NovelStem International Corp.: Form 10-K for the period ended Dec 31, 2012

Overview

Until December 15, 2010, Hollywood Media Corp. (“Hollywood Media,” the “Company,” “we,” “our,” or “us”) 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, as contemplated by the Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand (as amended, the “Purchase Agreement”) we completed the sale of our 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”). See Part II, Item 7 of this Annual Report on Form 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations and 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 more information on the Broadway Sale.

Following the Broadway Sale and the other transactions described below, we currently have the following businesses and interests: (i) our Ad Sales Division (including our 26.2% equity interest in MovieTickets.com, Inc. (“MovieTickets.com”)), (ii) our Intellectual Properties Division (consisting of our wholly-owned subsidiary, Tekno Books, and a 50% interest in NetCo Partners), (iii) a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct issued by Theatre Direct in connection with the Broadway Sale (as amended, the “Warrant”), and (iv) the right to receive payments from Key Brand under the that certain Second Lien Credit, Security and Pledge Agreement, dated as of December 15, 2010, entered into by Theatre Direct, Key Brand and Hollywood Media, as amended (the “Credit Agreement”).

Sale by Hollywood Media of its 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 (“Project Hollywood”), Mitchell Rubenstein (“Mr. Rubenstein”) and Laurie S. Silvers (“Ms. Silvers”). Baseline Holdings is wholly-owned by Mr. Rubenstein, the Chairman and Chief Executive Officer of Hollywood Media, and Ms. Silvers, the Vice-Chairman, President and Secretary of Hollywood Media. 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 $1,800,000.00 (the “Project Hollywood Purchase Price”). The Project Hollywood Purchase Price has been paid as follows: (1) $1,230,500.00 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 Credit Agreement (as of August 28, 2012, Mr. Rubenstein had the right to receive 4.76% of the principal, or $404,600.00, and interest on account of the Credit Agreement), and (3) Ms. Silvers waived her right to receive any future principal and interest owed by Key Brand to Hollywood Media under the Credit Agreement (as of August 28, 2012, Ms. Silvers has the right to receive 1.94% of the principal, or $164,900.00, and interest on account of the Credit Agreement). Hollywood Media acquired its membership interest in Project Hollywood on October 27, 2011 for $1,250,000.00. 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 and Part III, Item 13 of this Annual Report on Form 10-K – Certain Relationships and Related Transactions, and Director Independence for more information on the Assignment and the transactions contemplated by the Assignment.

Sale of Cinemasource UK Limited - Share Purchase Agreement

On May 1, 2012, Hollywood Media entered into a share purchase agreement (the “Share Purchase Agreement”) with Orchard Advertising Limited (“Buyer”), pursuant to which Hollywood Media sold, and Buyer purchased, the entire issued share capital of Cinemasource UK Limited (the “Purchased Shares”) which business was part of Hollywood Media’s Ad Sales segment 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 Hollywood Media 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.

See Part II, Item 7 of this Annual Report on Form 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operation and 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 more information on the sale of Cinemasource UK Limited.

Major Business Divisions of Hollywood Media

The following summary descriptions of our continuing operations major business divisions are followed by more detailed descriptions of such businesses.

Ad Sales Division

Hollywood Media’s Ad Sales Division includes Hollywood Media’s 26.2% equity interest in MovieTickets.com. Prior to the sale of Cinemasource UK Limited on May 1, 2012 described above (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 Part I, Item 3 of this Annual Report on Form 10-K for a discussion of the current lawsuit involving Hollywood Media, National Amusements Inc. and Movietickets.com as Plaintiffs and AMC Entertainment Inc., as Defendant.

Intellectual Properties Division

Our Intellectual Properties Division includes a book development and book licensing business owned and operated by our wholly-owned subsidiary, Tekno Books, which develops and executes book projects, frequently with best-selling authors. Tekno Books has worked with over 60 New York Times best-selling authors, including the late Isaac Asimov, Tom Clancy, Tony Hillerman, John Jakes, Jonathan Kellerman, Dean Koontz, the late Robert Ludlum, Nora Roberts and Scott Turow. Hollywood Media is also a 50% partner in NetCo Partners, a partnership that owns NetForce. Hollywood Media also owns directly additional intellectual property created for it by various best-selling authors such as Mickey Spillane, Anne McCaffrey and others. We are beginning a reorientation process of this business from print to digital distribution.

Other

Our Other Division 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. Prior to the assignment of Hollywood Media’s membership interest in Project Hollywood on August 28, 2012 described above, this division also included Hollywood Media’s membership interest in Project Hollywood.

Other Business and Financial Information

The following portions of this Business section of this Annual Report on Form 10-K contain more detailed information about our various business units, and “Item 1A – Risk Factors” below contains discussions of various related risks. Additional financial and other important information about Hollywood Media and our businesses is also contained elsewhere in this Annual Report on Form 10-K, including without limitation, the following portions of this Annual Report on Form 10-K: Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Part II, Item 8 – Financial Statements and Supplementary Data (including the Notes to Consolidated Financial Statements contained therein).

