.com Inc.’s ability to compete with the other online movie ticketing service and the outcome of, and potential impact of matters relating to, the lawsuit filed by Hollywood Media, National Amusements Inc. and MovieTickets.com, Inc. against AMC Entertainment Inc. relating to MovieTickets.com (for more information about such lawsuit, see Note 7 “Certain Commitments and Contingencies” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q);
- our ability to maintain and obtain sufficient capital to finance our operations;
- our ability to realize anticipated cost efficiencies;
- government regulation;
- adverse economic factors such as recession, war, terrorism, international incidents or labor strikes and disputes;
- our ability to design, implement and maintain effective internal controls;
- dependence on our founders;
- the unpredictability of our stock price;
- the possibility of our common stock being delisted from the NASDAQ Global Market and not qualifying for trading on another exchange or market (such as the NASDAQ Capital Market, the NYSE Amex (formerly the American Stock Exchange) or the over-the-counter market);
- the possibility of not receiving payments from Key Brand Entertainment Inc. in connection with the sale of our Broadway Ticketing business pursuant to that certain Second Lien Credit Security Pledge Agreement dated as of December 15, 2010, entered into by Theatre Direct NY, Inc., Key Brand Entertainment Inc., and Hollywood Media (the “Credit Agreement”);
- the impact of the death of Tekno Books’ former Chief Executive Partner, Dr. Martin Greenberg, on the ability of Tekno Books to maintain relationships it has with certain authors and publishers;
- the timing and amount of the payments we receive pursuant to the Credit Agreement; and
- our ability to exercise or put our warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct NY, Inc. issued to us by Theatre Direct NY, Inc. pursuant to that certain Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand Entertainment Inc. (as amended, the “Purchase Agreement”).

Hollywood Media is also subject to other risks detailed herein, or detailed in our Annual Report on Form 10-K for the year ended December 31, 2011, as amended, and in other filings made by Hollywood Media with the Securities and Exchange Commission.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors, including unknown or unpredictable ones, also could have material adverse effects on our future results.

Because these forward-looking statements are subject to risks and uncertainties, we caution you not to place undue reliance on these statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any responsibility to review or confirm analysts’ expectations or estimates or to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this Quarterly Report on Form 10-Q, except as required by law. As a result of the foregoing and other factors, no assurance can be given as to the future results, levels of activity or achievements and neither we nor any other person assumes responsibility for the accuracy and completeness of such statements.

Overview

Until December 15, 2010, Hollywood Media was comprised of various businesses focusing primarily on online ticket sales, deriving revenue primarily from Broadway, Off-Broadway and London’s West End ticket sales to individuals and groups, as well as advertising and book development license fees and royalties. Our Broadway Ticketing business was comprised of Broadway.com, 1-800-BROADWAY, Theatre Direct and Theatre.com. On December 15, 2010, we completed the sale of our Broadway Ticketing Business through the sale of all of the outstanding capital stock of Theatre Direct to Key Brand, as contemplated by the Purchase Agreement. Following this sale, our business segments for our continuing operations are as follows:

- **Ad Sales –** includes Hollywood Media’s 26.2% equity interest in MovieTickets.com. Prior to the sale of Cinemasource UK Limited on May 1, 2012 (which business included UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW.CO.UK Limited), the Ad Sales segment also sold advertising on plasma TV displays throughout the U.K. and Ireland, on lobby display posters, movie brochure booklets and ticket wallets distributed in cinemas, live theater and other entertainment venues in the U.K. and Ireland. See Note 3, “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for information on the sale of Cinemasource UK Limited.
- **Intellectual Properties –** owns or controls the exclusive rights to certain intellectual properties created by best-selling authors and media celebrities, which it licenses for book and other media. This segment also includes our wholly-owned subsidiary, Tekno Books, a book development business, and this segment does not include our 50% interest in NetCo Partners, for purposes of this discussion and analysis.
- **Other –** is comprised of payroll and benefits for corporate and administrative personnel as well as other corporate-wide expenses, such as legal fees, audit fees, proxy costs, insurance, centralized information technology, and includes consulting and other fees and costs relating to compliance with the provisions of the Sarbanes-Oxley Act of 2002 that require Hollywood Media to assess and report on internal control over financial reporting, and related development of controls. Until August 28, 2012, this segment also included Hollywood Media’s equity interest in Project Hollywood (which was reduced from 21.74% of the total equity in Project Hollywood to 20.65% of the total equity in Project Hollywood at June 30, 2012), which in turn owns Baseline. On August 28, 2012 Hollywood Media assigned Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange for certain consideration. For additional information on the assignment of Hollywood Media’s interest in Project Hollywood, LLC and the change in Hollywood Media’s equity interest in Project Hollywood, see Note 9, “Related Party Transactions” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

Results of Operations

The following discussion and analysis should be read in conjunction with Hollywood Media’s Unaudited Condensed Consolidated Financial Statements and the notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

The Ad Sales segment currently consists of the Company’s investment in MovieTickets.com. As the Company accounts for its investment in MovieTickets.com under the equity method of accounting, there are no net revenues, operating income (loss), capital expenditures or depreciation and amortization expense to report for the Ad Sales segment. The following table summarizes Hollywood Media’s revenues, operating expenses and operating income (loss) from continuing operations by reportable segment for the nine months ended September 30, 2012 (“Y3-12”) and 2011 (“Y3-11”) and the three months ended September 30, 2012 (“Q3-12”) and 2011 (“Q3-11”), respectively:

*(unaudited)*

| Y3-12 | Intellectual Properties | Other | Total |
| --- | ---: | ---: | ---: |
| Net Revenues | $429,082 | $- | $429,082 |
| Operating Expenses | 507,978 | 3,456,034 | 3,964,012 |
| Operating Loss | $(78,896) | $(3,456,034) | $(3,534,930) |
| **Y3-11** |  |  |  |
| (unaudited) |  |  |  |
| Net Revenues | $841,546 | $- | $841,546 |
| Operating Expenses | 776,455 | 5,062,595 | 5,839,050 |
| Operating Income (Loss) | $65,091 | $(5,062,595) | $(4,997,504) |
| **Q3-12** |  |  |  |
| (unaudited) |  |  |  |
| Net Revenues | $96,035 | $- | $96,035 |
| Operating Expenses | 151,550 | 1,002,961 | 1,154,511 |
| Operating Loss | $(55,515) | $(1,002,961) | $(1,058,476) |
| **Q3-11** |  |  |  |
| (unaudited) |  |  |  |
| Net Revenues | $152,424 | $- | $152,424 |
| Operating Expenses | 162,358 | 1,768,911 | 1,931,269 |
| Operating Loss | $(9,934) | $(1,768,911) | $(1,778,845) |

### Results of Discontinued Operations

### Sale of Broadway Ticketing Division to Key Brand Entertainment, Inc.

On December 15, 2010, Hollywood Media Corp. (“Hollywood Media”) completed the sale of its Broadway Ticketing Division (“the Broadway Sale”) through the sale of all of the outstanding capital stock of Theatre Direct NY, Inc. (“Theatre Direct”) to Key Brand Entertainment Inc. (“Key Brand”), as contemplated by the Stock Purchase Agreement, dated as of December 22, 2009, as amended, entered into between Hollywood Media and Key Brand (“the Purchase Agreement”). There are no material relationships among Hollywood Media and Key Brand or any of their respective affiliates other than in respect of the Purchase Agreement and the related ancillary agreements.

