are an integral part of these condensed
consolidated statements of cash flows.
HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
(1)
|
BASIS
OF PRESENTATION AND CONSOLIDATION:
|
In the opinion of
management, the accompanying unaudited condensed consolidated financial statements have been prepared by Hollywood Media Corp.
(“Hollywood Media”, “our” or “Company”) in accordance with accounting principles generally
accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article
8 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed
or omitted pursuant to applicable rules and regulations. However, management believes that the disclosures contained herein are
adequate to make the information presented not misleading. The accompanying financial statements reflect, in the opinion of management,
all material adjustments (which include only normal recurring adjustments) necessary to present fairly Hollywood Media’s
condensed consolidated financial position, results of operations and cash flows. The results of operations for the three months
ended March 31, 2013 and the cash flows for the three months ended March 31, 2013 are not necessarily indicative of the results
of operations or cash flows for the remainder of 2013. The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and notes thereto included in Hollywood Media’s
Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission.
|
(2)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
|
Principles of Consolidation
Hollywood Media’s
consolidated financial statements include the accounts of Hollywood Media and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Hollywood Media’s 50% and 26.2% ownership interests in
NetCo Partners and MovieTickets.com, respectively, are accounted for under the equity method of accounting.
Loss per Common Share
Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) Topic No. 260,
“Earnings Per Share”
(ASC 260), requires companies
to present basic and diluted earnings per share (“EPS”). Loss per common share is computed by dividing net loss attributable
to Hollywood Media Corp. (the numerator) by the weighted average number of common shares outstanding (the denominator) for the
period presented.
The weighted average
number of common shares issuable upon conversion of convertible securities and upon exercise of outstanding options and warrants
totaled 75,000 shares for the three months ended March 31, 2013 and such shares were excluded from the calculation of basic and
diluted loss per share for the three months ended March 31, 2013 because their impact was anti-dilutive to the loss per share
from continuing operations. Unvested shares are not included in the basic calculation until vesting occurs and are not included
in the diluted calculation because they are anti-dilutive. There were no unvested shares as of March 31, 2013 and 2012, respectively.
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
22,776,185
|
|
|
|
23,179,066
|
|
Effect of dilutive unvested restricted stock
|
|
|
-
|
|
|
|
-
|
|
Dilutive weighted average shares outstanding
|
|
|
22,776,185
|
|
|
|
23,179,066
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of Common Stock and other stock-based awards outstanding which
are not included in the calculation of diluted income (loss) per share because their impact is anti-dilutive
|
|
|
75,000
|
|
|
|
75,000
|
|
Segment Information
ASC Topic No. 280,
“Segment Reporting”
, establishes standards for reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services,
geographic areas and major customers. ASC Topic No. 280 has been applied to the information appearing in Note 6, “Segment
Reporting.”
Derivative Instruments
The Company records
derivative instruments at fair value in our accompanying condensed consolidated balance sheet with changes in the fair values
of those instruments reported in earnings in our condensed consolidated results of operations. The Company does not hold any derivative
instruments that reduce risk associated with hedging exposure, accordingly the Company has not designated any of its derivatives
liability financial instruments as hedge instruments.
Recent Accounting
Pronouncements
In October 2012, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2012-04, ''Technical Corrections
and Improvements" in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics
in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards
Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for
fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 did not have a material impact on our financial
position or results of operations.
|
(3)
|
DISCONTINUED
OPERATIONS:
|
Sale of Broadway Ticketing Division
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 (as amended, 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) an $8,500,000 note (the "Loan”)
from Key Brand pursuant to a Second Lien Credit, Security and Pledge Agreement, dated as of December 15, 2010 (as amended, the
“Credit Agreement”), pursuant to which Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per
annum, with the Loan maturing on December 15, 2015, which Loan is secured on a second lien basis by all stock and assets of Theatre
Direct and its subsidiaries, and (iii) a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct as
of the closing date on a fully diluted basis at an exercise price of $.01 per share (as amended, the “Warrant”), and
(b) Key Brand assumed $1,600,000 of liabilities associated with employment agreements with certain employees of Theatre Direct.
In addition, Hollywood Media was entitled to receive earnout payments (the "Earnout”) of up to $14,000,000, in two
$7,000,000 tranches, contingent upon Theatre Direct and its subsidiaries achieving certain revenue targets during the period from
the closing date through the end of the 10
th
full fiscal year following the closing date as set forth in the Purchase
Agreement.