SEC Reports Available on Internet

Hollywood Media makes available free of charge through its internet website, www.hollywoodmedia.com (http://www.hollywoodmedia.com), its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the “SEC”). Such materials are available on the website under the caption “Company SEC Filings” (this is a link to the Company’s “Real-Time SEC Filings” as provided by NASDAQ on NASDAQ’s website at www.nasdaq.com (http://www.nasdaq.com)). Hollywood Media is a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and files reports and other information with the SEC. Our public electronic filings with the SEC (including the above-referenced filings) are available at the SEC’s internet website (www.sec.gov (http://www.sec.gov)). Hollywood Media’s Internet website and any other website mentioned in this Annual Report on Form 10-K, and the information contained or incorporated therein, are not intended to be incorporated into this Annual Report on Form 10-K.

Ad Sales Division

MovieTickets.com. Hollywood Media launched the MovieTickets.com website in May 2000 with several major theater exhibitors. MovieTickets.com is one of the two leading website destinations for the purchase of movie tickets through the Internet. The MovieTickets.com website allows users to purchase movie tickets and retrieve them at “will call” windows or kiosks at theaters and, for theaters with the capability, for users to print tickets out at their home or office. MovieTickets.com generates revenues primarily from service fees charged to users for the purchase of tickets, the sale of advertising, and the sale of research data.

Hollywood Media owns a 26.2% equity interest in MovieTickets.com. See Part II, Item 7 of this Annual Report on Form 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Equity in Earnings of Unconsolidated Investees” below, and Note 13 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K below, for additional information about our equity interest in MovieTickets.com. MovieTickets.com entered into an agreement with Viacom Inc. effective August 2000 whereby Viacom Inc. acquired a 5% interest (now 4.1% after dilution) in MovieTickets.com for $25.0 million of advertising and promotion over five years. MovieTickets.com is promoted through on-screen advertising in most participating exhibitors’ theaters. In March 2001, America Online Inc. (“AOL”) purchased a non-interest bearing convertible preferred equity voting interest in MovieTickets.com for $8.5 million in cash, which was convertible into approximately 3% of the common stock of MovieTickets.com and which was converted in April 2005. The AOL interest is currently held by Time Warner Inc. In connection with the 2001 transaction with AOL, MovieTickets.com’s ticket inventory was promoted throughout AOL’s interactive properties and ticket inventory, including Moviefone. Through an agreement in August 2004 between MovieTickets.com and Moviefone, MovieTickets.com acquired by assignment and assumed the ticketing agreements that Moviefone had with its movie theater exhibitors. The Moviefone exhibitor agreements assumed by MovieTickets.com includes agreements with Clearview Cinemas and Landmark Theaters. Currently, MovieTickets.com sells tickets for over 250 movie theater chains.

Intellectual Properties Business

Book Development and Book Licensing. Our Intellectual Properties division includes a book development and book licensing business owned and operated by our wholly-owned subsidiary, Tekno Books, which develops and executes book projects, frequently with best-selling authors. Tekno Books has worked with more than 60 New York Times best-selling authors, including the late Isaac Asimov, Tom Clancy, Tony Hillerman, John Jakes, Jonathan Kellerman, Dean Koontz, the late Robert Ludlum, Nora Roberts and Scott Turow, and numerous media celebrities, including Leonard Nimoy. Our intellectual properties division has licensed books for publication with more than 80 domestic book publishers, including Random House (Bertelsmann), Penguin Publishing Group (Pearson), Simon & Schuster (Viacom), HarperCollins (News Corp.), St. Martin’s Press (Holtzbrink of Germany), Warner Books (Time Warner), and the publishing division of Barnes & Noble. Tekno Books has also produced numerous books under license from such entertainment companies as Universal Studios, CBS Television, DC Comics (Time Warner), and MGM Studios. Since 1980, Tekno Books has developed over 2,080 books that have been published. Another 3,800 foreign, audio, paperback, electronic, and other editions of these books have been sold to hundreds of publishers around the world, and published in 33 languages. Tekno’s books have been finalists for, or winners of, more than 200 awards, including The Edgar Allan Poe Award, The Agatha Christie Award (Mystery), The Hugo Award (Science Fiction), The Nebula Award (Fantasy), The International Horror Guild Award (Horror) and The Sapphire Award (Romance).

Intellectual Properties. The Intellectual Properties division also owns directly (separate from Tekno Books) the exclusive rights to certain intellectual properties that are complete stories and ideas for stories, created by best-selling authors and media celebrities. Some examples of our intellectual properties are Neil Gaiman’s Mr. Hero, Neil Gaiman’s Lady Justice, Anne McCaffrey’s Acorna the Unicorn Girl, Leonard Nimoy’s Primortals, and Mickey Spillane’s Mike Danger. We have the right to license rights to certain of our intellectual properties for use by licensees in developing projects in various media forms. We are beginning a reorientation process of this business from print to digital distribution.