Pursuant to the Purchase Agreement, at the closing of the Broadway Sale, (a) Hollywood Media received (i) $20,530,102 in cash (including $530,102 pursuant to the estimated working capital adjustment described in the Purchase Agreement), (ii) a $8,500,000 note (“the Loan”) from Key Brand pursuant to a Second Lien, Security and Pledge Agreement, dated as of December 15, 2010 (the “Credit Agreement”), pursuant to which Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum, with the loan maturing on December 15, 2015, which Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries, and (iii) a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct as of the closing date on a fully diluted basis at an exercise price of $.01 per share (the “Warrant”), and (b) Key Brand assumed $1,600,000 of liabilities associated with employment agreements with certain employees of Theatre Direct. In addition, Hollywood Media was entitled to receive earnout payments (“the Earnout”) of up to $14,000,000, in two $7,000,000 tranches, contingent upon Theatre Direct and its subsidiaries achieving certain revenue targets during the period from the closing date through the end of the 10th full fiscal year following the closing date as set forth in the Purchase Agreement.

On April 22, 2012, the Company entered into Amendment No. 4 (the "Amendment") to the Purchase Agreement. Pursuant to the Amendment, the Company consented to the contribution of the “group sales” business (but not the Broadway.com consumer ticketing business) owned by Key Brand to a newly formed joint venture (the “Group Sales JV”; such contribution, the “Group Sales Contribution”). The balance of the business sold to Key Brand under the terms of the Purchase Agreement, which included Broadway.com, remained at Key Brand and Theatre Direct. As part of the Amendment, Key Brand agreed to pay the first $7 million earnout amount (the “First $7 Million Earnout”) to the Company on or before October 1, 2012 regardless of the actual revenues of Theatre Direct and its subsidiaries for the fiscal year of Key Brand ending June 30, 2012. The First Earnout amount of $7 million was paid by Key Brand to the Company on October 1, 2012. In addition, the revenue calculation for the second $7 million earnout amount (the “Second $7 Million Earnout”) was modified to exclude “group sales” (and the revenues of the new joint venture conduction such business) and the target for the Second Earnout was reduced from $150 million to $123 million accordingly. On October 5, 2012, Hollywood Media received written notice from Key Brand that Theatre Direct achieved the revenue target for the Second $7 Million Earnout in Key Brand’s fiscal year ended June 30, 2012. Accordingly, pursuant to the Amendment, the Second $7 Million Earnout was added as of October 1, 2012 to the principal amount of the Loan under the Credit Agreement. Pursuant to the Credit Agreement, interest at a rate of 12% per annum and principal on such Second $7 Million Earnout will be amortized over the term of the Credit Agreement in equal quarterly installments through the maturity date of the Loan on December 15, 2015. As a result of the Second $7 Million Earnout being added to the $8.5 million principal amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012. See Note 3, “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for information regarding revisions to the earnout payments. The Warrant will be marked to market each reporting period to reflect the changes in fair value.

After the closing date of the sale of Theatre Direct pursuant to the Purchase Agreement, Hollywood Media delivered on March 14, 2011 to Key Brand a closing statement setting forth Hollywood Media’s calculation of Theatre Direct’s working capital as of the closing date determined in the manner described in the Purchase Agreement. Pursuant to the closing statement, Hollywood Media accrued $3,702,620 as a working capital adjustment as of December 31, 2010 under the agreement which included $530,102 related to the estimated working capital delivered at closing by Key Brand. This working capital adjustment of $3,734,106 was paid on March 22, 2011 and included $31,486 of interest which is included in “Gain on sale of discontinued operations, net of income taxes” in the accompanying condensed consolidated statements of operations for the nine months ending September 31, 2011.

For additional information about this transaction, see Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

### Sale by Minority Interest in Project Hollywood LLC (which owns the Baseline StudioSystems business)

On August 28, 2012, Hollywood Media entered into an Assignment and Assumption of Membership Interest and Waiver (the “Assignment”) with Baseline Holdings LLC (“Baseline Holdings”), Project Hollywood LLC, Mitchell Rubenstein and Laurie S. Silvers. Baseline Holdings is wholly-owned by Mr. Rubenstein and Ms. Silvers. As described below, the Assignment and the transactions contemplated by the Assignment were approved by a Special Committee of Hollywood Media’s Board of Directors comprised solely of independent directors (the “Special Committee”).

Pursuant to the Assignment, Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange for total consideration of $1,800,000 (the “Project Hollywood Purchase Price”). The Project Hollywood Purchase Price has been paid as follows: (1) $1,230,500 in cash (which has been paid by Baseline Holdings to Hollywood Media), (2) Mr. Rubenstein waived his right to receive any future principal and interest owed by Key Brand to Hollywood Media pursuant to the Loan (as of August 28, 2012, Mr. Rubenstein had the right to receive 4.76% of the principal, or $404,600, and interest on account of the Loan), and (3) Ms. Silvers waived her right to receive any future principal and interest owed by Key Brand to Hollywood Media pursuant to the Loan (as of August 28, 2012, Ms. Silvers has the right to receive 1.94% of the principal, or $164,900, and interest on account of the Loan). Hollywood Media recorded the fair value of the waivers by Mr. Rubenstein and Ms. Silvers in the long term portion of “Other Assets” in the accompanying condensed consolidated balance sheets included in Part I, Item I of this Quarterly Report on Form 10-Q. Hollywood Media acquired its membership interest in Project Hollywood on October 27, 2011 for $1,250,000.

As a result of the waivers of Mr. Rubenstein and Ms. Silvers described in the preceding paragraph, after August 28, 2012, Hollywood Media will retain all payments of principal and interest made by Key Brand under the Loan. As of August 28 and September 30, 2012, the principal balance due under the Loan was $8,500,000.