In connection with
the Credit Agreement, Hollywood Media, Key Brand and JPMorgan Chase Bank, N.A., as administrative agent for the senior secured
lenders of Key Brand, entered into a Subordination and Intercreditor Agreement, dated December 15, 2010 (the “JPM Intercreditor
Agreement”) which defined the rights and obligations of the senior secured lenders and Hollywood Media as subordinated lender,
including, without limitation, the rights of payment and the subordination of the security interests of Hollywood Media.
On March 14, 2011,
Hollywood Media delivered to Key Brand a closing statement setting forth Hollywood Media’s calculation of Theatre Direct’s
working capital as of the closing date of the Broadway Sale determined in the manner described in the Purchase Agreement. Pursuant
to such closing statement, Hollywood Media accrued $3,702,620 as a working capital adjustment as of December 31, 2010 under the
Purchase Agreement which included $530,102 related to the estimated working capital delivered at closing by Key Brand. The working
capital adjustment of $3,734,106 was paid on March 22, 2011.
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 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 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 the $7,000,000 portion of the Loan will be 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
$8,500,000 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 initially
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
is included in "Accretion of discount, net of allowance for uncollectability" in the accompanying unaudited condensed
consolidated statements of operations. 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 $7,000,000
portion of the Loan and $260,666 of interest on the $8,500,000 portion of the Loan. The principal payment of $538,462, combined
with accretion of discount of $288,585, reduced the value of the $7,000,000 portion of the Loan 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 $8,500,000 portion
of the Loan during the three months ended December 31, 2012. On March 29, 2013, Hollywood Media received a scheduled payment under
the Loan in the amount of $1,132,404, which included a principal payment of $646,154, an interest payment of $210,000 on the $7,000,000
portion of the Loan and $276,250 of interest on the $8,500,000 portion of the Loan. The principal payment of $646,154, combined
with accretion of discount of $343,326, reduced the value of the $7,000,000 portion of the Loan from $4,250,123 at December 31,
2012 to $3,947,295 at March 31, 2013. Accretion of discount was $267,159 on the $8,500,000 portion of the Loan during the three
months ended March 31, 2013.
On April 22, 2012,
Hollywood Media also 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 million 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 was $700,000 on March 31, 2013 and December 31, 2012, respectively.
In connection with
the Second Credit Agreement Amendment, Terido Intercreditor Agreement and the amendment to the Warrant described above, on December
31, 2012, 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.
Hollywood.com Business
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 $197,517 in earnout gain during the three months ended March 31, 2012, which is included in “Gain
on sale of discontinued operations, net of income taxes” in our accompanying unaudited condensed 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 unaudited condensed 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 unaudited condensed 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.
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. 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. The current portion of the discounted amount of
the non-interest bearing loan is included in “Notes receivable, current” and the long-term portion of the non-interest
bearing loan is included in “Notes receivable, less current portion” in our accompanying unaudited condensed 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.
Results from Discontinued Operations
The net income from
discontinued operations has been classified in the accompanying unaudited condensed consolidated statements of operations as “Income
from discontinued operations” and includes the gain on sale of the Hollywood.com Business. Summarized results of discontinued
operations include the operating loss from the Cinemasource UK Limited Business and through their respective dates of disposition,
for the three months ended March 31, 2013 and 2012.
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Net Revenues:
|
|
$
|
-
|
|
|
$
|
533,041
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations, net of
income taxes
|
|
|
-
|
|
|
|
197,517
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(11,582
|
)
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
-
|
|
|
$
|
185,935
|
|
|
(4)
|
STOCK
REPURCHASE PROGRAM:
|
During the first quarter
of 2013, 510,700 shares of Hollywood Media’s common stock were purchased under the repurchase program for $749,966.
No shares were repurchased during the three months ended March 31, 2012. For additional information relating to the stock repurchase
program, see Part II, Item 2 of this Quarterly Report on Form 10-Q and “Liquidity and Capital Resources” in Part I,
Item 2 of this Quarterly Report on Form 10-Q. As of March 31, 2013, the maximum approximate dollar value of shares that may have
been purchased under the Repurchase Program was $1,923,295 (calculated by subtracting (i) the total paid for all shares purchased
under the Repurchase Program from inception through March 31, 2013 or $8,076,705 from (ii) the $10,000,000 potential maximum dollar
value of repurchases approved under the life of the Repurchase Program).
|
(5)
|
FAIR
VALUE MEASUREMENTS:
|
The carrying amounts of cash and
cash equivalents, receivables and accounts payable, approximate their fair values due to the short-term maturities of these instruments.