Tekno Books

Effective as of December 30, 2011 in connection with the settlement of a dispute involving life insurance proceeds from the death of Tekno Books’ Chief Executive Partner, Dr. Martin H. Greenberg, as described below, the Estate of Martin H. Greenberg (“the Estate”) transferred all of its partnership and ownership interest in Tekno Books to Hollywood Media for no additional consideration pursuant to an Assignment of General Partnership Interest. Before such transfer, Hollywood Media owned 51% of Tekno Books. Following such transfer, Hollywood Media owns 100% of Tekno Books.

Mitchell Rubenstein (the Chairman and CEO of Hollywood Media) was appointed Chief Executive Partner of Tekno Books on July 21, 2011 due to the death on June 25, 2011 of Dr. Greenberg. In July 2011, Hollywood Media and Tekno Books each received a $750,000 payment from a $1.5 million key-man life insurance policy resulting from Dr. Greenberg’s death.

There was a dispute with the Estate as to whether the $750,000 in life insurance proceeds distributed to Tekno Books should instead have been paid to Hollywood Media. Hollywood Media believed that pursuant to the amended and restated partnership agreement of Tekno Books, the entire $1.5 million in policy proceeds were due to Hollywood Media. There was no dispute as to the $750,000 payment on the policy which was made to Hollywood Media in July 2011.

On February 8, 2012, Hollywood Media resolved its dispute with the Estate over the life insurance policy payments that were received as a result of Dr. Martin Greenberg’s death. As a result of such resolution, effective as of December 30, 2011, the Estate and Rosalind M. Greenberg (Dr. Greenberg’s widow) waived any right, entitlement or claim they may have to the above-mentioned a $1.5 million key-man life insurance policy payment, Tekno Books and Hollywood Media waived any right, entitlement or claim they may have to an additional $500,000 life insurance policy payment received by Rosalind M. Greenberg, and the Estate transferred all of its partnership and ownership interest in Tekno Books to Hollywood Media for no additional consideration pursuant to an Assignment of General Partnership Interest. Following such transfer, Hollywood Media owned 100% of Tekno Books and recorded the $367,500 reserve in “Other Income” in the Consolidated Financial Statements contained in Part II, Item 8 or this Annual Report on Form 10-K.

NetCo Partners. In June 1995, Hollywood Media and C.P. Group Inc. (“C.P. Group”), entered into an agreement to form NetCo Partners. NetCo Partners owns NetForce. Hollywood Media and C.P. Group are each 50% partners in NetCo Partners. Tom Clancy is a shareholder of C.P. Group. At the inception of the partnership, C.P. Group contributed to NetCo Partners all rights to NetForce, and Hollywood Media contributed to NetCo Partners all rights to Tad Williams’ MirrorWorld, Arthur C. Clarke’s Worlds of Alexander, Neil Gaiman’s Lifers, and Anne McCaffrey’s Saraband. In 1997, NetCo Partners licensed to Putnam Berkley the rights to publish the first six NetForce books in North America, which books were created and published. This agreement was subsequently renewed in December 2001 for four more books that were created and published. NetForce books have so far been published in mass market paperback format. NetCo owns all rights in all media to the NetForce property including film, television, and video games. The first book in the series was adapted as a four-hour mini-series on ABC. Through its interest in NetCo Partners, Hollywood Media receives distributions of its share of proceeds generated from the rights to the NetForce series.

Corporate Information

Hollywood Media is a corporation that was incorporated in the State of Florida on January 22, 1993. Our principal executive office is located at 301 East Yamato Road, Suite 2199, Boca Raton, Florida 33431, and the telephone number at our principal executive office is (561) 998-8000.

Employees

At December 31, 2012, Hollywood Media employed approximately 15 full-time employees and no part-time employees for its continuing operations. Of those 15 full-time employees, 2 employees (who are overseen by Mitchell Rubenstein, the Chief Executive Partner of Tekno Books and Chairman and CEO of Hollywood Media) are engaged in our Intellectual Properties division and 13 are corporate, technology and administrative employees. None of the employees are represented by a labor union, nor have we experienced any work stoppages. We consider our relations with our employees to be in good standing.

Risks of Investing in Our Shares

Investments in our common stock are speculative and involve a high degree of risk. Investors should carefully consider the following matters, as well as the other information in this Annual Report on Form 10-K. If any of these risks or uncertainties actually occur, our business, results of operations, financial condition, or prospects could be substantially harmed, which would adversely affect your investment. Additional risks and uncertainties may also impair our business, operating results, financial condition, and prospects.

We have a history of losses in our continuing operations.

We had a loss from continuing operations before income taxes of approximately $4.4 million and $6.9 million in 2012 and 2011, respectively. We may incur additional losses in the future.

Because Theatre Direct represented a substantial portion of our business, following the Broadway Sale our business is substantially different.

Theatre Direct, which owned our Broadway Ticketing Business, represented a substantial portion of our business until its sale in December 2010 (the “Broadway Sale”). As a result, our operating results for any particular period may not accurately predict our future operating results. Summarized results of our discontinued operations, which include the Broadway Ticketing Business, for 2011 and 2012 are set forth in the notes to our financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Our results of operation and financial condition may be materially adversely effected if (i) our ability to receive any dividends and any other distributions from MovieTickets.com is inhibited in any way, (ii) our ability to receive the payments under the Credit Agreement in connection with the Broadway Sale is inhibited in any way, or (iii) our ability to exercise or put the Warrant issued to us in connection with the Broadway Sale is inhibited in any way.