The Special Committee unanimously approved the Assignment and determined that the transactions contemplated by the Assignment were advisable, fair to and in the best interests of Hollywood Media and its shareholders. In connection with approving the transactions contemplated by the Assignment, the Special Committee received a fairness opinion from a firm with experience in valuation work, which stated that as of August 28, 2012, based upon and subject to (and in reliance on) the assumptions made, matters considered and limits of such review, in each case as set forth in its opinion, the Project Hollywood Purchase Price was fair from a financial point of view to Hollywood Media. As of October 1, 2012, the Principal Balance due under the Loan increased to $15,500,000 as a result of the achievement of the revenue threshold for the Second $7 Million Earnout in the Purchase Agreement.

### Sale of Hollywood.com Business Unit to R&S Investments, LLC

On August 21, 2008, Hollywood Media entered into a purchase agreement (the “R&S Purchase Agreement”) with R&S Investments, LLC (“R&S Investments”) for the sale of the Hollywood.com Business. R&S Investments is wholly-owned by Mr. Rubenstein, Hollywood Media’s Chief Executive Officer and Chairperson of the Board, and Ms. Silvers, Hollywood Media’s President, Secretary and Vice-Chairperson of the Board. Pursuant to the R&S Purchase Agreement, Hollywood Media sold the Hollywood.com Business to R&S Investments for a potential purchase price of $10.0 million, which includes $1.0 million in cash which was paid to Hollywood Media at closing and potential earnout payments totaling $9.0 million, of which $1,892,629 has been paid as of September 30, 2012. During the nine and three months ending September 30, 2012, Hollywood Media recorded $412,684 and $85,926 respectively, in earnout income under the R&S Purchase Agreement. The Hollywood.com Business included the Hollywood.com website and related URLs and celebrity fan websites and Hollywood.com Television, a free video on demand service distributed pursuant to annual affiliation agreements with certain cable operators. For additional information about this transaction, see Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Item I, Part I of this Quarterly Report on Form 10-Q.

### Buyout of Obligation of R&S Investments, LLC to Pay Hollywood.com Earnout

On August 28, 2012, (1) Hollywood Media and R&S Investments entered into an Agreement (the “R&S Agreement”) regarding the R&S Purchase Agreement, (2) Hollywood Media, Mr. Rubenstein and Ms. Silvers entered into a letter agreement regarding the R&S Agreement (the “Rubenstein Silvers Letter Agreement”), and (3) R&S Investments provided Hollywood Media with a letter regarding a contingent additional payment (the “R&S Letter”). As described below, the R&S Agreement and the Rubenstein Silvers Letter Agreement and the transactions contemplated by the R&S Agreement and the Rubenstein Silvers Letter Agreement were approved by a Special Committee of Hollywood Media’s Board of Directors comprised solely of independent directors (the “Special Committee”).

Pursuant to the R&S Agreement, in exchange for R&S Investments paying Hollywood Media $2,950,000 in cash (the “Buyout Amount”), which payment has been made to Hollywood Media, R&S Investments fully satisfied all of its obligation to pay the purchase price under Section 3.1 of the R&S Purchase Agreement and any additional consideration or earnout payment under Section 3.3 of the R&S Purchase Agreement, and R&S Investments shall have no further obligations and/or liabilities (and Hollywood Media shall have no further rights and/or remedies) under Article III of the R&S Purchase Agreement or otherwise.

Pursuant to the Rubenstein Silvers Letter Agreement, Mr. Rubenstein agreed that that, in connection with the transaction consummated under the R&S Agreement and in addition to the Buyout Amount, the next $280,000 of the MovieTickets.com 5% Interest (as defined in the Amended and Restated Employment Agreement dated as of December 22, 2008, between Hollywood Media and Mr. Rubenstein, as amended (the “Rubenstein Employment Agreement”)) that would be distributed by Hollywood Media to Mr. Rubenstein pursuant to the Rubenstein Employment Agreement will be retained by Hollywood Media (and not paid to Mr. Rubenstein) and is a reduction to “Derivative Liabilities” in the accompanying condensed consolidated balance sheets included in Part I, Item I of this Quarterly Report on Form 10-Q.

In addition, pursuant to the Rubenstein Silvers Letter Agreement, Ms. Silvers agreed that, in connection with the transaction consummated under the R&S Agreement and in addition to the Buyout Amount, the next $280,000 of the MovieTickets.com 5% Interest (as defined in the Amended and Restated Employment Agreement dated as of December 22, 2008, between Hollywood Media and Ms. Silvers, as amended (the “Silvers Employment Agreement”)) that would be distributed by Hollywood Media to Ms. Silvers pursuant to the Silvers Employment Agreement will be retained by Hollywood Media (and not paid to Ms. Silvers) and is a reduction to “Derivative Liabilities” in the accompanying condensed consolidated balance sheets included in Part I, Item I of this Quarterly Report on Form 10-Q.

Pursuant to the R&S Letter, R&S Investments agreed that in the event of a sale of all the assets of Hollywood.com, LLC to one person or a group of persons not controlled, directly or indirectly, by Mr. Rubenstein and Ms. Silvers or their heirs, personal representatives or affiliates prior to August 31, 2015, R&S Investments shall pay to Hollywood Media $3,500,000 or, if less, the amount received by R&S Investments in connection with such transaction.

The Special Committee unanimously approved the R&S Agreement and the Rubenstein Silvers Letter Agreement and determined that the transactions contemplated by the R&S Agreement and the Rubenstein Silvers Letter Agreement were advisable, fair to and in the best interests of Hollywood Media and its shareholders. In connection with approving the transactions contemplated by the R&S Agreement and the Rubenstein Silvers Letter Agreement, the Special Committee received a fairness opinion from a firm with experience in valuation work, which stated that as of August 28, 2012, based upon and subject to (and in reliance on) the assumptions made, matters considered and limits of such review, in each case as set forth in its opinion, the Buyout Amount which was paid by R&S Investments was fair from a financial point of view to Hollywood Media.

### Sale of Cinemasource UK Limited – Share Purchase Agreement

On May 1, 2012, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Orchard Advertising Limited (“Buyer”), pursuant to which the Company sold, and Buyer purchased, the entire issued share capital of Cinemasource UK Limited (the “Purchased Shares”) which business was part of the Company’s Ad Sales division and included UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW.CO.UK Limited.