The carrying value of notes payable and the non-interest bearing loan receivable with imputed interest at 16.5%, per annum, approximate
fair value because the interest rates approximate the market rates.
Financial instruments
that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company’s cash management and investment policies restrict investments to low risk, highly-liquid
securities, and the Company performs periodic evaluations of the credit standing of the financial institutions with which it deals.
The Company generally does not require collateral when granting credit.
Fair value is the
price that would be received to sell an asset or paid to transfer a liability in the Company’s principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the
exit price. In accordance with ASC Topic 820,
Fair Value Measurements and Disclosures
(“ASC 820”),
the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed
based on market data obtained from sources independent of the Company and the Company’s own assumptions about market participant
assumptions developed based on the best information available in the circumstances.
The levels of fair
value hierarchy are:
Level 1: Quoted
prices in active markets for identical assets and liabilities at the measurement date.
Level 2: Observable
inputs other than quoted prices included in Level 1, such as (i) quoted prices for similar assets and liabilities in active
markets, (ii) quoted prices for identical or similar assets and liabilities in markets that are not active, and (iii) other inputs
that are observable or can be corroborated by observable market data.
Level 3: Unobservable
inputs for which there is little or no market data available.
Within this level
of the hierarchy, fair value is based upon the lowest level of any input that is significant to the fair value measurement. However,
the determination of what constitutes “observable” requires significant judgment by the Company. The Company
considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable,
not proprietary, and provided by independent sources that are actively involved in the relevant market. In contrast,
the Company considers unobservable data to be data that reflects the Company’s assumptions of what market participants would
use in pricing the asset or liability developed based on the best information available in the circumstances.
Compensation Liabilities
On December 29, 2009,
the Company and Mitchell Rubenstein and Laurie S. Silvers entered into amended and restated employment agreements which include
a compensation arrangement that includes the right for
each to receive 5% of all of the distributions
that the Company receives from its interest in MovieTickets.com which includes 5% to each of all proceeds received by the Company
from either dividends or from the sale of all or any portion of MovieTickets.com. In connection with the buyout of the obligation
of R&S Investments, LLC to pay to Hollywood Media the Hollywood.com earnout under the R&S Purchase Agreement, the Rubenstein
Silvers Letter Agreement reduced the amount of distributions payable to Mr. Rubenstein and Ms. Silvers. The fair value of this
liability, which was initially measured on March 15, 2011, the date that the compensation arrangement was effective, is recorded
in “Derivative Liabilities”, with any changes in the fair value recorded in “Other, net” in the accompanying
unaudited
condensed
consolidated statements of operations.
See Note 3, “Discontinued Operations” to these unaudited condensed consolidated financial statements for information
on the Buyout Amount and its reduction of the derivative liability. At March 31, 2013 and December 31, 2012, the fair value of
the derivative liability was $60,000.
Warrant Held by
Hollywood Media in Theatre Direct
In conjunction with
the Broadway Sale, the Company received a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct,
which can only be exercised upon a Conversion Event, as defined, and which also contains a put option that allows the Company,
after the seventh anniversary of the issue date (which was later shortened to June 30, 2015 as referenced below), to put the warrant
to Key Brand for the greater of (i) fair market value of the shares and (ii) $1.0 million (which was later increased to $3.0 million
as referenced below). The Warrant is revalued on a recurring basis.
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. After estimating future
cash flows adjusted for risk factors it was determined that the fair value of the Warrant was $700,000 at March 31, 2013 and December
31, 2012.
The estimate of fair
value of the Warrant employed using a multiples approach and discounted cash flow analysis and assumed the Warrant was to be monetized
as of the valuation date. The Warrant's values were then adjusted to reflect a range of outcomes and assigned probability
weights, and the Warrant's put and call rights of Hollywood Media and Key Brand. The key assumptions used to determine the
fair value of the Warrant during fiscal 2012 were: implied multiples used in the business enterprise value income and market approaches
ranging from 3.25 to 4.0 for fiscal 2012; and a discount rate of 25%, based on the Company’s best estimate of the weighted-average
cost of capital adjusted for risks associated with the Warrant for fiscal 2012.