We may not receive the payments due under the Credit Agreement in the Broadway Sale transaction.

Pursuant to the Intercreditor Agreement, Key Brand’s obligations under the Credit Agreement are subordinated to up to $15 million of certain senior indebtedness of Key Brand and our ability to exercise remedies upon a default under the Credit Agreement are subject to certain limitations. There can be no assurance that Hollywood Media will receive all of the payments due under the Credit Agreement. The financial condition and performance of Key Brand and/or its subsidiaries and the ability of Key Brand and/or its subsidiaries to satisfy the covenants and obligations in the Credit Agreement (or any other applicable financing agreements) could adversely affect Key Brand’s ability to satisfy its obligations under the Credit Agreement.

Key Brand’s financial performance and condition will impact Key Brand’s ability to satisfy its obligations under the Credit Agreement and the Purchase Agreement.

Key Brand’s financial performance and condition will impact Key Brand’s ability to finance and grow its business, which would impact its ability to satisfy its obligations under the Credit Agreement and the Purchase Agreement. There can be no assurances that Key Brand will satisfy any or all of these obligations.

We are unable to compete with Theatre Direct for 7 years from the date of closing of the transactions contemplated by the Purchase Agreement.

We have agreed that Hollywood Media will not, and will cause its affiliates (as defined in the Purchase Agreement) not to, directly or indirectly, own, manage, engage in, operate, control, work for or participate in the ownership, management, operation or control of, any business, whether in corporate, proprietorship or partnership form or otherwise, engaged in the sales of tickets to live musical, live theatrical or other live entertainment performances in the City of New York, New York or that otherwise competes with the business of Theatre Direct and its subsidiaries as it exists as of the closing date, subject to certain exceptions, including that there are no restrictions on the sale of advertisements (including online advertising). Accordingly, subject to these exceptions, the non-competition agreement restricts our ability to engage in any business which competes with Theatre Direct for 7 years from the date of closing of the transactions contemplated by the Purchase Agreement.

There can be no assurance that the fair value of the Warrant will ever be realized.

After estimating future cash flows adjusted for risk factors, we determined that the fair value of the Warrant issued to us in connection with the Broadway Sale was $700,000 as of December 31, 2012. The Warrant will be marked to market each reporting period to reflect changes in fair value.

The valuation methodologies used to determine fair value can be subject to significant subjectivity, and the fair value of the Warrant established pursuant to such methodologies may never be realized.

See Note 7, “Fair Value of Financial Instruments and Concentration of Credit Risk” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K for information on the methodologies used to determine fair value.

For as long as we remain a public company, we will continue to incur the expenses of complying with public company reporting requirements.

Our reporting obligations as a U.S. public company were not affected as a result of completing the Broadway Sale. For as long as we remain a public company, we have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act, which includes the filing with the SEC of periodic reports, proxy statements and other documents relating to our business, financial conditions and other matters, even though compliance with such reporting requirements is economically burdensome.

Following the Broadway Sale, we may be deemed an Investment Company and subjected to related restrictions under the Investment Company Act of 1940.

The regulatory scope of the Investment Company Act of 1940, as amended (the "Investment Company Act"), which was enacted principally for the purpose of regulating vehicles for pooled investments in securities, extends generally to companies engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. The Investment Company Act may, however, also be deemed to be applicable to a company that does not intend to be characterized as an investment company but that, nevertheless, engages in activities that may be deemed to be within the definitional scope of certain provisions of the Investment Company Act. We believe that our anticipated principal activities following the Broadway Sale, which include operating the Intellectual Properties Division, in which we now own 100%, will not subject us to regulation under the Investment Company Act. Nevertheless, there can be no assurance that we will not be deemed to be an investment company. If we are deemed to be an investment company, we may become subject to certain restrictions relating to our activities, including restrictions on the nature of our investments and the issuance of securities. In addition, the Investment Company Act imposes certain requirements on companies deemed to be within its regulatory scope, including registration as an investment company, adoption of a specific form of corporate structure and compliance with certain reporting, record keeping, voting, proxy, disclosure and other rules and regulations. In the event of the characterization of Hollywood Media as an investment company, our inability to satisfy such regulatory requirements, whether on a timely basis or at all, would, under certain circumstances, have a material adverse effect on Hollywood Media.

Because our business is smaller following the Broadway Sale, there is a possibility that our common stock may be delisted from the NASDAQ Global Market if we fail to satisfy the continued listing standards of that market.