Pursuant to the Share Purchase Agreement, the purchase price for the Purchased Shares is U.S. $250,000, payable in cash in a non-interest bearing loan in twenty equal quarter-annual installments of $12,500 each over a period of five years. Subject to the terms and conditions of the Share Purchase Agreement, the first installment of the purchase price was due and was paid to the Company on July 31, 2012 and subsequent installments of the purchase price are due every three calendar months thereafter. The Company imputed interest at 16.5% per annum on this $250,000 non-interest bearing loan resulting in a discounted amount of $168,014 which was included in the total gain on sale attributable to the sale of Cinemasource UK Limited of $649,215. This gain on sale is included in “Income from Discontinued Operations” in the Condensed Consolidated Statement of Operations included in Item I, Part I of this quarterly report on Form 10-Q. The discounted amount of the non-interest bearing loan is included in “Other Assets” in the condensed consolidated balance sheets included in Item I, Part I of this quarterly report on Form 10-Q.

NET REVENUES

Total net revenues were $429,082 for Y3-12 as compared to $841,546 for Y3-11, a decrease of $412,464 or 49% and $96,035 for Q3-12 as compared to $152,424 for Q3-11, a decrease of $56,389 or 37%. The decrease in net revenue in Y3-12 as compared to Y3-11 and Q3-12 as compared to Q3-11 is the result of a decrease in Intellectual Property revenue.

The decrease in Intellectual Properties net revenues in Y3-12 as compared to Y3-11 and Q3-12 as compared to Q3-11 was attributable to the timing of the delivery of manuscripts and the beginning of a reorientation of the focus of this business to digital distribution from print. The Intellectual Properties division generates revenues from several different activities including intellectual property licensing and book development. Revenues vary quarter to quarter depending on the timing of delivery of manuscripts to the publishers. Revenues are recognized when the earnings process is complete and the ultimate collection of such revenues is no longer subject to contingencies. This division does not include NetCo Partners, which is reported separately; see “Earnings (Losses) of Unconsolidated Investees” below.

### EARNINGS (LOSSES) OF UNCONSOLIDATED INVESTEES

Earnings (losses) of unconsolidated investees consisted of the following:

*(unaudited)*

*(unaudited)*

|  | Nine Months Ended September 30, 2012 | 2011 | Three Months Ended September 30, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| NetCo Partners (a) | $(436) | $358 | $(152) | $43 |
| MovieTickets.com (b) | (3,852,855) | (4,386,550) | (3,780,740) | (4,565,818) |
| Project Hollywood (c) | 111,440 | - | 21,227 | - |
|  | $(3,741,851) | $(4,386,192) | $(3,759,665) | $(4,565,775) |

(a) NetCo Partners

Hollywood Media owns 50% of NetCo Partners as of September 30, 2012 and accounts for its investment under the equity method. NetCo Partners owns *NetForce* and is primarily engaged in the development and licensing of *NetForce*. NetCo Partners recognizes revenues when the earnings process has been completed based on the terms of the various agreements, generally upon the delivery of the manuscript to the publisher and at the point where ultimate collection is substantially assured. When advances are received prior to completion of the earnings process, NetCo Partners defers recognition of revenue until the earnings process has been completed. Hollywood Media’s 50% share of income of NetCo Partners was essentially $0 for Y3-12 and Y3-11 as well as Q3-12 and Q3-11.

(b) MovieTickets.com

Hollywood Media owns 26.2% of the equity in MovieTickets.com, Inc. as of September 30, 2012 and shares in 26.2% of the income or losses generated by the joint venture. This investment is recorded under the equity method of accounting, recognizing 26.2% of ownership of MovieTickets.com income or loss as “Equity in earnings of unconsolidated investees” in the accompanying condensed consolidated statements of operations. Under applicable accounting principles, Hollywood Media recorded $252,855 and $180,740 in loss from its investment in MovieTickets.com for the nine and three months ended September 30, 2012, respectively. Hollywood Media did not record $23,903 of its share of losses from MovieTickets.com for the nine and three months ended September 30, 2012 because accumulated dividends and net losses from 2012 and prior years exceed the Company’s investment in MovieTickets.com as of September 30, 2012. Hollywood Media recorded $4,386,550 and $4,565,818 in loss from its investment in MovieTickets.com for the nine and three months ended September 30, 2011, respectively. During Y3-11, the Company determined that goodwill associated with the assets of the Ad Sales Segment was impaired and accordingly recorded a non-cash goodwill impairment charge of $4,795,783. During Y3-12, the Company determined that goodwill associated with the assets of the Ad Sales Segment was impaired and accordingly recorded a non-cash goodwill impairment charge of $3,600,000. For additional information see Note 6 – Segment Reporting in the Notes to Condensed Consolidated Financial Statements included in Item I, Part I of this quarterly report on Form 10-Q. The MovieTickets.com web site generates revenues primarily from service fees charged to users for the purchase of movie tickets online, the sale of advertising and research fees. On July 18, 2011 MovieTickets.com declared a dividend of $4,000,000. Hollywood Media received its 26.2% pro rata share of such dividend, amounting to $1,048,875 on July 19, 2011, which reduced the Company’s investment in MovieTickets.com as the dividend did not exceed the amount of the Company’s investment. Hollywood Media distributed on, July 19, 2011, $52,444 of such dividend distribution, representing 5% of Hollywood Media’s share of the dividends, to each of Mr. Rubenstein and Ms. Silvers in accordance with their amended and restated employment agreements dated December 23, 2009, as amended. Other than the July 18, 2011 dividend discussed above, there were no dividends declared by MovieTickets.com or received from MovieTickets.com during the nine and three months ended September 30, 2012 and September 30, 2011, respectively.

(c) Project Hollywood LLC

On August 28, 2012 Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange for total consideration of $1.8 million. Prior to that assignment, Hollywood Media owned 20.65% of the total equity in Project Hollywood LLC (“Project Hollywood”). Hollywood Media’s equity ownership in Project Hollywood was reduced from 21.74% of the total equity in Project Hollywood to 20.65% of the total equity in Project Hollywood at June 30, 2012. Hollywood Media did not own any equity in Project Hollywood as of September 30, 2011 Hollywood Media’s initial interest in Project Hollywood was acquired on October 27, 2011. Hollywood Media recorded its investment in Project Hollywood under the equity method of accounting, recognizing its percentage interest in Project Hollywood’s income or loss as earnings of unconsolidated investees. Under applicable accounting principles, Hollywood Media recorded $111,440 and $21,227 in income from its investment in Project Hollywood for the nine and three months ended September 30, 2012, respectively. There were $182,617 and $5,435 of distributions during the nine and three months ended September 30, 2012, respectively. For additional information about Hollywood Media’s assignment of its membership interest in Project Hollywood LLC and the change in Hollywood Media’s equity interest in Project Hollywood, see Note 9, “Related Party Transactions” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

### OPERATING EXPENSES

### Editorial, Production, Development and Technology.

Editorial, production, development and technology costs include fees and royalties paid to authors and co-editors for the Intellectual Properties segment. Editorial, production, development and technology costs were $391,503 for Y3-12 as compared to $562,042 for Y3-11, a decrease of $170,539 or 30%, and $108,727 for Q3-12 as compared to $105,140 for Q3-11, an increase of $3,587 or 3%. As a percentage of revenues, these costs were 91% and 67% for Y3-12 and Y3-11 respectively, and 113% and 69% for Q3-12 and Q3-11, respectively. The decrease in Y3-12 as compared to Y3-11was due primarily to a decrease in payments to writers and co-editors.

