HHSE Corporate Activities - Week of May 3, 2013

Dear HHSE Friends and Shareholders - The coming week is poised to be historic in stature for Hannover House, in that we are approaching completion of long-delayed corporate governance and operational matters.

1).  AUDITS -- The Company took so long to get our supporting materials together that we ended up moving the audit year periods to 2011 and 2012 (instead of 2010 as the first year).  This is good for several reasons.  First of all, it's the "two most current" years, which is a customary Edgar filing requirement.  Secondly, it answers some of the concerns previously posed about having the "starting point" for the 2010 audit being the vague numbers provided to Hannover House from the company's prior management covering 2009 and earlier years.  Finally, having the audits for 2011 and 2012 covers the periods during which our payables tracking (and account assignments) have been in place. We're handing this all off to the auditors on Friday, and will encourage them to move expeditiously in their review.

2).  REGISTRATION WITH EDGAR / S.E.C. -- We have completed a Form 10 Registration for the Company's stock, but not yet filed with the S.E.C. due to conflicting information about eligibility for filing prior to audits.  Company has engaged a securities attorney to review our Form 10 and advise if we are eligible to proceed with the filing now (sans audits).  The S.E.C. Edgar Filing Department has been helpful and receptive, but cannot substitute for the advice we are seeking from independent securities counsel.  If we are advised by counsel to file this week, we will do so and will post an update to our shareholders in this matter.

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With respect to the above two "critical issues," both Parkinson and Shefte offer shareholders a sincere apology for the delays in completing these matters. There simply has not been "enough hours in every day" to get our core distribution duties addressed, and still leave the hours of time required to address tedious corporate governance issues.  The back-up history of sales and costs for library titles was not in an audit-friendly format (i.e., cases of old records in deep storage to retrieve and sort-through), and the Edgar reporting issues proved too complex to attempt without securities counsel's help (so this has now risen to a priority cash issue).  It's been no secret that the Company has been instantly reinvesting / reallocating cash flow revenues for operations, new releases and debt management... leaving little crumbs for "unusual" expenses such as the advice of outside securities counsel.  But we're sucking-it-up and getting it done - both the daily commitments AND the long-term corporate issues - for the sake of all shareholders. 

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3).   MULTI-STUDIO DISTRIBUTION PACT -- We have discussed in prior disclosures and blogs that the Company is structuring an exciting "multi-studio" distribution pact.  To meet late Summer / early Fall release slots, a major effort is underway to conclude this structure within the next two weeks (if it's going to happen); while Hannover House is happy with our current distribution conduit structures (both direct and through two-step wholesalers), we feel that the new structure as proposed could result in a 2X or greater improvement in overall sales... so it's absolutely been a major priority of the management time invested.

4).   NEW ACQUISITIONS -- Lots of activities in this arena for new films and titles for home video and VOD release.  As and when announcements of these new title acquisitions are approved by the licensors, these will be posted.

Parkinson and Shefte are committed to conmpleting the corporate governance items, and will work diligently to restore the support of shareholders. 

Lead, Follow or Get Out of the Way...

HHSE management has endured a lot of criticism over the past few months and years, some arguably deserved, but most being what we consider to be pure nonsense.  The delays in completing audits - and the effect this has had on delaying the Company's plans to improve reporting status - are the one / two issues that we believe have merit critique.  A "gray area" complaint relates to our commitment to transparancy and timely communications.  By posting and otherwise disclosing "deals in process" we satisfy our goal of being open.  But in respect of the complexity of dealing with third parties, regulations and timing issues, we have been criticized for being open about "potential" deals since it's virtually impossible for all potential deals to ultimately close.  Accordingly, we have been encouraged to adopt a more restrained posture when dislosing deals-in-progress.  The assault from naysayers when the Company does not "bat 1000" has a more detrimental affect than when we deliver hall-of-fame batting results that were not telegraphed through early disclosure.

That said, the Company will not be immediately posting news about Parkinson's various meetings in New York last week, or Shefte's meetings in Los Angeles.  When these deals are signed, sealed and delivered, the Company will conform to the required disclosure (and if appropriate, a separate press announcement and / or blog posting).

