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TMCNet:  HOLLYWOOD MEDIA CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 19, 2012]

HOLLYWOOD MEDIA CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Note Regarding Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q or that are otherwise made by us or on our behalf about our financial condition, results of operations and business constitute "forward-looking statements," within the meaning of federal securities laws. Hollywood Media Corp. ("Hollywood Media", "our", or "Company") cautions readers that certain important factors may affect Hollywood Media's actual results, levels of activity, performance or achievements and could cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements anticipated, expressed or implied by any forward-looking statements that may be deemed to have been made in this Quarterly Report on Form 10-Q or that are otherwise made by or on behalf of Hollywood Media. Without limiting the generality of the foregoing, "forward-looking statements" are typically phrased using words such as "may," "will," "should," "expect," "plans," "believe," "anticipate," "intend," "could," "estimate," "pro forma" or "continue" or the negative variations thereof or similar expressions or comparable terminology.



Factors that may affect Hollywood Media's results and the market price of our common stock include, but are not limited to: · our continuing operating losses; · negative cash flows and accumulated deficit; · our ability to develop and maintain strategic relationships; · MovieTickets.com Inc.'s ability to compete with the other online movie ticketing service and the outcome of, and potential impact of matters relating to, the lawsuit filed by Hollywood Media, National Amusements Inc. and MovieTickets.com, Inc. against AMC Entertainment Inc. relating to MovieTickets.com (for more information about such lawsuit, see Note 7 "Certain Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); [23] · our ability to maintain and obtain sufficient capital to finance our operations; · our ability to realize anticipated cost efficiencies; · government regulation; · adverse economic factors such as recession, war, terrorism, international incidents or labor strikes and disputes; · our ability to design, implement and maintain effective internal controls; · dependence on our founders; · the unpredictability of our stock price; · the possibility of our common stock being delisted from the NASDAQ Global Market and not qualifying for trading on another exchange or market (such as the NASDAQ Capital Market, the NYSE Amex (formerly the American Stock Exchange) or the over-the-counter market); · the possibility of not receiving payments from Key Brand Entertainment Inc. in connection with the sale of our Broadway Ticketing business pursuant to that certain Second Lien Credit Security Pledge Agreement dated as of December 15, 2010, entered into by Theatre Direct NY, Inc., Key Brand Entertainment Inc., and Hollywood Media (the "Credit Agreement"); · the impact of the death of Tekno Books' former Chief Executive Partner, Dr.

Martin Greenberg, on the ability of Tekno Books to maintain relationships it has with certain authors and publishers; · the timing and amount of the payments we receive pursuant to the Credit Agreement; and · our ability to exercise or put our warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct NY, Inc. issued to us by Theatre Direct NY, Inc. pursuant to that certain Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand Entertainment Inc. (as amended, the "Purchase Agreement").

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

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

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

[24] Overview Until December 15, 2010, Hollywood Media was comprised of various businesses focusing primarily on online ticket sales, deriving revenue primarily from Broadway, Off-Broadway and London's West End ticket sales to individuals and groups, as well as advertising and book development license fees and royalties.

Our Broadway Ticketing business was comprised of Broadway.com, 1-800-BROADWAY, Theatre Direct and Theatre.com. On December 15, 2010, we completed the sale of our Broadway Ticketing Business through the sale of all of the outstanding capital stock of Theatre Direct to Key Brand, as contemplated by the Purchase Agreement. Following this sale, our business segments for our continuing operations are as follows: Ad Sales - includes Hollywood Media's 26.2% equity interest in MovieTickets.com. Prior to the sale of Cinemasource UK Limited on May 1, 2012 (which business included UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW.CO.UK Limited), the Ad Sales segment also sold advertising on plasma TV displays throughout the U.K. and Ireland, on lobby display posters, movie brochure booklets and ticket wallets distributed in cinemas, live theater and other entertainment venues in the U.K. and Ireland.

See Note 3, "Discontinued Operations" in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for information on the sale of Cinemasource UK Limited.

· Intellectual Properties - owns or controls the exclusive rights to certain intellectual properties created by best-selling authors and media celebrities, which it licenses for book and other media. This segment also includes our wholly-owned subsidiary, Tekno Books, a book development business, and this segment does not include our 50% interest in NetCo Partners, for purposes of this discussion and analysis.