Our business is now smaller as a result of the Broadway Sale, and therefore we may fail to satisfy the continued listing standards of the NASDAQ Global Market. In the event that we are unable to satisfy the continued listing standards of the NASDAQ Global Market, our common stock may be delisted from that market. In order to continue to be listed on the NASDAQ Global Market, we must meet the bid price and total shareholders requirements as set forth in NASDAQ Listing Rule 5450(a) and at least one of the three standards in NASDAQ Listing Rule 5450(b). Pursuant to NASDAQ Listing Rule 5450(a), the bid price of our common stock cannot fall below $1.00 per share for 30 consecutive business days and we must have at least 400 total shareholders (including both holders of beneficial interest and holders of record). We believe that if we continue to qualify for listing on the NASDAQ Global Market, we will satisfy the Equity Standard under NASDAQ Listing Rule 5450(b), which requires (i) stockholders’ equity of at least $10 million, (ii) at least 750,000 publicly held shares (total shares outstanding, less any shares held directly or indirectly by officers, directors or any person who is the beneficial owner of more than 10% of the total shares outstanding of the company), (iii) market value of publicly held shares of at least $5 million, and (iv) at least two registered and active market makers.

If we are delisted from the NASDAQ Global Market, we may apply to transfer our common stock listing to the NASDAQ Capital Market. However, our application may not be granted if we do not satisfy the applicable listing requirements for the NASDAQ Capital Market at the time of the application. Even if we successfully transfer our common stock listing to the NASDAQ Capital Market, but are unable to satisfy the minimum bid price requirement of $1.00 per share or any of the other continued listing standards of the NASDAQ Capital Market, our common stock could be delisted from the NASDAQ Capital Market. If our common stock were delisted from the NASDAQ Stock Market, we may apply to transfer our common stock listing to the NYSE MKT. However, our application may not be granted if we do not satisfy the applicable listing requirements for NYSE MKT at the time of the application. If our common stock were to be delisted from the NASDAQ Global Market and we could not satisfy the listing standards of the NASDAQ Capital Market or the NYSE MKT, trading of our common stock most likely would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities. Such trading could reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock.

If our common stock is delisted from the NASDAQ Global Market and we could not satisfy the listing standards of the NASDAQ Capital Market or the NYSE MKT and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on the NASDAQ Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of shareholders to borrow against or “margin” low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual shareholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock.

There can be no assurance that any disposition or other strategic transaction will occur or, if one is undertaken, of its potential terms or timing.

From time to time we explore potential transactions that may help us to realize the full value of our assets in the interest of our shareholders. There can be no assurance that any transaction will occur or, if one is undertaken, of its potential terms or timing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

We may not be able to compete successfully in the e-books development business.

Numerous companies and individuals are engaged in the book development business. We also compete with a large number of companies that license characters and properties into film, television, books and merchandise. Competition in these businesses is largely based on the number and quality of relationships that we are able to develop with authors and celebrities. There can be no assurance that our current or future competitors will not be successful in developing relationships with authors and celebrities with whom we have previously had relationships. Our revenues will decrease if we are unable to maintain these relationships or develop new relationships.

We may not be able to successfully protect our trademarks and proprietary rights.

Intellectual Properties Business. Hollywood Media has applied for trademark and copyright protection for its major intellectual property titles. Each of Hollywood Media and NetCo Partners currently has U.S. registered trademarks as well as pending trademark applications in the U.S. related to its respective business, and they also have foreign registered trademarks and pending trademark applications in several foreign jurisdictions. As Hollywood Media’s properties are developed, Hollywood Media intends to apply for further trademark and copyright protection in the United States and certain foreign countries.

Copyright protection in the United States on new publications of works for hire extend for a term of 95 years from the date of initial publication or 120 years from the year of creation, whichever expires first. Trademark registration in the United States extends for a period of ten years following the date of registration. To maintain the registration, affidavits must be filed between the fifth and sixth years following the registration date affirming that the trademark is still in use in commerce and providing evidence of such use. The trademark registration must be renewed prior to the expiration of the ten-year period following the date of registration.

Failure to adequately protect these intellectual property rights could result in adverse consequences for these businesses due to the risks described above.

We may become subject to liability for infringement of third-party intellectual property rights.

There can be no assurance that third parties will not bring copyright or trademark infringement claims against us, or claim that our use of certain technology violates a patent. Even if these claims are not meritorious, they could be costly and could divert management’s attention from other more productive activities. If it is determined that we have infringed upon or misappropriated a third party’s proprietary rights, there can be no assurance that any necessary licenses or rights could be obtained on terms satisfactory to us, if at all. The inability to obtain any required license on satisfactory terms could force us to incur expenses to change the way we operate our businesses. If our competitors prepare and file applications that claim trademarks owned or registered by us, we may oppose these applications and have to participate in administrative proceedings to determine priority of right in the trademark, which could result in substantial costs to us, even if the eventual outcome is favorable to us. An adverse outcome could require us to license disputed rights from third parties or to cease using such trademarks. In addition, inasmuch as we license a portion of our content from third parties, our exposure to copyright infringement or right of privacy or publicity actions may increase; because we must rely upon such third parties for information as to the origin and ownership of such licensed content. We generally obtain representations as to the origins, ownership and right to use such licensed content and generally obtain indemnification to cover any breach of any such representations; however, there can be no assurance that such representations will be accurate or that such indemnification will provide adequate compensation for any breach of such representation. There can be no assurance that the outcome of any litigation between such licensors and a third party or between us and a third party will not lead to royalty obligations for which we are not indemnified or for which such indemnification is insufficient, or that we will be able to obtain any additional license on commercially reasonable terms if at all.