Certain assets such
as long-lived assets and goodwill are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are
not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances such as impairment
review. In those circumstances, fair value measurements are principally based upon unobservable inputs (Level 3 of the fair value
hierarchy) using the Company’s own assumptions in determining fair value.
The following table
presents the Company’s derivative liabilities and warrant on a recurring basis and the Company’s goodwill on a non-recurring
basis within the fair value hierarchy utilized to measure fair value as of March 31, 2013:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
6,200,000
|
|
There were no transfers between the levels
of the fair value hierarchy during the quarter ended March 31, 2013.
The following table presents a reconciliation
of the compensation derivative liabilities measured at fair value on a recurring basis using significant unobservable input (Level
3) from December 31, 2012 to March 31, 2013:
|
|
Compensation
|
|
|
|
derivative
|
|
|
|
liabilities
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
60,000
|
|
Change in fair value included in earnings
|
|
|
-
|
|
Balance at March 31, 2013
|
|
$
|
60,000
|
|
The following table presents a reconciliation of the Warrant
measured at fair value on a recurring basis using significant unobservable input (Level 3) from December 31, 2012 to March 31,
2013:
|
|
Warrant
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
700,000
|
|
Change in fair value included in "Other, net"
|
|
|
-
|
|
Balance at March 31, 2013
|
|
$
|
700,000
|
|
Hollywood Media’s
reportable segments are Ad Sales, Intellectual Properties, and Other.
The Ad Sales segment
consists of Hollywood Media’s investment in MovieTickets.com. Prior to the sale of Cinemasource UK Limited on May 1, 2012
(which business included UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW.CO.UK Limited), the
Ad Sales segment also sold advertising on plasma TV displays throughout the U.K. and Ireland, on lobby display posters, movie
brochure booklets and ticket wallets distributed in cinemas, live theater and other entertainment venues in the U.K. and Ireland.
See Note 3, “Discontinued Operations” to these unaudited condensed consolidated financial statements for information
on the sale of Cinemasource UK Limited.
The Intellectual Properties
segment owns or controls the exclusive rights to certain intellectual properties created by best-selling authors and media celebrities,
which it licenses across all media. This segment also includes Tekno Books, a book development business.
The Other segment
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 fees and other
fees and costs relating to compliance with the provisions of the Sarbanes-Oxley Act of 2002 that require Hollywood Media to make
an assessment of and report on internal control over financial reporting. This segment also included Hollywood Media’s investment
in Project Hollywood, LLC ("Project Hollywood"). On August 28, 2012 Hollywood Media assigned to Baseline Holdings LLC
all of Hollywood Media’s membership interest in Project Hollywood in exchange for total consideration of $1,800,000. See
Note 9, “Related Party Transactions” to these unaudited condensed consolidated financial statements for more information
on the assignment of Hollywood Media’s membership interest in Project Hollywood.
There are no intersegment
sales or transfers.
As of March 31,
2013, the Ad Sales segment consists of the Company’s investment in MovieTickets.com. As the Company accounts for its investment
in MovieTickets.com under the equity method of accounting, there are no net revenues, operating income (loss), capital expenditures
or depreciation and amortization expense to report for the Ad Sales segment. The following table illustrates the financial information
regarding Hollywood Media’s reportable segments.
|
|
Three months ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
Intellectual Properties
|
|
$
|
81,059
|
|
|
$
|
176,834
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
81,059
|
|
|
$
|
176,834
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
Intellectual Properties
|
|
$
|
(59,761
|
)
|
|
$
|
18,905
|
|
Other
|
|
|
(1,310,102
|
)
|
|
|
(908,336
|
)
|
|
|
$
|
(1,369,863
|
)
|
|
$
|
(889,431
|
)
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Intellectual Properties
|
|
$
|
-
|
|
|
$
|
-
|
|
Other
|
|
|
40,784
|
|
|
|
16,890
|
|
|
|
$
|
40,784
|
|
|
$
|
16,890
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
Amortization Expense:
|
|
|
|
|
|
|
|
|
Intellectual Properties
|
|
$
|
265
|
|
|
$
|
1,112
|
|
Other
|
|
|
20,869
|
|
|
|
36,482
|
|
|
|
$
|
21,134
|
|
|
$
|
37,594
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
|
|
Segment Assets:
|
|
|
|
|
|
|
Ad Sales
|
|
$
|
6,197,998
|
|
|
$
|
6,197,998
|
|
Intellectual Properties
|
|
|
353,559
|
|
|
|
893,961
|
|
Other
|
|
|
18,888,642
|
|
|
|
19,523,863
|
|
|
|
$
|
25,440,199
|
|
|
$
|
26,615,822
|
|
|
(7)
|
CERTAIN
COMMITMENTS AND CONTINGENCIES:
|
Litigation
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 15
th
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.