### Selling, General and Administrative.

Selling, general and administrative (SG&A) expenses consist of occupancy costs, professional, legal and consulting service fees, telecommunications costs, provision for doubtful accounts receivable, general insurance costs and selling and marketing costs (such as advertising, marketing, promotional, business development, public relations, and commissions due to advertising agencies, advertising representative firms and other parties). SG&A expenses for Y3-12 were $1,839,990 compared to $2,270,799 for Y3-11, a decrease of $430,809 or 19%. SG&A expenses for Q3-12 were $639,012 compared to $543,350 for Q3-11, an increase of $95,662 or 18%. The increase in SG&A expenses for Q3-12 as compared to Q3-11 was due to increased legal expenses.

The decrease in SG&A expenses in Y3-12 as compared to Y3-11 was due primarily to the following: legal expense decreased by approximately $96,000, a $100,000 decrease in office-related expenses attributable to the Company’s continuing effort to reduce costs and expenses, an $85,000 decrease in insurance costs and a $77,000 decrease in shareholder relations expense. For additional information, see Note 9 – Related Party Transactions in the Notes to Condensed Consolidated Financial Statements included in Part I, of this Quarterly Report on Form 10-Q.

### Payroll and Benefits.

Payroll and benefits expenses include payroll and benefits and other types of compensation expense as well as human resources and administrative functions.

Payroll and benefits expenses for Y3-12 were $1,619,487 compared to $2,843,556 for Y3-11, a decrease of $1,224,069 or 43%. Payroll and benefits expenses for Q3-12 were $368,904 compared to $1,232,765 for Q3-11, a decrease of $863,861 or 70%.

The decrease in payroll and benefits expense in Y3-12 as compared to Y3-11 was primarily due to a decrease in executive payroll of $771,000, a decrease in payroll of the accounting department of approximately $59,000, a combined decrease in payroll of human resources, administration, MIS and legal of approximately $298,000 and a reduction in the Intellectual Properties division payroll of $73,000. The decrease in payroll and benefits expenses in Q3-12 as compared to Q3-11 was primarily due to a decrease in executive payroll of $800,000.

### Depreciation and amortization.

Depreciation and amortization expense consists of depreciation of property and equipment, furniture and fixtures, leasehold improvements, and equipment under capital leases and amortization of intangible assets. Depreciation and amortization expense was $113,032 for Y3-12 and $162,653 for Y3-11, and $37,868 for Q3-12 and $50,014 for Q3-11.

The decrease in depreciation and amortization expense of $49,621 or 31% in Y3-12 from Y3-11 was primarily due to reduced leasehold improvements depreciation amortization because of a change in location of the corporate office to a less expensive rental space and the balance is due to fixed assets becoming fully depreciated during or prior to Q1-11.

The decrease in depreciation and amortization expense of $12,146 or 24% in Q3-12 from Q3-11 was primarily due to reduced leasehold improvements depreciation amortization because of a change in location of the corporate office to a less expensive rental space and the balance is due to fixed assets becoming fully depreciated during or prior to Q1-11.

### Interest, net.

Interest, net was $777,411 of income for Y3-12 as compared to $789,660 of income for Y3-11. Interest, net was $264,400 of income for Q3-12 as compared to $260,381 of income for Q3-11. Interest, net primarily consists of the interest on the $8,500,000 note received by Hollywood Media from the purchaser of the Broadway Ticketing Division in the amount of $776,333. The note has an interest rate of 12% per annum, is paid quarterly and matures on December 15, 2015. For additional information, see Note 3 - Discontinued Operations in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

As described in Note 3, “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Item I, Part I of this Quarterly Report on Form 10-Q, Hollywood Media received from Key Brand in connection with the Broadway Sale the First $7 Million Earnout payment in cash and an additional $7 million representing the Second $7 Million Earnout payment which was added to the Loan under the Credit Agreement. As a result of the Second $7 Million Earnout amount being added to the $8.5 million principal amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012. Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum on the Loan, with the Loan maturing on December 15, 2015. The Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries subordinated to a $15 million loan to JP Morgan. The Second Earnout amount of $7 million added to the Loan (from the Second $7 Million Earnout) as of October 1, 2012 is to be amortized in equal quarter annual installments with interest at 12% per annum through maturity on December 15, 2015. Interest will begin on the $7 million portion of the Loan starting October 1, 2012 with the first principal and interest payments on this $7 million portion to be received on December 31, 2012 in the amount of approximately $750,000 consisting of principal of $538,000 and interest of $215,000. Principal and interest payments on the $7,000,000 portion of the Loan (from the Second Earnout) are expected to be approximately $2,840,000 in 2013. In addition, interest payments on the original $8,500,000 portion of the Loan are expected to be approximately $1,030,000 in 2013.

### Income from Discontinued Operations.

Income from discontinued operations was $2,467,475 for Y3-12 compared to $91,971 for Y3-11, an increase of $2,375,504. Income from discontinued operations for Q3-12 was $1,839,788 compared to $158,058 for Q3-11, an increase of $1,681,730.

The increase in discontinued operations in Y3-12 as compared to Y3-11 and Q3-12 as compared to Q3-11 was primarily due to the receipt by Hollywood Media of the Buyout Amount, the earnout gain from R&S Investments, and the gain on sale in connection with the assignment of Hollywood Media’s membership interest in Project Hollywood.

### LIQUIDITY AND CAPITAL RESOURCES

Hollywood Media’s cash and cash equivalents were $5,959,801 at September 30, 2012 as compared to $3,683,063 at December 31, 2011. Hollywood Media’s net working capital (defined as current assets less current liabilities) was $5,285,175 at September 30, 2012 as compared to $3,067,465 at December 31, 2011.