The Company also asks that shareholders refrain from emailing Parkinson and Shefte directly, as no "one-on-one" communications can occur outside of issues already disclosed (and hopefully, these disclosures will continue to be clear enough to not require follow-up questions).  As a point in case, Parkinson received over 1,000 emails over the past 5-business days, several hundred of which were from shareholders asking about items already clearly disclosed in postings. 

As for the current share price, management believes that the speculators that are applying pressure to drive the stock price down are wrong.  Or maybe they also don't believe their own baloney, and are simply hoping to scare up some cheap shares while the hold the share price under water as long as possible.  But when the tide rises - or when the speculators exhaust from their efforts to hold down the price - the balance should be restored quickly... not unlike the way an inner tube will pop back to the surface after being held under water.  That's management's opinion.  However, the OTC Pinksheets markets do not always respond logically, so there can be no assurance that the appropriate result will be the actual result.  Still, it's what management confidently believes.

Another item of interest...

The State of Arkansas currently has a twenty percent (20%) incentive rebate provision for qualifying motion picture and television productions.  This was recently increased from 15%.  Under the current structure, a movie -- such as "THE LEGEND OF BELLE STARR" (with a production budget of $1-mm to be spent in Arkansas) -- would be eligible for about $200,000 back from the State of Arkansas.  There's an addition incentive from the State EDEC for a rebate of funds paid to tax-paying State of Arkansas residents or entities, which could add another 4% to the pool of rebates. 

Over the past month, Fred Shefte and Eric Parkinson have traveled to Little Rock (the State Capitol) for meetings, including strategic discussions with the leaders of a new tax benefit for Arts & Entertainment (an ADDITIONAL 20% rebate for those projects meeting the specific requirements).  This bill, HR 1980 and 1981, appear to have sufficient support to pass.  If this occurs, a movie such as "THE LEGEND OF BELLE STARR" could receive up to 44% of its production costs back in State of Arkansas incentives.  This total would be greater than Louisiana or Michigan (the current USA leading states for film incentives), and does not factor in the additional benefit of cost-of-living being lower in Arkansas (so "crews" cost less to start with than crews in Louisiana).

We're mentioning this in the Blog due to shareholder questions about why both Fred and Eric were in Little Rock at the same meetings.  Oftentimes -- usually -- Fred and Eric split up meetings.  For instance, Eric will be in NYC next week on a major acquisition closing and a finance meeting;  Fred will be in L.A. next week meeting with a DVD / Blu-Ray replicator about an enhanced credit line for the Company.  Generally, the two managers like to split-up to get more deals done!

In any event, because the potential upside to Hannover House is so huge if these State of Arkansas Arts & Entertainment incentives pass, we felt it was important to present a united front with Fred and Eric both present in Little Rock to represent Hannover House as a distribution conduit for qualifying productions.

Stay tuned...

Blog Ramblings...

Greetings Friends and Shareholders of HHSE -- the past few weeks have been unusually busy and the schedules stretched for both Eric Parkinson and Fred Shefte -- but we are pleased to make an update of sorts now, in a near stream-of-consciousness mode.  So many different (specific) issues have been requested for update that we'll do our best to address them all.

a).  AUDIT STATUS -- when, pray tell, will the audit-from-hell be completed?  A common question we receive.  Short answer:  both Parkinson and Shefte will be back in the Arkansas Corp. offices during the third week of April (specifically, Tuesday the 23rd through Friday the 26th), which corresponds to the availability of our outside accountant reviewer as well as the Hogan Taylor team (reprioritized for tax season, and now finishing that up).  We have again complied with document requests, and do not believe there are any other issues that have not been addressed and fully supported with back-up.  We hope that we are right.  If that's the case, then the audit completion should be pretty fast... and on a going forward basis (now that our internal systems have been modified to conform to simplified audit review), future reporting should be as simple as a print out from our software systems.  Despite the well-thought analysis from shareholder Malcolm Stone, the completion of our audits is not impacted by the legal issues affecting the former TDGI CEO, Fotis Georgiadis, on a matter unrelated to TDGI.  There had been some speculation that this could create further delays in the long-awaited audit completion, but this is not the case.  UPDATE:  To be clear, Malcolm had a very valid analysis in determining that the "uncertain" status of the total holdings of HHSE stock by Fotis Georgiadis (and / or entities beneficially controlled), would qualify an issue impacting both an independent auditor's report as well as a Form 10 Registration.  However, as of 09/30/12, Company filings listing 5% owners of record had been modified to list Georgiadis as an unknown and potential control person under Rule 144 (even though HHSE stock ownership details have not been provided to the Company by Georgiadis).  Clearly, as of Jan. 1, 2010 Mr. Georgiadis (and / or entities owned or beneficially controlled by him) owned more than the 24-million share threshold which at that time defined who were the  5% or more controlling shareholders (there were a total of 200-million shares issued to Georgiadis in December, 2009, as a result of the "forgiveness" of a note and the commitment to raise $1.5-mm for the Company).  At this time, Company does not know how many shares of HHSE stock are currently owned by Georgiadis or entities which fall under the beneficial control definition.  Accordingly, and out of an abundance of caution, Mr. Georgiadis has been listed as a "potential" control person in the Company's disclosure filings.