Hollywood Media is
from time to time party to various legal proceedings, including matters arising in the ordinary course of business. Currently
the Company is unaware of any actual or threatened litigation against it.
Hollywood Media owns 26.2% of the equity
in MovieTickets.com, Inc. as of March 31, 2013 and shares in 26.2% of the income or losses generated by the joint venture.
This investment is recorded under the equity method of accounting, recognizing 26.2% of ownership of MovieTickets.com income or
loss as “Equity in Earnings of Unconsolidated Investees” in the accompanying unaudited condensed consolidated statements
of operations.
Hollywood Media
recorded its 26.2% share of net income or $48,919 under “Earnings of unconsolidated investees” in the accompanying
unaudited condensed consolidated statement of operations for the three months ended March 31, 2012. Hollywood Media did not record
$410,249 of its share of losses from MovieTickets.com for 2012 and the three months ended March 31, 2013 because accumulated dividends
and net losses from 2013 and prior years exceed the Company’s investment in MovieTickets.com as of March 31, 2013.
There were no dividends declared or received during the three months ended March 31, 2013 or during the three months ended March
31, 2012.
|
(9)
|
RELATED
PARTY TRANSACTIONS:
|
Hollywood Media recorded
$197,517 in earn-out gain from R&S Investments, LLC ("R&S Investments") during the three months ended March
31, 2012. As of March 31, 2013, the Company had $30,929 included in “Related Party Receivable” in our accompanying
unaudited condensed consolidated balance sheet which primarily consisted of expense reimbursements from R&S Investments. As
of December 31, 2012, the Company had $37,287 included in “Related Party Receivable” in our accompanying consolidated
balance sheet which primarily consisted of expense reimbursements from R&S Investments. During the year ended December
31, 2012, Hollywood Media received such earn-out amounts and expense reimbursements in accordance with the payment terms.
Pursuant to the R&S
Agreement dated August 28, 2012, in exchange for 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. Accordingly, the earnout receivable from R&S Investments was $0 as of December 31,
2012 and March 31, 2013. See Note 3, “Discontinued Operations” to these unaudited condensed consolidated financial
statements for more information on the R&S Agreement, the Buyout Amount and this transaction.
On October 27, 2011,
following Project Hollywood's acquisition of all of the membership interests of Baseline LLC, Hollywood Media acquired a 21.74%
ownership interest in Project Hollywood for $1.25 million, which was contributed to Project Hollywood and which was based on the
same per membership unit price paid by Baseline Holdings LLC for its 78.26% ownership interest in Project Hollywood. The
funds contributed were used for working capital and other capital needs of the Baseline StudioSystems business.
Project Hollywood entered into two agreements with the two former senior executives of Baseline StudioSystems to manage the business
on a day-to-day basis, as of December 1, 2011. Under those agreements, the managers will each receive 7.5% of Project Hollywood
membership units subject to a three year vesting schedule (at a rate of 2.5% per annum) and the obtaining of certain performance-based
EBITDA hurdles each year. Under that vesting schedule, Hollywood Media’s ownership in Project Hollywood was reduced
to 20.65% at June 30, 2012.
Distributions of $130,683
to Hollywood Media reduced Hollywood Media’s investment in Project Hollywood during the three months ended March 31, 2012.
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, Mitchell Rubenstein and Laurie S. Silvers.
Baseline Holdings is wholly-owned by Mr. Rubenstein, Hollywood Media’s Chief Executive Officer and Chairperson of the Board,
and Ms. Silvers, Hollywood Media’s President, Secretary and Vice-Chairperson of the Board. As described below, the
Assignment and the transactions contemplated by the Assignment were approved by a Special Committee of Hollywood Media’s
Board of Directors comprised solely of independent directors (the “Special Committee”).