Net cash used in operating activities during Y3-12 was $2,006,196, which was primarily attributable to a $3,600,000 non-cash goodwill impairment charge partially offset by the following: (1) $322,500 non-cash amortization expense of deferred compensation costs, (2) $113,032 depreciation and amortization, (3) $776,333 of interest on the $8,500,000 note received from Key Brands, and (4) working capital of $221,343. By comparison, net cash used in operating activities during Y3-11 was $1,982,652.

As described in Note 3, “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Item I, Part I of this Quarterly Report on Form 10-Q, Hollywood Media received on October 1, 2012, following the end of the third quarter period, from Key Brand in connection with the Broadway Sale the First $7 Million Earnout payment in cash. Further, an additional $7 million representing the Second $7 Million Earnout payment was added to the Loan under the Credit Agreement as of October 1, 2012, which $7 million amount is to be amortized with interest at 12% per annum over the period October 1, 2012 through December 15, 2015 in equal quarter-annual installments. As a result of the Second $7 Million Earnout being added to the $8.5 million principal amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012. Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum on the Loan, with the Loan maturing on December 15, 2015. The Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries. Interest will begin on the $7,000,000 portion of the Loan (from the Second Earnout) starting October 1, 2012 with the first principal and interest payments on this $7,000,000 portion to be received on December 31, 2012 in the amount of approximately $750,000 consisting of principal of $538,000 and interest of $215,000. Principal and interest payments on the $7,000,000 portion of the Loan (from the Second Earnout) are expected to be approximately $2,840,000 in 2013. In addition, interest payments on the original $8,500,000 portion of the Loan are expected to be approximately $1,030,000 in 2013.

Net cash used in operating activities during Y3-11 was $1,982,652, which was primarily attributable to: (1) a net loss of $6,871,113, (2) a gain of $1,132,500 on life insurance recognized on the death of Dr. Martin Greenburg, the former Chief Executive Partner of Tekno Books (3) a non-cash change in the value of the derivative liability in the amount of $635,112, (4) $641,697 non-cash equity in losses of unconsolidated subsidiaries, and (5) working capital used of $189,971. These items were partially offset by the following: (1) $4,795,783 non-cash goodwill impairment charge, (2) $233,850 amortization expense of deferred compensation costs, (3) $162,653 depreciation and amortization, and (4) $773,500 of interest received on the $8,500,000 note received from Key Brands.

Net cash provided by investing activities during Y3-12 was $4,299,789 primarily attributable to: (1) $1,230,500 cash received in connection with the assignment and assumption of Hollywood Media’s membership interest in Project Hollywood; (2) $2,950,000 cash received in connection with the Buyout Amount from R&S Investments, and (3) Hollywood.com earnout payments of $155,000 paid to the Company. By comparison, net cash used in investing activities during Y3-11 was $5,429,095 primarily used to pay Key Brand a working capital adjustment of $3,734,106 in connection with the sale of the Broadway Ticketing business and for payments of $1,740,040 in payroll related bonuses including change of control payments contractually due as a result of the Broadway Sale in Q4-10.

Net cash used in financing activities during Y3-12 was $16,855, for repayments under capital lease obligations. By comparison, net cash used in financing activities during Y3-11 was $16,455,367, which cash usage was primarily for the purchase of common stock tendered in the amount of $16,400,000. For additional information about the purchase of common stock tendered, see Note 4 – “Purchase of Common Stock Tendered” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I, of this Quarterly Report on Form 10-Q.

### Sale of Broadway Ticketing Division to Key Brand Entertainment, Inc.

On December 15, 2010, as contemplated by the Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand Entertainment Inc. (as amended, the “Purchase Agreement”), Hollywood Media completed the sale of Hollywood Media’s Broadway Ticketing Division (the “Broadway Sale”), through the sale of all of the outstanding capital stock of Theatre Direct NY, Inc. (“Theatre Direct”) to Key Brand Entertainment Inc. (“Key Brand”). Pursuant to the Purchase Agreement, at the closing of the Broadway Sale:

- Hollywood Media received $20.5 million in cash (including $0.5 million pursuant to the estimated working capital adjustment described in the Purchase Agreement);
- Hollywood Media, Theatre Direct and Key Brand entered into that certain Second Lien Credit, Security and Pledge Agreement, dated as of December 15, 2010 (the “Credit Agreement”) pursuant to which Key Brand is obligated to pay to the Company $8.5 million at an interest rate of 12% per annum, which obligation matures on December 15, 2015 and is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries;
- Theatre Direct issued the Company a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct as of the closing date on a fully diluted basis at an exercise price of $.01 per share (the “Warrant”);
- Key Brand assumed $1.6 million of liabilities associated with employment agreements with certain employees of Theatre Direct; and
- Hollywood Media was entitled to receive earnout payments of up to $14 million, in two $7 million tranches, contingent upon Theatre Direct and its subsidiaries achieving certain revenue targets during the period from the closing date through the end of the tenth full fiscal year of Theatre Direct following the closing date as set forth in the Purchase Agreement.
- In connection with the Credit Agreement, Hollywood Media, Key Brand and JPMorgan Chase Bank, N.A., as administrative agent for the senior secured lenders of Key Brand, entered into a Subordination and Intercreditor Agreement, dated December 15, 2010 (the “Intercreditor Agreement”) which defines the rights and obligations of the senior secured lenders and Hollywood Media as subordinated lender, including, without limitation, the rights of payment and the subordination of the security interests of Hollywood Media.
- On April 22, 2012, the Company entered into Amendment No. 4 (the “Amendment”) to the Purchase Agreement. Pursuant to the Amendment, the Company consented to the contribution of the “group sales” business (but not the Broadway.com consumer ticketing business) owned by Key Brand to a newly formed joint venture (the “Group Sales JV”; such contribution, the “Group Sales Contribution”). The balance of the business sold to Key Brand under the terms of the Purchase Agreement, which included Broadway.com, remained at Key Brand and Theatre Direct. As part of the Amendment, Key Brand agreed to pay the first $7 million earnout amount (the “First $7 Million Earnout”) to the Company on or before October 1, 2012 regardless of the actual revenues of Theatre Direct and its subsidiaries for the fiscal year of Key Brand ending June 30, 2012. The First $7 Million Earnout was paid by Key Brand to the Company on October 1, 2012 and was recorded upon collection of the $7 million received on October 1, 2012. In addition, the revenue calculation for the second $7 million earnout amount (the “Second $7 Million Earnout”) was modified to exclude “group sales” (and the revenues of the new joint venture conducting such business) and the target for the Second Earnout was reduced from $150 million to $123 million accordingly. On October 5, 2012, Hollywood Media received written notice from Key Brand that Theatre Direct achieved the revenue target for the Second $7 Million Earnout in Key Brand’s fiscal year ended June 30, 2012. Accordingly, pursuant to the Amendment, the Second $7 Million Earnout was added as of October 1, 2012 to the principal amount of the Loan under the Credit Agreement. Pursuant to the Credit Agreement, interest at a rate of 12% per annum and principal on such Second $7 Million Earnout will be amortized over the term of the Credit Agreement in equal quarterly installments, which amortization period commenced on October 1, 2012 and ends on the maturity date of the Loan which is December 15, 2015. As a result of the Second $7 Million Earnout being added to the $8.5 million principal amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012.