· Other - is comprised of payroll and benefits for corporate and administrative personnel as well as other corporate-wide expenses, such as legal fees, audit fees, proxy costs, insurance, centralized information technology, and includes consulting and other fees and costs relating to compliance with the provisions of the Sarbanes-Oxley Act of 2002 that require Hollywood Media to assess and report on internal control over financial reporting, and related development of controls. Until August 28, 2012, this segment also included Hollywood Media's equity interest in Project Hollywood (which was reduced from 21.74% of the total equity in Project Hollywood to 20.65% of the total equity in Project Hollywood at June 30, 2012), which in turn owns Baseline. On August 28, 2012 Hollywood Media assigned Baseline Holdings all of Hollywood Media's membership interest in Project Hollywood in exchange for certain consideration. For additional information on the assignment of Hollywood Media's interest in Project Hollywood, LLC and the change in Hollywood Media's equity interest in Project Hollywood, see Note 9, "Related Party Transactions" in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

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

[25] The Ad Sales segment currently consists of the Company's investment in MovieTickets.com. As the Company accounts for its investment in MovieTickets.com under the equity method of accounting, there are no net revenues, operating income (loss), capital expenditures or depreciation and amortization expense to report for the Ad Sales segment. The following table summarizes Hollywood Media's revenues, operating expenses and operating income (loss) from continuing operations by reportable segment for the nine months ended September 30, 2012 ("Y3-12") and 2011 ("Y3-11") and the three months ended September 30, 2012 ("Q3-12") and 2011 ("Q3-11"), respectively: Intellectual Properties Other Total Y3-12 (unaudited) Net Revenues $ 429,082 $ - $ 429,082 Operating Expenses 507,978 3,456,034 3,964,012 Operating Loss $ (78,896 ) $ (3,456,034 ) $ (3,534,930 ) Y3-11 (unaudited) Net Revenues $ 841,546 $ - $ 841,546 Operating Expenses 776,455 5,062,595 5,839,050 Operating Income (Loss) $ 65,091 $ (5,062,595 ) $ (4,997,504 ) Q3-12 (unaudited) Net Revenues $ 96,035 $ - $ 96,035 Operating Expenses 151,550 1,002,961 1,154,511 Operating Loss $ (55,515 ) $ (1,002,961 ) $ (1,058,476 ) Q3-11 (unaudited) Net Revenues $ 152,424 $ - $ 152,424 Operating Expenses 162,358 1,768,911 1,931,269 Operating Loss $ (9,934 ) $ (1,768,911 ) $ (1,778,845 ) Results of Discontinued Operations Sale of Broadway Ticketing Division to Key Brand Entertainment, Inc.

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

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

On April 22, 2012, the Company entered into Amendment No. 4 (the "Amendment") to the Purchase Agreement. Pursuant to the Amendment, the Company consented to the contribution of the "group sales" business (but not the Broadway.com consumer ticketing business) owned by Key Brand to a newly formed joint venture (the "Group Sales JV"; such contribution, the "Group Sales Contribution"). The balance of the business sold to Key Brand under the terms of the Purchase Agreement, which included Broadway.com, remained at Key Brand and Theatre Direct. As part of the Amendment, Key Brand agreed to pay the first $7 million earnout amount (the "First $7 Million Earnout") to the Company on or before October 1, 2012 regardless of the actual revenues of Theatre Direct and its subsidiaries for the fiscal year of Key Brand ending June 30, 2012. The First Earnout amount of $7 million was paid by Key Brand to the Company on October 1, 2012. In addition, the revenue calculation for the second $7 million earnout amount (the "Second $7 Million Earnout") was modified to exclude "group sales" (and the revenues of the new joint venture conduction such business) and the target for the Second Earnout was reduced from $150 million to $123 million accordingly. On October 5, 2012, Hollywood Media received written notice from Key Brand that Theatre Direct achieved the revenue target for the Second $7 Million Earnout in Key Brand's fiscal year ended June 30, 2012. Accordingly, pursuant to the Amendment, the Second $7 Million Earnout was added as of October 1, 2012 to the principal amount of the Loan under the Credit Agreement. Pursuant to the Credit Agreement, interest at a rate of 12% per annum and principal on such Second $7 Million Earnout will be amortized over the term of the Credit Agreement in equal quarterly installments through the maturity date of the Loan on December 15, 2015. As a result of the Second $7 Million Earnout being added to the $8.5 million principal amount of the Loan, the principal amount of the Loan due Hollywood Media by Key Brand was $15.5 million as of October 1, 2012.