Pursuant to the Assignment,
Hollywood Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange
for total consideration of $1,800,000 (the “Project Hollywood Purchase Price”). The Project Hollywood Purchase Price
has been paid as follows: (1) $1,230,500 in cash (which has been paid by Baseline Holdings to Hollywood Media), (2) Mr.
Rubenstein waived his right to receive any future principal and interest owed by Key Brand to Hollywood Media pursuant to the
$8,500,000 portion of the Loan (as of August 28, 2012, Mr. Rubenstein had the right to receive 4.76% of the principal,
or $404,600, and interest on account of the $8,500,000 portion of the Loan), and (3) Ms. Silvers waived her right to receive
any future principal and interest owed by Key Brand to Hollywood Media pursuant to the $8,500,000 portion of the Loan (as of August 28, 2012,
Ms. Silvers has the right to receive 1.94% of the principal, or $164,900, and interest on account of the $8,500,000 portion of
the Loan). Hollywood Media recorded the fair value of the waivers by Mr. Rubenstein and Ms. Silvers in the long term portion of
“Other Assets” in the accompanying unaudited condensed consolidated balance sheets. As described above, Hollywood
Media acquired its membership interest in Project Hollywood on October 27, 2011 for $1,250,000.
As a result of the
waivers of Mr. Rubenstein and Ms. Silvers described in the preceding paragraph, after August 28, 2012, Hollywood Media will retain
all payments of principal and interest made by Key Brand under the Loan. As of August 28, 2012, the principal balance due under
the Loan was $8,500,000. As of October 5, 2012, the principal balance due under the Loan increased to $15,500,000 as a result
of the achievement of the revenue threshold for the Second $7 Million Earnout in the Purchase Agreement.
The Special Committee
unanimously approved the Assignment and determined that the transactions contemplated by the Assignment were advisable, fair to
and in the best interests of Hollywood Media and its shareholders. In connection with approving the transactions contemplated
by the Assignment, the Special Committee received a fairness opinion from a firm with experience in valuation work, which stated
that as of August 28, 2012, based upon and subject to (and in reliance on) the assumptions made, matters considered and limits
of such review, in each case as set forth in its opinion, the Project Hollywood Purchase Price was fair from a financial point
of view to Hollywood Media.
Amended and Restated Employment Agreements
of Mr. Rubenstein and Ms. Silvers
On December 23, 2009,
(i) Hollywood Media and Mitchell Rubenstein entered into an amendment to his amended and restated employment agreement (as amended,
the “Rubenstein Employment Agreement”) and (ii) Hollywood Media and Laurie S. Silvers entered into an amendment to
her amended and restated employment agreement (as amended, the “Silvers Employment Agreement”) which amendments provided
for, among other things, the following:
|
•
|
For
a period of ninety days after the closing of the sale of Theatre
Direct, Mr. Rubenstein’s and Ms. Silvers’ compensation
continued in accordance with then existing terms.
|
|
•
|
After
this ninety-day period, Mr. Rubenstein and Ms. Silvers base
salaries were each reduced to a nominal amount of $1 per year
plus each is entitled to five percent (5%) of the sum of (i)
any distributions and other proceeds Hollywood Media receives
after such ninety-day period in connection with its ownership
interest in MovieTickets.com, Inc. and (ii) certain other amounts
that may be received by Hollywood Media from MovieTickets.com,
Inc. ((i) and (ii) are referred to herein as the “5% Distribution”).
Upon a sale of Hollywood Media’s interest in MovieTickets.com,
Inc., Mr. Rubenstein and Ms. Silvers would each also receive
5% of the proceeds received by Hollywood Media in such sale.