We are dependent on developing and maintaining strategic relationships.

The success of our operations is dependent in part on MovieTickets.com’s ability to enter into and maintain strategic relationships and agreements with exhibitors and Tekno Books’ ability to develop and execute book projects with authors. There can be no assurance such relationships with exhibitors, authors and others will be developed and maintained or renewed and, if unable to do so, our financial condition and results of operations could be adversely impacted.

Our operations could be negatively impacted by systems interruptions.

The hardware and software used in the MovieTickets.com business could be damaged by fire, floods, hurricanes, earthquakes, power loss, telecommunications failures, break-ins and similar events. Our websites could also be affected by computer viruses, electronic break-ins or other similar disruptive problems. These system problems could negatively affect us. General Internet traffic interruptions or delays could also harm the MovieTickets.com business. To the extent MovieTickets.com’s services are disrupted, MovieTickets.com could lose users of its website.

Government regulation could impact our business.

The application of existing laws and regulations to the MovieTickets.com business relating to issues such as user privacy, pricing, taxation, content, sweepstakes, copyrights, trademarks, advertising, and the characteristics and quality of our products and services can be unclear.

Several federal laws could have an impact on the MovieTickets.com business. The Digital Millennium Copyright Act establishes binding rules that clarify and strengthen protection for copyrighted works in digital form, including works used via the Internet and other computer networks. The Child Online Protection Act is intended to restrict the distribution of certain materials deemed harmful to children. The Children’s Online Privacy Protection Act of 1998 protects the privacy of children using the Internet, by requiring, among other things, (1) that in certain specific instances the operator of a website must obtain parental consent before collecting, using or disclosing personal information from children under the age of 13, (2) the operator of a website to make certain disclosures and notices on the website or online service regarding the collection, use or disclosure of such personal information, and (3) the operator of a website or online service to establish and maintain reasonable procedures to protect the confidentiality, security and integrity of personal information collected from children under the age of 13.

We are dependent on Mitchell Rubenstein and Laurie S. Silvers, our founders.

Mitchell Rubenstein, our Chairman of the Board and Chief Executive Officer, and Laurie S. Silvers, our Vice Chairman, President and Secretary, have been primarily responsible for our organization and development. The loss of the services of either of these individuals would hurt our business. If either of these individuals were to leave Hollywood Media unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. The employment agreements between Hollywood Media and each of these individuals provide, among other things, that if we terminate either of these individuals without “cause” or either of these individuals resign for “good reason”, the other individual will have the right to resign for “good reason”.

The death of the Tekno Books Chief Executive Partner, Dr. Greenberg in June 2011 could have an adverse effect on the ability of Tekno Books to maintain its relationships with authors and publishers.

Tekno Books had been dependent on Dr. Martin Greenberg, the former Chief Executive Partner of Tekno Books, for the continued development and maintenance of strategic business relationships, including many of its relationships with authors and publishers. The death of Dr. Greenberg in June 2011 could have an adverse effect on the ability to develop and maintain these relationships.

We have authorized but unissued preferred stock, which could affect rights of holders of common stock.

Our articles of incorporation authorize the issuance of preferred stock with designations, rights and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. In addition, the preferred stock could be issued as a method of discouraging a takeover attempt. Although we do not intend to issue any preferred stock at this time, we may do so in the future. Shares of preferred stock are also subject to potential issuance under the terms of our shareholders' rights plan described below.

Our articles of incorporation, bylaws, shareholders’ rights plan and Florida law may discourage takeover attempts.

Certain provisions of our articles of incorporation, bylaws and our shareholders’ rights plan may discourage takeover attempts and may make it more difficult to change or remove management. Our articles of incorporation authorize the issuance of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our Board of Directors. Our bylaws include provisions requiring shareholders to provide specified advance notice to Hollywood Media of director nominations or proposed business to be transacted at shareholder meetings, in order for a shareholder to make a director nomination or propose meeting business. If certain events, such as a takeover bid not approved by our Board, occur, our shareholder’s rights plan will then entitle certain holders of our common stock to purchase at a specified price, shares of a series of our preferred stock with special voting, dividend and other rights.

In addition, Florida’s “control share acquisitions” statute provides that shares acquired in a “control share acquisition” (which excludes transactions approved by our board of directors) will not have voting rights unless the voting rights are approved by a majority of the corporation’s disinterested shareholders. A “control share acquisition” is an acquisition, in whatever form, of voting power in any of the following ranges: (a) at least 20% but less than 33-1/3% of all voting power; (b) at least 33-1/3% but less than a majority of all voting power; or (c) a majority or more of all voting power.

