NSTM NovelStem International Corp (PK)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012 AND 2011

Hollywood Media Corp. (“Hollywood Media” or “the Company”) was incorporated in the State of Florida on January 22, 1993. Hollywood Media is comprised of various businesses focusing primarily on book development license fees and royalties.

The Intellectual Properties segment owns or controls the exclusive rights to certain original characters and concepts created by best-selling authors and media celebrities, which it seeks to license across all media, including books, films and television, and other products. Hollywood Media acquires the rights to its intellectual properties pursuant to agreements that grant it exclusive rights in the intellectual property itself as well as the right to use the creator’s name in the title of the intellectual property. The intellectual properties division also includes a wholly-owned book development and licensing operation named Tekno Books which focuses on developing and executing book projects, typically with best-selling authors, which books are then licensed for publication to book publishers. Tekno Books generates revenues from new book projects in the form of non-refundable advances paid by publishers and royalties from its library of book titles.

Hollywood Media is a 50% partner in NetCo Partners. NetCo Partners was formed in June 1995 as a joint venture between Hollywood Media and C.P. Group, Inc. NetCo Partners is engaged in the development and licensing of NetForce. NetCo Partners is not consolidated in these financial statements, and Hollywood Media records 50% of the earnings in NetCo Partners as “equity in earnings of unconsolidated investees” in the accompanying consolidated financial statements.

Hollywood Media owns 26.2% of the equity of MovieTickets.com Inc. (“MovieTickets.com”), a joint venture. The MovieTickets.com joint venture is not consolidated in the accompanying consolidated financial statements. The MovieTickets.com website allows users to purchase movie tickets online and retrieve them at “will call” windows or kiosks at the theaters. MovieTickets.com generates revenue from the sale of advertising and from service fees charged to users for the purchase of tickets and from the sale of research data, which revenues are not included in Hollywood Media’s revenues. Hollywood Media records its share of the earnings or loss in MovieTickets.com as “Equity in Earnings of Unconsolidated Investees” in the accompanying consolidated financial statements.

On October 27, 2011, Hollywood Media acquired 21.74% of Project Hollywood LLC , a newly formed limited liability company owned by Baseline Holdings LLC (“Baseline Holdings”).  Baseline Holdings is owned by Mitchell Rubenstein, Hollywood Media's Chief Executive Officer and Chairperson of the Board, and Laurie Silvers, Hollywood Media's President, Secretary and Vice-Chairperson of the Board.  Prior to the acquisition, on October 7, 2011, Project Hollywood LLC had acquired all of the membership interests of Baseline LLC from The New York Times Company. 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” to these Consolidated Financial Statements 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.

The Company had an accumulated deficit totaling $268.9 million and $279.3 million at December 31, 2012 and 2011, respectively. The success of Hollywood Media’s operations in future years is dependent on its ability to generate adequate revenues and cash flows to offset operating expenses. Hollywood Media expects to incur additional losses. There can be no assurances that Hollywood Media will be able to generate sufficient revenues from these activities to cover its costs and therefore, Hollywood Media may continue to incur losses and negative cash flows from operations. To the extent that Hollywood Media does not generate sufficient revenues to offset expenses Hollywood Media may require further financing beyond cash on hand to fund ongoing operations. Hollywood Media estimates, based on operating plans and assumptions, that existing cash and cash equivalents and anticipated cash flows will be sufficient to meet working capital requirements for the year 2013.

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 $16,400,000. 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 23,179,066 shares outstanding.

D uring the fourth quarter of 2012, 16,600 shares of Hollywood Media’s common stock were purchased under the repurchase program.  As of December 31, 2012, the maximum approximate dollar value of shares that may have been purchased under the Repurchase Program was $2,673,261 (calculated by subtracting (i) the total paid for all shares purchased under the Repurchase Program from inception through December 31, 2012 or $7,326,739 from (ii) the $10,000,000 potential maximum dollar value of repurchases approved under the life of the Repurchase Program).  During the first quarter of 2013, 510,700 shares of Hollywood Media’s common stock were purchased under the repurchase program.  For additional information relating to the stock repurchase program, see Part II, Item 5 of this Annual Report on Form 10-K and “Liquidity and Capital Resources” in Part II, Item 7 of this Annual Report on Form 10-K.