See Note 3, "Discontinued Operations" in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for information regarding revisions to the earnout payments. The Warrant will be marked to market each reporting period to reflect the changes in fair value.

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

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

[27] Sale by Minority Interest in Project Hollywood LLC (which owns the Baseline StudioSystems business) On August 28, 2012, Hollywood Media entered into an Assignment and Assumption of Membership Interest and Waiver (the "Assignment") with Baseline Holdings LLC ("Baseline Holdings"), Project Hollywood LLC, Mitchell Rubenstein and Laurie S.

Silvers. Baseline Holdings is wholly-owned by Mr. Rubenstein and Ms. Silvers.

As described below, the Assignment and the transactions contemplated by the Assignment were approved by a Special Committee of Hollywood Media's Board of Directors comprised solely of independent directors (the "Special Committee").

Pursuant to the Assignment, Hollywood Media assigned to Baseline Holdings all of Hollywood Media's membership interest in Project Hollywood in exchange for total consideration of $1,800,000 (the "Project Hollywood Purchase Price"). The Project Hollywood Purchase Price has been paid as follows: (1) $1,230,500 in cash (which has been paid by Baseline Holdings to Hollywood Media), (2) Mr.

Rubenstein waived his right to receive any future principal and interest owed by Key Brand to Hollywood Media pursuant to the Loan (as of August 28, 2012, Mr.

Rubenstein had the right to receive 4.76% of the principal, or $404,600, and interest on account of the Loan), and (3) Ms. Silvers waived her right to receive any future principal and interest owed by Key Brand to Hollywood Media pursuant to the Loan (as of August 28, 2012, Ms. Silvers has the right to receive 1.94% of the principal, or $164,900, and interest on account of the Loan). Hollywood Media recorded the fair value of the waivers by Mr. Rubenstein and Ms. Silvers in the long term portion of "Other Assets" in the accompanying condensed consolidated balance sheets included in Part I, Item I of this Quarterly Report on Form 10-Q. Hollywood Media acquired its membership interest in Project Hollywood on October 27, 2011 for $1,250,000.

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

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

Sale of Hollywood.com Business Unit to R&S Investments, LLC On August 21, 2008, Hollywood Media entered into a purchase agreement (the "R&S Purchase Agreement") with R&S Investments, LLC ("R&S Investments") for the sale of the Hollywood.com Business. R&S Investments is wholly-owned by Mr.

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

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

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

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

In addition, pursuant to the Rubenstein Silvers Letter Agreement, Ms. Silvers agreed that, in connection with the transaction consummated under the R&S Agreement and in addition to the Buyout Amount, the next $280,000 of the MovieTickets.com 5% Interest (as defined in the Amended and Restated Employment Agreement dated as of December 22, 2008, between Hollywood Media and Ms.

Silvers, as amended (the "Silvers Employment Agreement")) that would be distributed by Hollywood Media to Ms. Silvers pursuant to the Silvers Employment Agreement will be retained by Hollywood Media (and not paid to Ms. Silvers) and is a reduction to "Derivative Liabilities" in the accompanying condensed consolidated balance sheets included in Part I, Item I of this Quarterly Report on Form 10-Q.

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

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

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

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

The discounted amount of the non-interest bearing loan is included in "Other Assets" in the condensed consolidated balance sheets included in Item I, Part I of this quarterly report on Form 10-Q.

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

The decrease in Intellectual Properties net revenues in Y3-12 as compared to Y3-11 and Q3-12 as compared to Q3-11 was attributable to the timing of the delivery of manuscripts and the beginning of a reorientation of the focus of this business to digital distribution from print. The Intellectual Properties division generates revenues from several different activities including intellectual property licensing and book development. Revenues vary quarter to quarter depending on the timing of delivery of manuscripts to the publishers.

Revenues are recognized when the earnings process is complete and the ultimate collection of such revenues is no longer subject to contingencies. This division does not include NetCo Partners, which is reported separately; see "Earnings (Losses) of Unconsolidated Investees" below.

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