Florida’s “affiliated transactions” statute requires approval by disinterested directors or supermajority approval by disinterested shareholders of certain specified transactions between a public corporation and holders of more than 10% of the outstanding voting shares of the corporation (or their affiliates).

Our stock price is volatile.

The trading price of our common stock has and may continue to fluctuate significantly. During the 24 months ended December 31, 2012, the trading price for our common stock on the NASDAQ Global Market ranged from $0.90 to $1.97 per share. Our stock price may fluctuate in response to a number of events and factors, such as our quarterly operating results, announcements of new products or services, announcements of mergers, acquisitions, strategic alliances, or divestitures and other factors, including similar announcements by other companies that investors may consider to be comparable to us. In addition, the stock market in general has experienced extreme volatility that often has been unrelated to the operating performance of the companies. These broad market and industry fluctuations may cause the market price of our stock to decrease, regardless of our operating performance.

Future sales of our common stock in the public market could adversely affect our stock price and our ability to raise funds in new stock offerings.

Future sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect prevailing market prices of our common stock and could impair our ability to raise capital through future offerings of equity securities. We may issue additional shares of common stock in connection with future financings, acquisitions or other transactions, or pursuant to outstanding stock options, warrants and other convertible securities, and we may also issue additional stock options and stock grants from time to time to our employees and directors. We are generally unable to estimate or predict the amount, timing or nature of future issuances or public sales of our common stock. Sales of substantial amounts of our common stock in the public market could cause the market price for our common stock to decrease. In addition, a decline in the price of our common stock would likely impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities.

We may require additional capital to finance our operations and there can be no assurance that additional financing will be available on favorable terms.

We may require additional financing in the future. Our long-term financial success depends on our ability to generate sufficient revenue and cash flow to offset operating expenses. To the extent we do not generate sufficient revenues and cash flow to offset expenses we will require further financing to fund our ongoing operations. We cannot assure you that any additional financing will be available or, if available, that it will be on favorable terms. The terms of any financing that we enter into will vary depending on many factors including, among other things, our then current financial condition, the market price of our common stock, and other characteristics and terms of our capital structure. We may seek to raise additional capital through public or private offerings of equity securities or debt financings. Our issuance of additional equity securities could cause dilution to holders of our common stock and may adversely affect the market price of our common stock. The incurrence of debt would increase our interest expense and other debt service obligations and could result in the imposition of covenants that restrict our operational and financial flexibility. See Part II, Item 7 of this Annual Report on Form 10-K– Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Changes in securities laws and regulations may increase our costs.

The Sarbanes-Oxley Act of 2002 and the SEC rules promulgated thereunder have imposed increased demands upon, and required ongoing changes in some of our operational systems and processes, corporate governance, and compliance and disclosure processes, and the NASDAQ Stock Market has implemented changes in its requirements for companies that are NASDAQ-listed. These developments have resulted in, and future changes in such rules may result in, increases in our expenses for information systems, auditing and consulting fees, legal compliance and financial reporting costs. These developments could also make it more difficult for us to attract and retain qualified members of our board of directors or executive officers.

Other economic factors may adversely affect our future results or the market price of our stock (such as recession, war, terrorism).

We operate in a rapidly changing economic and technological environment that presents numerous risks. Many of these risks are beyond our control and are driven by factors that we cannot predict. Economic recession, war, terrorism, international incidents, labor strikes and disputes, and other negative economic conditions may cause damage or disruption to our facilities, information systems, vendors, employees, customers and/or website traffic, which could adversely impact our revenues and results of operations, and stock price.

The outcome of, and potential impact of matters relating to, the lawsuit filed by Hollywood Media, National Amusements Inc. and MovieTickets.com against AMC Entertainment Inc. could have a material adverse effect on the value of Hollywood Media’s interest in MovieTickets.com.

As reported in Part I, Item 3 of this Annual Report on Form 10-K, Hollywood Media, National Amusements Inc. and MovieTickets.com filed a lawsuit against AMC Entertainment Inc. (“AMC”) alleging, among other things, that AMC has breached and continues to breach the MovieTickets.com Joint Venture Agreement, which obligates AMC to exclusively provide its ticket inventory to MovieTickets.com.

Hollywood Media and the other plaintiffs are seeking unspecified consequential damages and have reserved the right to seek punitive damages. Hollywood Media and the other plaintiffs also are seeking a declaratory judgment that AMC is obligated to make available on MovieTickets.com’s website AMC’s ticket inventory for sale on an exclusive basis and to honor its contractual and common law fiduciary duties of good faith and loyalty to the MovieTickets.com Joint Venture and its joint venturers, Hollywood Media and National Amusements, Inc.

If the lawsuit against AMC is unsuccessful, it could have a material adverse effect on the value of Hollywood Media’s interest in MovieTickets.com.

Hollywood Media leases office space in Florida and Wisconsin. The general terms of the leases for each of these locations are as follows:

On October 27, 2011, the Company, together with National Amusements Inc. and the MovieTickets.com Joint Venture, filed a lawsuit against AMC Entertainment Inc. (“AMC”) and MovieTickets.com Inc. (as nominal defendant) (Case No. 50 2011 CA 016684) in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida relating to MovieTickets.com. On February 8, 2012, MovieTickets.com, Inc. joined the lawsuit against AMC and an amended complaint was filed. MovieTickets.com is an online movie ticketing service in which Hollywood Media, National Amusements, Inc. and AMC each own a 26.2% equity interest.