Principles of Consolidation

Hollywood Media’s consolidated financial statements include the accounts of Hollywood Media and its wholly-owned subsidiary. 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.

Accounting Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on the information that is currently available and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. Significant estimates and assumptions embodied in the accompanying consolidated financial statements, which are evaluated on an ongoing basis, include the deferred tax asset valuation allowance, the adequacy of reserves for accounts receivables, note receivables and accruals for compensation, contingencies and litigation, as well as Hollywood Media’s ability to realize the carrying value of goodwill, intangible assets, investments in less than 50% owned companies and other long-lived assets.

Cash and Cash Equivalents

Hollywood Media considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Consolidated cash and cash equivalents were $11,378,519 and $3,683,063 at December 31, 2012 and 2011, respectively. Interest bearing amounts included in cash and cash equivalents were $9,527,401 and $3,110,540 at December 31, 2012 and 2011, respectively. The Company maintains cash balances with financial institutions in excess of federally insured limits.

Property and Equipment

Property and equipment are carried at cost and are classified in five categories. The categories and estimated service lives are as follows:

Maintenance and repairs are charged to expense when incurred.

Goodwill and Intangible Assets

Financial Accounting Standard Board ("FASB") Accounting Standards Codification (“ASC”) Topic No. 350, “Intangibles – Goodwill and Other” (ASC 350), goodwill and certain intangibles are not amortized; however, they are subject to evaluation for impairment annually, or more frequently if indicators arise, 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 approximately $3.6 million of the goodwill associated with its Ad Sales division should be written down after it was determined that the future cash flow of these assets is likely impaired, and the risk associated with previously expected cash flows has increased and accordingly recorded an impairment loss of $3.6 million for 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 an impairment loss of $4.8 million for the year ended December 31, 2011. 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 was 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.

Impairment of Long-Lived Assets

ASC Topic No. 360-10 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If an indicator of impairment is present, Hollywood Media evaluates the recoverability of long-lived assets not held for sale by comparing the carrying amount of the assets to the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying values of such assets, the assets are adjusted to their fair values if such fair values are lower than their carrying value. Hollywood Media determines fair value as the net present value of future cash flows. There were no adjustments to the carrying value of long-lived assets for the years ended December 31, 2012 and 2011.

Revenue Recognition

Revenue recognition policies for book packaging and licensing are set forth below.

Book Packaging and Licenses . Licensing revenues in the form of non-refundable advances and other guaranteed royalty payments are recognized when the earnings process has been completed, which is generally upon the delivery of a completed manuscript and acceptance by the publisher. Non-guaranteed royalties based on sales of licensed products and on sales of books published directly by Hollywood Media are recognized as revenues when earned based on royalty statements or other notification of such amounts from the publishers.

Revenue relating to Hollywood Media’s book licensing business is recognized when the earnings process is complete, typically when a publisher accepts a book for publishing. Advances received from publishers are recorded as “Deferred Revenue” in the accompanying consolidated balance sheets until the book is accepted by the publisher. In the book licensing division, expenditures for co-editors and permission payments are also deferred and recorded as “Prepaid expenses” in the accompanying consolidated balance sheet until the book is accepted by the publisher, at which time such costs are expensed.

ASC Topic No. 605, “Revenue Recognition” Subtopic No. 45, “Principal Agent Considerations” (ASC 605-45) provides guidance concerning under what circumstances a company should report revenue based on (a) the gross amount billed to a customer because it has earned revenue from the sale of goods or services or (b) the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or fee. Hollywood Media’s existing accounting policies conform to ASC 605-45.

Segment Information

ASC Topic No. 280, “Segment Reporting ” establishes standards for reporting of selected information about operating segments in annual and interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers (see Note 16).

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 derivative liability financial instruments as hedge instruments.  