Should the employment agreements be terminated by Hollywood
Media without “cause”, by death or by Mr. Rubenstein
and/or Ms. Silvers, as applicable, for “good reason”
the 5% Distributions and 5% of proceeds upon sale are due to
Mr. Rubenstein and Ms. Silvers or their heirs regardless of
whether or not Mr. Rubenstein and/or Ms. Silvers continue in
the employment of the Company.
|
|
•
|
A
deferment by Mr. Rubenstein and Ms. Silvers of $812,501 and
$332,189, respectively otherwise due to them as change of control
payments upon the consummation of the sale of Theatre Direct
(referred to herein as the “Deferred Change in Control
Payments”).
|
On August 28, 2012,
(1) Hollywood Media and R&S Investments, LLC (“R&S Investments”) entered into an Agreement (the “R&S
Agreement”) regarding the Purchase Agreement dated as of August 21, 2008 between Hollywood Media and R&S Investments,
as amended (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”). R&S
Investments is wholly-owned by Mr. Rubenstein and Ms. Silvers. See Note 3, “Discontinued Operations” to these
unaudited condensed consolidated financial statements for more information on the R&S Agreement, the Rubenstein Silvers Letter
Agreement and the R&S Letter and the transactions contemplated by the R&S Agreement, the Rubenstein Silvers Letter Agreement
and the R&S Letter.
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 5% Distribution 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 unaudited condensed 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 5% Distribution 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 unaudited condensed 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 Investment shall pay to Hollywood Media $3,500,000 or, if less, the amount received by R&S Investments
in connection with such transaction.
Regardless of whether
Mr. Rubenstein or Ms. Silvers continued to provide services to Hollywood Media after the first anniversary of the sale of Theatre
Direct, one-half of the Deferred Change in Control Payments were to be paid to Mr. Rubenstein and/or Ms. Silvers, as applicable,
upon the receipt by Hollywood Media of payments from Key Brand pursuant to the $8,500,000 credit agreement (the “Credit
Agreement”) entered into in connection with the sale of Theatre Direct, on a pro rata basis, and one-half of such payments
were be paid to Mr. Rubenstein and/or Ms. Silvers, as applicable, upon the receipt by Hollywood Media of payments under the First
$7 Million Earnout under the Purchase Agreement entered into in connection with the sale of Theatre Direct, on a pro rata basis.
As described above,
on August 28, 2012, Hollywood Media entered into “the Assignment” with Baseline Holdings, Project Hollywood, Mr. Rubenstein
and Ms. Silvers. Baseline Holdings is wholly-owned by Mr. Rubenstein and Ms. Silvers. Pursuant to the Assignment, Hollywood
Media assigned to Baseline Holdings all of Hollywood Media’s membership interest in Project Hollywood in exchange for total
consideration of $1,800,000 (the “Project Hollywood Purchase Price”), which interest Hollywood Media had acquired
on October 27, 2011 for $1,250,000. The Project Hollywood Purchase Price was paid as follows: (1) $1,230,500 in cash (which
was paid by Baseline Holdings to Hollywood Media), (2) Mr. Rubenstein waived his right to receive any future principal and interest
owed to Hollywood Media pursuant to the Loan under the Credit Agreement (as of August 28, 2012, Mr. Rubenstein had the
right to receive 4.76% of the principal, or $404,600, and interest on account of the Loan under the Credit Agreement), and (3)
Ms. Silvers waived her right to receive any future principal and interest owed to Hollywood Media under the Loan under the Credit
Agreement (as of August 28, 2012, Ms. Silvers has the right to receive 1.94% of the principal, or $164,900, and interest on account
of the Loan under the Credit Agreement). Hollywood Media recorded the fair value of the waivers by Mr. Rubenstein and Ms.
Silvers in the long term portion of “Other Assets” in the accompanying unaudited condensed consolidated balance sheets.
On October 1, 2012,
Hollywood Media received the First $7 Million Earnout under the Purchase Agreement entered into in connection with the sale of
Theatre Direct. In connection with the Deferred Change in Control Payments due to Mr. Rubenstein and Ms. Silvers in connection
with the sale of Theatre Direct, Mr. Rubenstein received $405,300 of such earnout payment and Ms. Silvers received $165,200 of
such earnout payment on October 5, 2012.
Tekno Books Advertising
On March 5, 2013,
in connection with the reorientation process of Tekno Books from print to digital distribution, Hollywood Media entered into an
advertising agreement with MovieTickets.com for $469,000 whereby Hollywood Media paid this amount for advertisements starting
in the second quarter of 2013 which will be expensed as the advertisements run. Of this amount, $100,000 is an advance against a
fee of $1 per digital book to MovieTickets.com for books sold via MovieTickets.com. The $469,000 is included in “Prepaid
expenses” in the accompanying unaudited condensed consolidated balance sheet at March 31, 2013.