The amended complaint alleges that AMC has breached and continues to breach the MovieTickets.com Joint Venture Agreement, which obligates AMC to exclusively provide its ticket inventory to MovieTickets.com, and has breached its contractual and common law duties of good faith, fair dealing, and loyalty with respect to the MovieTickets.com Joint Venture and its joint venturers, Hollywood Media and National Amusements, Inc., as a result of various actions by AMC. The amended complaint contends that when AMC’s demands for greater control and a larger share of MovieTickets.com were not met, AMC breached and continues to breach the MovieTickets.com Joint Venture Agreement, which obligates AMC to exclusively provide its ticket inventory to MovieTickets.com. The amended complaint further specifies breaches by AMC of its contractual and common law duties of good faith, fair dealing, and loyalty and violations of Florida’s Deceptive and Unfair Trade Practices Act. Among other things, the plaintiffs allege in the amended complaint that AMC used its inside position with MovieTickets.com and access to MovieTickets.com’s proprietary information in order to advance AMC’s own goals in contravention of its duty of loyalty to the joint venture and to the detriment of MovieTickets.com.

Hollywood Media and the other plaintiffs have asked for a jury trial and are seeking unspecified consequential damages and have reserved the right to seek punitive damages. Hollywood Media and the other plaintiffs also are seeking a declaratory judgment that AMC is obligated to make available on MovieTickets.com’s website AMC’s ticket inventory for sale on an exclusive basis and to honor its contractual and common law fiduciary duties of good faith and loyalty to the MovieTickets.com Joint Venture and its joint venturers, Hollywood Media and National Amusements, Inc.

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.

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.

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 10th 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.

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.

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”).

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.

(in millions)

(in millions)

Comparison of Percentage Changes in Net Revenues and Operating Expenses

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.

Equity in Earnings of Unconsolidated Investees

Equity in earnings (losses) of unconsolidated investees consists of the following:

(in millions)

(in millions)

(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.

(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.

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.

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. Cash 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.

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.

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.

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.

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.

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.

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of Hollywood Media’s management, including Hollywood Media’s Chief Executive Officer (principal executive officer) and Hollywood Media’s Chief Financial Officer and Chief Accounting Officer (principal financial and accounting officer), on the effectiveness of Hollywood Media’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, Hollywood Media’s management, including Hollywood Media’s Chief Executive Officer (principal executive officer) and Hollywood Media’s Chief Financial Officer and Chief Accounting Officer (principal financial and accounting officer), have concluded that Hollywood Media’s disclosure controls and procedures were effective as of December 31, 2012 to ensure that information required to be disclosed by Hollywood Media in reports Hollywood Media 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 Hollywood Media’s Chief Executive Officer (principal executive officer) and Hollywood Media’s Chief Financial Officer and Chief Accounting Officer (principal financial and accounting officer), to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Hollywood Media’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of Hollywood Media’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Hollywood Media’s receipts and expenditures are being made only in accordance with authorizations of Hollywood Media’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Hollywood Media’s assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those internal control systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Hollywood Media’s management, including Hollywood Media’s Chief Executive Officer (principal executive officer) and Hollywood Media’s Chief Financial Officer and Chief Accounting Officer (principal financial and accounting officer), conducted an evaluation of the effectiveness of Hollywood Media’s internal control over financial reporting based on the framework set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Hollywood Media’s management, including Hollywood Media’s Chief Executive Officer (principal executive officer) and Hollywood Media’s Chief Financial Officer and Chief Accounting Officer (principal financial and accounting officer), concluded that Hollywood Media’s internal control over financial reporting was effective as of December 31, 2012.

Changes in Internal Control Over Financial Reporting

As previously reported in Hollywood Media’s Annual Report on Form 10-K for the year ended December 31, 2011, as amended, Hollywood Media’s management assessed the effectiveness of Hollywood Media’s internal control over financial reporting as of December 31, 2011 and concluded the following deficiencies in Hollywood Media’s CinemasOnline and Intellectual Properties businesses constituted material weaknesses in Hollywood Media’s internal control over financial reporting as of December 31, 2011:

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.

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.

On May 1, 2012, Hollywood Media sold its U.K. based CinemasOnline business (see 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).

During the quarter ended December 31, 2012, Hollywood Media changed its internal control over financial reporting to eliminate the material weaknesses described above and improve (i) the systems for the processing of book development and book licensing revenue and deferred revenue in Hollywood Media’s Intellectual Properties Division and (ii) internal controls over disbursements of funds and recording of related assets and expenses in Hollywood Media’s Intellectual Properties Division.

Except as set forth above, there have not been any changes in Hollywood Media’s internal control over financial reporting during the year ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, Hollywood Media’s internal control over financial reporting.