Earnings Per Common Share

FASB Accounting Standard Codification No. 260, “Earnings per Share ” requires companies to present basic and diluted earnings per share. Earnings per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period presented.

Common shares issuable upon exercise of outstanding options and warrants of 75,000 were excluded from the calculation of diluted earnings per share for the years ended December 31, 2012 and 2011, respectively, because their impact was anti-dilutive. Non-vested shares are not included in the basic calculation until vesting occurs. There were no unvested shares as of December 31, 2012.

401(k) Plan

On September 27, 2010, upon recommendation of Mitchell Rubenstein, CEO and Chairman of Hollywood Media Corp., the Board of Directors of Hollywood Media Corp. approved the termination of the Company’s 401 (k) plan effective November 18, 2010.

Hollywood Media maintained a 401(k) Plan (“the Plan”) covering all employees who met certain eligibility requirements. The Plan provided that each participant may contribute up to 15% of his or her pre-tax gross compensation (not to exceed a statutorily prescribed annual limit). All amounts contributed by employee participants in conformity with Plan requirements and earnings on such contributions were fully vested at all times. The match in stock was 50% of the first 8% of the employees’ compensation contributions, for those participants employed in excess of 1,000 hours during the year and employed on the last day of the year. The match of $148,404 was paid in cash to the Plan for the year ended December 31, 2010 during the fourth quarter. The match paid for the year ended December 31, 2009 was 101,189 shares of Hollywood Media common stock, valued at $141,664, at a share price of $1.40 paid in the first quarter of fiscal 2010. The Plan had investments in Company stock of 303,270 shares valued at a share price of $1.64 or $497,363 as of December 31, 2010. The Plan assets remaining as of December 31, 2010 represent employee, or former employee, investments pending transfer or distribution. The Plan assets were fully transferred or distributed in fiscal 2011 and there were no plan assets remaining as of December 31, 2011.

Income Taxes

Income taxes are accounted for under the liability method pursuant to FASB Accounting Standards Codification No. 740, “ Income Taxes ” (ASC 740). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce net deferred income tax assets to an amount that is more likely than not to be realized. Pursuant to the provisions of ASC 740 uncertain tax positions must meet a “more-likely-than-not” recognition threshold. The Company recognizes interest and penalties related to unrecognized tax benefits within "Income tax benefit (expense), net of refund" in the accompanying consolidated statements of operations. Accrued interest and penalties are included "Accrued expenses" in the accompanying consolidated balance sheets.

Effective as of December 30, 2011 in connection with the settlement of a dispute involving life insurance proceeds from the death of Tekno Books’ then 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 owned 100% of Tekno Books.

Mitchell Rubenstein was appointed Chief Executive Partner of Tekno Books (which was 51% owned by Hollywood Media) 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 key-man life insurance policy resulting from Dr. Greenberg’s death. 

There was a dispute with the Estate as to whether the $750,000 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 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 a separate $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.

Shareholder-Approved Plans

Hollywood Media has active shareholder-approved equity compensation plans as follows: the 2004 Stock Incentive Plan and the Directors Stock Option Plan (the “Plans”). In addition to stock options, the Plans permit the granting of stock awards and other forms of equity compensation for key personnel and non-employee directors. There were an aggregate of 502,261 shares remaining available for issuance under Hollywood Media’s equity compensation plans at December 31, 2012 and 2011, respectively. The options may be either “qualified incentive stock options” (as defined in Section 422 of the Internal Revenue Code of 1986, as amended) or nonqualified stock options. Stock options granted to date generally have had an exercise price per share equal to the market value per share of the common stock on the date prior to grant and generally expire five years or ten years from the date of grant. Options awarded to Hollywood Media’s employees generally become exercisable in annual increments over a four-year period beginning one year from the grant date, although some are immediately exercisable and some vest based on other terms as specified in the option grants. Options awarded to directors become exercisable six months after date of grant. The Plans are registered with the SEC on Form S-8. Shares issued under the Plans are issued from the Company’s unissued shares authorized under its articles of incorporation.