b).  FORM 10 STATUS -- This is on the Company's table at present, as additional disclosure items still need to be assembled and added to the prior filing.  We are told that there are circumstances under which a Form 10 statement can be filed without the need for simultaneous audit filings, and this is the route we are pursuing so that the Edgar reporting is in place faster.

c).  DISTRIBUTION VENTURE -- Hannover House is working with three other, well-known independent studio suppliers on structuring a "JV" of sorts to improve access to retail video distribution and enhanced volume for all placements.  Each of these prospective supplier-partners has non-competitive / complementary product lines, and each are likely to benefit from the improved stature of a multi-label sales presence.  Additionally, each company will save on sales overhead.  This concept has been structured similarly to the successful "WEA DISTRIBUTION" venture (a combined sales force for Warner - Elektra and Atlantic music products).  The existing distribution channels for Hannover House (primarily a two-step process through an intermediary wholesaler of VMI partner) continues to operate well for the company.  However, the multi-label structure as proposed is expected to work better (i.e., greater market penetration, higher volume of orders on placements and higher per-unit wholesale revenues back to HH).  This is a structure we hope to finalize within the next four to six weeks, if it's going to happen (remember, we're dealing with other companies!!).

d).  INTERNATIONAL ACTIVITIES -- Parkinson and Shefte are excited about the high-level meetings set at the upcoming Cannes Film Festival (and Marche du Filme Market), May 15 - 26.  Presale agreements for the Company's major title slate will be pursued (and in some cases finalized and announced);  the title production slate will not be announced until a few days prior to the market (for competitive reasons... as you cannot "copyright" a great idea for a movie, unfortunately!).  Hannover planned on some Cannes announcements last year (specifically, announcing the "other" star casting as well as our primary financing partnerships);  but for strategic reasons, were requested to not make such public announcements at that time.  We will announce certain elements at Cannes, perhaps not all of the elements or some of the more exciting activities, but you can expect news from France next month that does not require third party approvals!

e).  LEVERAGING OF KEY RETAIL RELATIONSHIPS -- The Company is looking at the possibility of acting as a distribution or "retail sales agency" for representation of entertainment related and other retail-friendly items into the Company's key USA retail accounts.  This strategy of a sales-agency representation structure has worked tremendously well for Gaiam, Inc. (GAIA) in helping them rapidly build annual gross revenues to over $200-mm.   Hannover House has been presented with some items from other manufacturers -  such as videogame software, sporting-goods related merchandise and nutritional supplements.  Some of these items very appear likely to be considered or placed with accounts such as Wal-Mart, SAMS, Costco, Best Buy, Walgreens and other existing retail accounts for Hannover House home video products.  Structurally, under such a scenario, the suppliers would be responsible for all costs, with HHSE earning an off-the-top sales placement fee.  We do not see any  downside risk, and as this topic is on the table, we wanted to let our shareholders know it's being analyzed and considered.

f).  UPCOMING NEW RELEASES -- Looking ahead for the upcoming months, "Next Up" and "Inconsistent Truth" were both rescheduled for July;  Coming in August, the company will release "The Coffin" (horror), "Yoga Fit" (exercise), "Cowboys and Heroes" (western multipack) and the "S.E.C. Football Preview 2013" DVD products.  There is a possibility that August will also kick-off a venture with a major media company (that does not have a home video operation!), and this will result in up to three new movies per month for Hannover House to release onto DVD, Blu-Ray and VOD.  If this venture is consummated (closing is pending for next week in New York), a separate announcement will be jointly released.   Company is also looking to emulate the successful Magnolia Pictures plan of debuting certain titles on premium VOD or On-Demand prior to their theatrical openings.  The first three items planned for this type of release in September are "Weather Station", "Asalto Al Cine" and "The Honeymoon."

g).  CORPORATE FINANCING -- We lost a lot of momentum, unfortunately, in structuring a financing deal with a New York based entity that ultimately was unable to perform.  Frankly, we were promised funds back in October, and almost daily since then, were given assurances of imminent funding which were optimistic at best.  In any event, we have moved-on to more fertile sources, and have signed an agreement with a separate NYC based group for a revolving line-of-credit (up to $4-mm);  with an initial availability of a more modest $300k to start.  Use of proceeds is expressly limited to new release activity (and cannot be utilized for existing payables);  however, it's nice to have a funding venture in place to cover ongoing acquisition and releasing activities to keep the company growing and dynamic.  Overall corporate debts for Hannover House were significantly reduced during calendar year 2012, despite taking on new debts associated with the production and theatrical release of "Toys in the Attic" and the journal-entry acknowledgement of the Bedrock settlement and the court default to Interstar Releasing (both matters are subject to judicial review, but were included in the year-end financials based on the status as of that moment in time).

h).  MARKET MAKER & SPENCER EDWARDS -- The Company will be earning the support soon from Spencer Edwards as a market maker in our stock.  Filing requirements to support this relationship are about two weeks away from completion.  It's difficult to say if having a market maker's support for the stock will stop some of the "boxing" that has enabled bashers to profit from scaring up sales, but we think it's another step in the right direction.  Speaking of bashers, Company is very pleased to be working with the FBI in monitoring communications and trading activities of persons known or suspected to be involved in stock manipulations and false statements about the Company and its officers.  We are certain that these individuals will be brought to justice.  It takes time, but much time has already transpired.   We're sitting back and watching these guys incriminate themselves.... one "screen name" is saying that the Company provided insider information to another basher, then stopped and this motivated the vendetta?  Not quite, Brasco, the vendetta was sparked because the company REFUSED to provide the basher (or anyone!) with information of a material nature.  Communicating with the purported I-Hub moderator about already announced news is quite acceptable.  But don't let facts get in the way of a good lie and scare tactic.  Don't even try to make a plausible lie Mr. Donnie or Mikey, or Tommy or whatever fictional poster name they are using at any given moment.  They can fake up emails, fake up facts, pretend that Hannover House is a coffee shop or that Fred is a domestic terrorist.  Doesn't make any of it true.  So they can save their bullshit lies for the authorities.  As we stated, tell these bashers to stand up and show their true identities.  Fred and I are not afraid to do so!  But they KNOW they are lying and as such, they are HIDING behind fictional names and posting IDs.  If they won't stand behind their statements, why should anyone listen?

i).  FORECAST FOR 2013? -- Company is still navigating choppy waters of dealing with the painful debt-burden from "Twelve" and a few other (thankfully, more manageable non-Twelve) debts.  But the Gaumont license for "Twelve" (originally at $1.75-mm) has been reduced to only $145,000, and other P&A debts and loans (originally totaling $2.3-mm) have been reduced to $680,000 (plus the Bedrock claim of $578,000).  So a total of $4-mm in debt on "Twelve" has been reduced by $2,637,000 in the past two-and-one-half years.  With deals in place (or pending finalization) for the other major debt matters, the Company should enjoy smooth-sailing through 2013 and into 2014.  Revenues amounts for 2013 are difficult to peg for a variety of reasons:  do we post international presales as executed or as the projects are delivered?  will we complete the infrastructure needs to launch VODwiz in a bigger than beta mode? is there merit in handling non home video product lines?  Regardless of these answers, Fred Shefte and Eric Parkinson remain diligent and committed to maximizing revenues and shareholder values.  The mistakes of the past -- such as acquiring an uber-expensive title -- will not be repeated.  The strategy of representing major suppliers of entertainment will not only assure a steady supply of quality products for home video release, but will enable the company to concentrate on sales and more lucrative ventures (as opposed to the monthly grind of seeking out new, indie titles that merit release).