The Company also consented to certain amendments to the Credit Agreement, including consent to the Group Sales Contribution and to provide for additional reporting requirements. The Company and Key Brand’s other lender, JPMorgan Chase Bank, N.A., also agreed to amend the Intercreditor Agreement to provide that, subject to Key Brand’s compliance with the terms and conditions of its senior secured credit agreement, Key Brand would be permitted to make scheduled quarterly installment payments to Hollywood Media of the Second Earnout amounts prior to the maturity of the Credit Agreement.

For additional information about the sale of the Broadway Ticketing Business, see Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I, of this Quarterly Report on Form 10-Q.

### Sale of Hollywood.com Business Unit to R&S Investments, LLC

On August 21, 2008, Hollywood Media entered into and simultaneously closed on a definitive purchase agreement with R&S Investments, LLC, pursuant to which R&S Investments acquired the Hollywood.com Business for a potential purchase price of $10.0 million, which included $1.0 million in cash that was paid to Hollywood Media at closing and potential earnout payments of up to $9.0 million. Since August 21, 2008, $1,892,692 in earnout payments were paid to Hollywood Media. Hollywood Media also received $2,950,000 in connection with the buy-out of the Hollywood.com earnout by R&S Investments. For additional information about the Hollywood.com business transactions and the purchase of the Hollywood.com earnout by R&S Investments, see Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

### Sale of CinemaSource UK Limited to Orchard Advertising

On May 1, 2012, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Orchard Advertising Limited (“Buyer”), pursuant to which the Company sold, and Buyer purchased, the entire issued share capital of Cinemasource UK Limited (the “Purchased Shares”) which business was part of the Company’s Ad Sales division and included UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW.CO.UK Limited.

Pursuant to the Share Purchase Agreement, the purchase price for the Purchased Shares is U.S. $250,000, payable in cash in a non-interest bearing note in twenty equal quarter-annual installments of $12,500 each over a period of five years. Subject to the terms and conditions of the Share Purchase Agreement, the first installment of the purchase price was due and was paid to the Company on July 31, 2012 and subsequent installments of the purchase price are due every three calendar months thereafter. The Company imputed interest at 16.5%, per annum, on this $250,000 non-interest bearing loan resulting in a discounted amount of $168,014 which was included in the total gain on sale attributable to the sale of Cinemasource UK Limited of $649,215. As of September 30, 2012, the Company has received all payments on the $250,000 non-interest bearing loan in accordance with the payment terms. This gain on sale is included in “Income from Discontinued Operations” in the Condensed Consolidated Statement of Operations included in Item I, Part I of this quarterly report on Form 10-Q. The discounted amount of the non-interest bearing loan is included in “Other Assets” in the condensed consolidated balance sheets included in Item I, Part I of this quarterly report on Form 10-Q.

For additional information about the sale of CinemaSource UK Limited to Orchard Advertising, see Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I, of this Quarterly Report on Form 10-Q.

### Purchase of Common Stock Tendered

On February 25, 2011, Hollywood Media announced the final result of a tender offer to purchase up to 8,000,000 shares of its common stock at a price of $2.05 per share (less any applicable withholding taxes and without interest) which expired on February 18, 2011. Hollywood Media accepted 8,000,000 shares for purchase for a total cost of approximately $16.4 million. The number of shares properly tendered and not withdrawn was 24,157,429. Accordingly, payment was made for approximately 33% of the tendered shares, and the rest of the tendered shares were withdrawn from the tender offer. Immediately following the purchase of the tendered shares, Hollywood Media had approximately 23,179,066 shares outstanding. For additional information about the purchase of common stock tendered, see Note 4 – “Purchase of Common Stock Tendered” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I, of this Quarterly Report on Form 10-Q.

### Capital Expenditures

Hollywood Media’s capital expenditures during the nine and three months ended September 30, 2012 were $36,222 and zero respectively. We currently anticipate that additional capital expenditures during 2012 will total approximately $15,000 including various system and equipment upgrades.

### Authorization of Stock Repurchase Program

Hollywood Media previously reported in its current report on Form 8-K filed with the SEC on October 4, 2007, that its Board of Directors authorized a stock repurchase program (the “Repurchase Program”) under which Hollywood Media may use up to $10.0 million of its cash to repurchase shares of its outstanding common stock. During the third quarter of 2012, no shares of Hollywood Media’s common stock were repurchased under the Repurchase Program.

Pursuant to the Repurchase Program, Hollywood Media is authorized to purchase shares of its common stock from time to time on the open market or in negotiated transactions. The purchases are to be funded from available cash and cash equivalents, and the timing and amount of any shares repurchased will be determined by Hollywood Media’s management based on its evaluation of financial and market conditions, legal requirements and other factors. The Repurchase Program has no time limit and may be suspended for periods or discontinued at any time, and there is no guarantee as to the number of shares or the amount of cash to be utilized for repurchases. Shares repurchased under the Repurchase Program will become authorized but unissued shares of Hollywood Media’s common stock. For additional information regarding the Repurchase Program, see Part II, Item 2 of this Quarterly Report on Form 10-Q.

### Off-Balance Sheet Arrangements

At September 30, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes of the sort contemplated by paragraph (a) (4) of Item 303 of SEC Regulation S-K. As such, management believes that we currently do not have any disclosures to make of the sort contemplated by paragraph (a) (4) of Item 303 of SEC Regulation S-K regarding “off-balance sheet arrangements.”

### Critical Accounting Estimates

In response to the SEC’s Release Number 33-8040 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and SEC Release Number 33-8056, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to asset impairment, accruals for compensation and related benefits, revenue recognition, allowance for doubtful accounts, and contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

#### Derivative Instruments

The Company records derivative instruments at fair value in our accompanying condensed consolidated balance sheets with changes in the fair values of those instruments reported in earnings in our condensed consolidated results of operations. The Company does not hold any derivative instruments that reduce risk associated with hedging exposure, accordingly the Company has not designated any of its derivatives liability financial instruments as hedge instruments. For additional information about our significant accounting policies, including the critical accounting policies discussed below, see Note 2 – Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and Note 2 to the Consolidated Financial Statements included in Part II, Item 8 in our Annual Report on Form 10-K for the year ended December 31, 2011, as amended.

#### Impairment of Goodwill

Under FASB Accounting Standard Codification Topic No. 350, “*Intangibles – Goodwill and Other”* (ASC 350), beginning January 1, 2002, goodwill and certain intangibles are no longer amortized; however, they are subject to evaluation for impairment at least annually using a fair value based test. The fair value based test is a two-step test. The first step involves comparing the fair value of each of our reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds the fair value of the reporting unit, we are required to proceed to the second step. In the second step, the fair value of the reporting unit would be allocated to the assets (including unrecognized intangibles) and liabilities of the reporting unit, with any residual representing the implied fair value of goodwill. An impairment loss would be recognized if and to the extent that the carrying value of goodwill exceeds the implied value.

In September 2011, the FASB issued ASU No. 2011-08, “*Testing for Goodwill Impairment (Topic 350),” (“*ASU 2011-08”). ASU 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting period is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011 and its early adoption by the Company during the quarter ended September 30, 2011 did not have a material effect on the Company’s consolidated financial statements.

During the three months ended September 30, 2012, the Company determined that $3.6 million of the goodwill associated with its Ad Sales division should be written down after it was determined that the future cash flow of these assets is likely impaired, and the risk associated with previously expected cash flows has increased and accordingly recorded an impairment loss of $3.6 million. For additional Information see Note 6 - Segment Reporting in the Notes to Condensed Consolidated Financial Statements included in included in Item I, Part I of this quarterly report on Form 10-Q. At September 30, 2012 we are not aware of any additional items or events that would cause us to adjust the recorded value of Hollywood Media’s goodwill further. The goodwill recorded in the accompanying consolidated balance sheets as of September 30, 2012 and December 31, 2011 was $6,200,000 and $9,800,000, respectively. At September 30, 2012 and December 31, 2011 goodwill represented 44% and 54%, respectively, of total assets. Future changes in estimates used to conduct the impairment review, including revenue projections or market could cause the analysis to indicate that Hollywood Media’s goodwill is impaired in subsequent periods and result in a write-off of a portion or all of the goodwill. In order to evaluate the sensitivity of the fair value calculations of our reporting units on the impairment calculation, we applied a hypothetical decrease to the fair values of each reporting unit. The Company believes that the fair value of its remaining reporting unit that contains goodwill at September 30, 2012 and December 31, 2011 met or exceeded the book value of that reporting unit.

The Company believes that the disparity between the book value of its assets as compared to the market capitalization of its business is in large part a consequence of market conditions, including perceived risks in the debt markets, the Company’s industry and the broader economy. While the Company believes that some of these risks are unique to specific companies, some represent global industry risks. The Company believes that there is no fundamental change in our underlying business model or prospects for our Company. The Company has evaluated the impairment of its goodwill, giving consideration to these risks, and their impact upon the respective reporting units’ fair values, and has reported impairments where it deems appropriate. The Company believes that the fair value of its remaining reporting unit that contains goodwill at September 30, 2012 and December 31, 2011 exceeded the book value of those units.

### Inflation and Seasonality

Although we cannot accurately determine the precise effects of inflation, we do not believe inflation has a material effect on revenue or results of operations. We consider our business to be somewhat seasonal and expect net revenues to be generally higher during the second and fourth quarters of each fiscal year for our Tekno Books book licensing business as a result of the general publishing industry practice of paying royalties semi-annually. In addition, although not seasonal, our Intellectual Properties division experiences fluctuations in its revenue stream, earnings and cash flow as a result of the amount of time that is expended in the creation and development of the intellectual properties and its licensing agreements. The recognition of licensing revenue is typically triggered by specific contractual events which occur at different points in time rather than on a regular periodic basis.

## Controls and procedures

As filed, 4,075 characters.

### Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of Hollywood Media’s management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer and Chief Accounting Officer (principal financial and accounting officer), of the effectiveness of Hollywood Media’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation and the material weakness described below, Hollywood Media’s management, including the Chief Executive Officer and Chief Financial Officer and Chief Accounting Officer, have concluded that Hollywood Media’s disclosure controls and procedures were not effective, as of September 30, 2012, to ensure that information required to be disclosed by Hollywood Media in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to Hollywood Media’s management, including the Chief Executive Officer and Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure.

As previously reported in Hollywood Media’s Annual Report on Form 10-K for the year ended December 31, 2011, as amended, which was filed with the Securities and Exchange Commission on April 16, 2012 and was amended on April 30, 2012, management assessed the effectiveness of Hollywood Media’s internal control over financial reporting as of December 31, 2011 and included its Report on Internal Control Over Financial Reporting in such Annual Report on Form 10-K for the year ended December 31, 2011, as amended. The Report on Internal Control over Financial Reporting concluded the following deficiencies in the Company’s CinemasOnline and Intellectual Properties businesses constitute material weaknesses in the Company’s internal control over financial reporting:

Identified insufficient internal controls over the advertising sales process within its U.K. based CinemasOnline business, including inadequate systems to allow for processing of advertising sales and deferred advertising sales; and deferred tax assets and insufficient internal controls over its disbursements of funds and recording of related assets and expenses in the CinemasOnline business. See Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for information on the Company’s sale of CinemasOnline on May 1, 2012.

Identified insufficient internal controls over the book development and book licensing process within its Intellectual Properties Division, including inadequate systems to allow for processing of book development and book licensing revenue and deferred revenue; and insufficient internal controls over its disbursements of funds and recording of related assets and expenses in the Intellectual Properties Division.

A material weakness in internal control over financial reporting is a control deficiency (within the meaning of the Public Company Accounting Oversight Board Auditing Standard No. 5), or a combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of September 30, 2012, Hollywood Media had not remediated these material weaknesses.

### Changes in Internal Control over Financial Reporting

There have been no changes in Hollywood Media’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, Hollywood Media’s internal control over financial reporting.

Filed Nov 19, 2012.
Source: SEC EDGAR, the filing index for accession 0001144204-12-063883. Last ingested by Listed: Oct 24, 2026, 15:00 ET. No prices; not investment advice.