Warrants

Equity compensation not approved by shareholders consists primarily of warrants or other equity purchase rights granted to non-employees of Hollywood Media in exchange for services. Additional information about such equity compensation is included in the paragraphs and tables below.

2004 Stock Incentive Plan

During the year ended December 31, 2004, Hollywood Media’s Board of Directors and shareholders approved Hollywood Media’s 2004 Stock Incentive Plan (the “2004 Plan”). The purpose of the 2004 Plan is to advance the interests of Hollywood Media by providing an additional incentive to attract, retain and motivate highly competent persons as officers and key employees of, and consultants to, Hollywood Media and its subsidiaries and affiliates and to encourage stock ownership in Hollywood Media by such persons by providing them opportunities to acquire shares of Hollywood Media’s common stock, or to receive monetary payments based on the value of such shares pursuant to the benefits described therein. Additionally, the 2004 Plan is intended to assist in further aligning the interest of Hollywood Media’s officers, key employees and consultants to those of its other stockholders. The 2004 Plan will expire in 2014.

Under the 2004 Plan, 1,500,000 shares of common stock are reserved for issuance upon exercise of benefits granted under the 2004 Plan. The maximum number of shares of Common stock with respect to which benefits may be granted or measured to any individual participant under the 2004 Plan during the term of the 2004 Plan shall not exceed 500,000 subject to certain potential adjustments as provided in the 2004 Plan. If any benefit granted pursuant to the 2004 Plan terminates, expires, or is canceled or surrendered, in whole or in part, shares subject to the unexercised portion may again be issued pursuant to the 2004 Plan. The shares acquired upon exercise of benefits granted under the 2004 Plan will be authorized and issued shares of common stock. Hollywood Media’s shareholders do not have any preemptive rights to purchase or subscribe for the shares reserved for issuance under the 2004 Plan.

The 2004 Plan is administered by the Stock Option Committee or the Compensation Committee of the Board of Directors for grants to executive officers, which has the right to determine, among other things, the persons to whom options, restricted stock, or other benefits are granted, the number of shares of common stock subject to options and other benefits, the exercise price of options and the other terms and conditions thereof. The 2004 Plan provides for the issuance of Incentive Stock Options and Nonqualified Stock Options. An Incentive Stock Option is an option to purchase common stock that meets the definition of “incentive stock option” set forth in Section 422 of the Internal Revenue Code of 1986. A Nonqualified Stock Option is an option to purchase common stock that meets certain requirements in the 2004 Plan but does not meet the definition of an “incentive stock option” set forth in Section 422 of the Code. In addition, the benefits under the 2004 Plan may be granted in any one or a combination of options, stock appreciation rights, stock awards, performance awards and stock units. Upon receiving Grants of benefits, each holder of benefits must enter into a benefit agreement with Hollywood Media that contains the appropriate terms and conditions as determined by the Stock Option Committee.

As of December 31, 2012, there were no options outstanding to purchase common stock under the 2004 Plan. During the year ended December 31, 2012, no options were granted, cancelled or expired under the 2004 Plan. There were 502,261 shares remaining available for issuance under the 2004 Plan.

Directors Stock Option Plan

Hollywood Media has established the shareholder-approved Directors Stock Option Plan for non-employee directors, which provides for grants to each non-employee director of options to purchase 15,000 shares of Hollywood Media’s common stock upon election or re-election. In December 2007, the Board of Directors of Hollywood Media elected to temporarily suspend such annual option issuances until such time that the Board determines to reserve additional shares of common stock for issuance upon exercise of options granted under the Directors Stock Option Plan. The ability to grant more options under the Directors Stock Option Plan expired on July 1, 2008. As such, no further grants are permitted under the Directors Stock Option Plan. A total of 300,000 shares of common stock were reserved for issuance upon exercise of options granted under the Directors Stock Option Plan.

As of December 31, 2012, options to purchase 75,000 shares of common stock were outstanding under Directors Stock Option Plan. During the year ended December 31, 2012, no options were granted, exercised, cancelled or expired under the Directors Stock Option Plan. There were no options available for future grant under the Director’s Plan.

Accounting for Share-Based Compensation

Pursuant to ASC Topic No. 718, “Compensation-Stock Compensation” (ASC 718) the Company uses the modified prospective transition method and recognizes compensation cost for (i) share-based awards granted prior to but not yet vested as of January 1, 2006, based on the fair value calculated on the grant date, and (ii) share-based awards granted subsequent to January 1, 2006, also based on the fair value calculated on the grant date.

During the year ended December 31, 2012, Hollywood Media did not record any stock-based compensation expense as no shares were granted under the Plans.

(1)     The aggregate intrinsic value is computed based on the closing price of Hollywood Media’s stock on December 31, 2012, which is a price per share of $1.35.

As of December 31, 2012 and 2011, there were no unrecognized compensation costs related to non-vested stock option awards since all outstanding awards are fully vested.

There were no stock options exercised during the years ended December 31, 2012 and 2011.

The following is a summary of stock options and warrants outstanding and exercisable as of December 31, 2012:

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 (“the Purchase Agreement”). There are no material relationships among Hollywood Media and Key Brand or any of their respective affiliates other than in respect of the Purchase Agreement and the related ancillary agreements.

Pursuant to the Purchase Agreement, at the closing of the Broadway Sale, (a) Hollywood Media received (i) $20,530,102 in cash (including $530,102 pursuant to the estimated working capital adjustment described in the Purchase Agreement), (ii) a $8,500,000 note (“the Loan”) from Key Brand pursuant to a Second Lien Credit, 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 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 “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.

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. 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 (loss) on sale of discontinued operations, net of income taxes” in the accompanying consolidated statements of operations for the year ended December 31, 2011.

Amendment to the Broadway Sale 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 $7 Million Earnout amount was paid by Key Brand to the Company on October 1, 2012 and was recorded upon collection of the $7 million received on October 1, 2012. In addition, the revenue calculation for the second $7 million earnout amount (the “Second $7 Million Earnout”) was modified to exclude “group sales” (and the revenues of the new joint venture conducting such business) and the target for the Second $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 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 amount 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 $8.5 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.

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.  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.

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 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 of the Second Earnout amounts prior to the maturity of the Credit Agreement, notwithstanding that the obligations under the Credit Agreement are subordinated to $15 million of Key Brand’s obligations under the senior secured credit agreement.

Amendment to Second Lien Credit, Security and Pledge Agreement

On December 31, 2012, Hollywood Media Corp. (“Hollywood Media ”) entered into Amendment No. 2 (the “Second Amendment”) to that certain Second Lien Credit, Security and Pledge Agreement, dated as of December 15, 2010, as amended by that Amendment No. 1 to the Credit Agreement, by and among Key Brand, Theatre Direct, and Hollywood Media. Pursuant to the 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 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 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 “2012 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 2012 Intercreditor Agreement are substantially similar to the terms and conditions of the prior subordination and intercreditor agreement among Hollywood Media, Key Brand and JPMorgan Chase Bank, N.A.

On December 31, 2012, in connection with the 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 change in fair value of the Warrant during the year ended December 31, 2012 was $700,000.

In connection with the transactions and agreements 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.

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 $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.

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. 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 “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 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.

Pursuant to ASC Topic No. 360, “Accounting for the Impairment or Disposal of Long-Lived Assets” ASC 360, the Company’s consolidated financial statements have been reclassified for all periods presented to reflect the operations, assets and liabilities of Cinemasource UK Limited as discontinued operations. The sale of Cinemasource UK Limited qualifies for discontinued operations treatment under ASC 360. The assets and liabilities of such operations have been reclassified as current or long term “Assets of discontinued operations” and current and long term “Liabilities of discontinued operations” in the accompanying December 31, 2011 consolidated balance sheet, and consist of the following:

Results from Discontinued Operations

The net income from discontinued operations has been classified in the accompanying consolidated statements of operations as “Income from discontinued operations” and includes the gain on sale of the Broadway.com Business, the gain on sale of the Hollywood.com Business and the gain on sale of Cinemasource UK Limited Business. Summarized results of discontinued operations include the operating gain from the Hollywood.com Business and the operating gain from the Cinemasource UK Limited Business and through their respective dates of disposition, for the years ended December 31, 2012 and 2011.

(1) Income tax expense is offset by consolidated net operating losses in the accompanying Consolidated Statements of Operations.

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 tender offer expired on February 18, 2011. Hollywood Media accepted 8 million shares for purchase for a total cost of approximately $16,400,000. The number of shares properly tendered 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 23,179,066 shares of common stock outstanding.

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 approximates 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 consolidated statements of operations. See Note 5, “Discontinued Operations” to these Consolidated Financial Statements for information on the Buyout Amount and its reduction of the derivative liability. At 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 in the Warrant, and which also contains a put option that allows the Company, after the seventh anniversary of the issue date, to put the warrant to Key Brand for the greater of fair market value of the shares or $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 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 circumstance 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 December 31, 2012:

There were no transfers between the levels of the fair value hierarchy during the year ended December 31, 2012 and 2011.

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, 2010 to December 31, 2012:

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, 2011 to December 31, 2012:

Depreciation and amortization expense of property and equipment was $128,010 and $187,500 for the years ended December 31, 2012 and 2011, respectively. Included in these amounts is depreciation and amortization expense for equipment under capital leases of $20,236 and $50,421 for the years ended December 31, 2012 and 2011, respectively.

The following table reflects the changes in the net carrying amount of goodwill relating to continuing operations by operating segment (see Note 16) for the years ended December 31, 2012 and 2011:

The intangible assets of continuing operations, other than goodwill, consist of the following at December 31, 2012 and 2011:

Amortization expense was $8,433 and $15,733 for the years ended December 31, 2012 and 2011, respectively. Based on the carrying value of identified intangible assets recorded at December 31, 2012, and assuming no subsequent impairment of the underlying assets, the annual amortization expense is expected to be as follows:

Patents and trademarks are amortized on a straight-line basis over 3 to 17 years.

Future minimum lease payments under capital leases, which contain bargain purchase options, together with the present value of the net minimum lease payments as of December 31, 2012 are as follows:

Hollywood Media reported in its Form 8-K report filed on October 4, 2007, that its Board of Directors authorized a stock repurchase program under which Hollywood Media may use up to $10 million of its cash and cash equivalents to repurchase shares of its outstanding common stock. Pursuant to the repurchase program, Hollywood Media purchased an aggregate of 16,600 shares of its common stock during the year ended December 31, 2012. The shares were purchased for $24,582 during the year ended December 31, 2012, reflecting an approximate average price per share of $1.45 for the year ended December 31, 2012. Subsequent to December 31, 2012 through January 24, 2013, pursuant to the repurchase program, Hollywood Media purchased an aggregate of 510,700 shares of its common stock for $749,966 reflecting an approximate average price per share of $1.44. No shares were repurchased under the stock repurchase program during the year ended December 31, 2011.

The Company follows the provisions of ASC No. 740, “ Income Taxes. ” There are no unrecognized tax benefits in the consolidated financial statements as of December 31, 2012 and December 31, 2011.

Hollywood Media is in a cumulative net loss position for both financial and tax reporting purposes. The primary item giving rise to the Company’s net deferred tax asset is a net operating loss carryforward of $173,402,068 as a result of losses incurred during the period from inception (January 22, 1993) to December 31, 2011. However, due to the uncertainty of Hollywood Media’s ability to generate taxable income in the future, and, to the extent taxable income is generated in the future, the uncertainty as to Hollywood Media’s ability to utilize its loss carryforwards subject to the “ownership change” provisions of Section 382 of the U.S. Internal Revenue Code, Hollywood Media has established a valuation allowance for the full amount of the deferred tax asset.

The net operating loss carryforwards expire as follows:

The components of Hollywood Media’s deferred tax assets and liabilities consist of the following at December 31: