The Company has not declared or paid any cash dividends on its Common Stock during the past two completed fiscal years. The Company may nothas a credit facility (the “Amegy Credit Agreement”) with Amegy Bank National Association (“Amegy”) which contains a covenant which could limit its ability to pay dividends on itsthe Common Stock unless all declared and unpaid dividends on its Series A 4% Convertible Preferred Stock (the “Series A Preferred Stock”) have been paid. In addition, whenever the Company shall declare or pay any dividend on its Common Stock, the holders of Series A Preferred Stock are entitled to receive such Common Stock dividends on a ratably as-converted basis. There are currently no shares of Series A Preferred Stock issued and outstanding.
Not applicable.
The following is a discussion of the Company’s financial condition and results of operations comparing the calendar years ended December 31, 20102011 and 2009.2010. You should read this section in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto that are incorporated herein by reference and the other financial information included herein and the notes thereto.
Wilhelmina has strong brand recognition that enables it to attract and retain top talent to service a broad universe of quality media and retail clients.
The business of talent management firms, such as Wilhelmina, depends heavily on the state of the advertising industry, as demand for talent is driven by Internet, print and TV advertising campaigns for consumer goods and retail clients. Contractions in the availability of business and consumer credit, a decrease in consumer spending, a significant rise in unemployment and other factors have all ledThe Company continues to increasingly volatile capital markets over the course of 2008 and 2009. In early 2009, the financial services, automotive and other sectors of the global economy came under increased pressure, resulting in, among other consequences, extraordinarily difficult conditions in the capital and credit markets and a global economic recession that, during 2009, negatively impacted Wilhelmina’s clients’ spending on the services that the Wilhelmina Companies provide. During 2009 and 2010, the Company focusedfocus on cutting costs and recruiting top agents when available and continued to developscouting and scoutdeveloping new talent. As a result, during 2010,2011, Wilhelmina
Although Wilhelmina has a large and diverse client base, as discussed below, it is not immune to global economic conditions. Continued economic uncertainty and reductions in consumer spending may result in further reductions in client spending levels that could adversely affect Wilhelmina’s results of operations and financial condition. Wilhelmina intends to continue to closely monitormonitors economic conditions, client spending and other factors and in response, will endeavor to take actionscontinually looks for ways to reduce costs, manage working capital and conserve cash. There can be no assurance as to the effects on Wilhelmina of future economic circumstances, client spending patterns, client credit worthiness and other developments and whether, or to what extent, Wilhelmina’s efforts to respond to them will be effective.
The Company expects that the combination of Wilhelmina’s main operating base in New York City, the industry’s capital, with the depth and breadth of its talent pool and client roster and its diversification across various talent management segments, together with its geographical reach should make Wilhelmina’s operations more resilient to industry changes and economic swings than those of many of the smaller firms operating in the industry. Similarly, in the segments where Wilhelmina competes with other leading full service agencies, Wilhelmina competed successfully in 2010.2011. Accordingly, the Company believes that the current economic climate will create new growth opportunities for strong industry leaders such as Wilhelmina.
Wilhelmina has seen an increasingly strong influx of talent, at both the new and seasoned talent levels, and believes it is increasingly attractive as an employer for successful agents across the industry as evidenced by the quality of agents expressing an interest in joining Wilhelmina. Similarly, new business and branding opportunities directly or indirectly relating to the fashion industry are being brought to Wilhelmina’s attention. In order to take advantage of these opportunities and support its continued growth, Wilhelmina will need to continue to successfully allocate resources and staffing in a way that enhances its ability to respond to these new opportunities.
Due to the increasing ubiquity of the Internet as a standard business tool, the Wilhelmina Companies have increasingly sought to harness the opportunities of the Internet and other digital media to improve their communications with clients and to facilitate the effective exchange of fashion model and talent information. During 2010, theThe Company madecontinues to make significant investments in technology in pursuit of gains in efficiency and better communications with customers. At the same time, the Internet presents challenges for the Wilhelmina Companies, including (i) the cannibalization of traditional print advertising business and (ii) pricing pressures with respect to photo shoots and client engagements.
Management’s strategy is to increase value to shareholders through the following initiatives:
On February 13, 2009, the Company closed the Wilhelmina Transaction and acquired the Wilhelmina Companies as discussed in further detail in Item 1 of this Form 10-K. As of the closing of the Wilhelmina Transaction, the business of Wilhelmina represents the Company’s primary operating business. Prior to closing of the Wilhelmina Transaction, the Company’s interest in Ascendant, acquired on October 5, 2005, represented the Company’s sole operating business.
The key financial indicators that the Company reviews to monitor the business are gross billings, revenues, model costs, operating expenses and cash flows.
The Company analyzes revenue by reviewing the mix of revenues generated by the different “boards” (each a specific division of the fashion model management operations which specializes by the type of model it represents (Women, Men, Sophisticated,Select, S2, Runway, Curve, Lifestyle, Kids, etc.)) of the business, revenues by geographic locations and revenues from significant clients. Wilhelmina has three primary sources of revenue: revenues from principal relationships whereby the gross amount billed to the client is recorded as revenue, when the revenues are earned and collectability is reasonably assured; revenues from agent relationships whereby the commissions paid by models as a percentage of their gross earnings are recorded as revenue when earned and collectability is reasonably assured; and a separate service charge,charges, paid by clients in addition to the booking fees, iswhich are calculated as a percentage of the models’ booking fees and isare recorded as revenues when earned and collectability is reasonably assured. See Critical Accounting Policies - Revenue Recognition. Gross billings are an important business metric that ultimately drivesdrive revenues, profits and cash flows.
Because Wilhelmina provides professional services, salary and service costs represent the largest part of the Company’s operating expenses. Salary and service costs are comprised of payroll and related costs and travel costs required to deliver the Company’s services and to enable new business development activities.
During the year ended December 31, 2010,2011, revenues increased approximately $16,164,000,$6,547,000, or 51.7%13.3%, to approximately $47,428,000,$55,466,000, compared to approximately $31,264,000$48,919,000 during the year ended December 31, 2009.2010. This increase in revenues is attributable to increases in gross billings for the core modeling business and recognition of revenues previously deferred.
In addition, revenues during the year ended December 31, 2011 increased at a rate greater than the rate of increase in gross billings over the year ended December 31, 2010 as a result of a larger percentage of total revenues being derived from relationships which required the reporting of revenues gross (as a principal) versus net (as an agent).
revenues on a gross basis. Relationships in the WAM business are usually determined to be agent relationships, which require the reporting of revenues on a net basis.
License Fees and Other Income
The Company has an agreement with an unconsolidated affiliate to provide management and administrative services, as well as sharing of space. For each of the yearyears ended December 31, 2011 and December 31, 2010, management fee and rental income from the unconsolidated affiliate amounted to approximately $110,000, compared to $101,000 for the year ended December 31, 2009.$110,000.
License fees consist primarily of franchise revenues from independently owned model agencies that use the Wilhelmina trademark name and various services provided to them by the Wilhelmina Companies. During the year ended December 31, 2010,2011, license fees totaled approximately $192,000,$171,000, compared to $154,000$192,000 for the year ended December 31, 2009.2010.
The Company has entered into product licensing agreements with clients. Under these agreements, the Company earns commissions and service charges and participates in sharing of royalties with talent it represents. During the year ended December 31, 2010,2011, revenue from these licensing agreements totaled approximately $780,000,$880,000, compared to $324,000$780,000 for the year ended December 31, 2009.2010.
Other income includes the following: fees derived from participants in the Company’s model search contests and television syndication royalties and a production series contract. In 2005, the Wilhelmina Companies produced the television show “The Agency” and in 2007 the Wilhelmina Companies entered into an agreement with a television network to develop a television series titled “She’s Got the Look”, which, in 2010, completed its third season on the network channel TV Land Prime. The television series documentsdocumented the lives of women competing in a modeling competition. The Company provided the television series with the talent and the “Wilhelmina” brand image, and agreed to a modeling contract with the winner of the competition, in consideration of a fee per episode produced, plus certain fees, as defined.
Model Costs
Model costs consist of costs associated with relationships with models where the key indicators suggest that the Company acts as a principal. Therefore, the Company records the gross amount billed to the client as revenue when the revenues are earned and collectability is reasonably assured, and the related costs incurred to the model as model cost. During the year ended December 31, 2010,2011, model costs increased approximately $10,943,000,$4,714,000, or 49.9%14.4%, to approximately $32,838,000,$37,552,000, compared to approximately $21,895,000$32,838,000 during the year ended December 31, 2009.2010. Increases in model costs are a direct result of an increase in the utilization of models by the customers of the Company and an increase in average billing rates for models. During the year ended December 31, 2010,2011, model costs as a percentage of revenues were approximately 69.2%67.7%, compared to 70.0%67.1% during the year ended December 31, 2009.2010. Margins improveddeclined slightly from the prior year periods due toperiod mostly as a result of a larger percentage of total revenues being derived from relationships, which required the reporting of revenues gross (as a principal) versus net (as an increased utilization of the Company’s models which results in a greater recovery of certain fixed model costs.agent).
Operating Expenses
Operating expenses consist of costs that support the operations of the Company, including payroll, rent, overhead, insurance, travel, professional fees, amortization and depreciation, asset impairment charges and corporate overhead. During the year ended December 31, 2010,2011, operating expenses increased approximately $1,886,000,$866,000, or 14.8%5.9%, to approximately $14,596,000,$15,400,000, compared to approximately $12,710,000$14,596,000 during the year ended December 31, 2009.2010. The increase in operating expenses is mainly attributable to increases in salaries and service costs andpartially offset by a decrease in office and general expenses.expenses and amortization.
Salaries and Service Costs
Salaries and service costs consist of payroll and related costs and travel costs required to deliver the Company’s services to theits customers and models. During the year ended December 31, 2010,2011, salaries and service costs increased approximately $1,807,000,$1,190,000, or 27.8%14.3%, to approximately $8,312,000,$9,502,000, compared to approximately $6,505,000$8,312,000 during the year ended December 31, 2009. 2010. Salaries and service costs were 17.1% of revenues for the year ended December 31, 2011, compared to 17.0% for the year ended December 31, 2010. The Company has consistently leveraged its employees to meet the increased demands from customers for Wilhelmina talent in 2011.
The Company experienced increased travel costs in connection with delivering services to its customers and models due to increased gross billings and also in pursuit of generating new revenues. The Company also incurred additional incentive compensation for the year ended December 31, 2010,2011, as compared to the year ended December 31, 2009,2010, due to the achievement of performance targets by certain employees.
Salaries and service costs were 17.5% of revenues for the year ended December 31, 2010, compared to 20.8% for the year ended December 31, 2009. The Company was better able to leverage its employees to meet the increased demands from customers for Wilhelmina talent in 2010.
Office and General Expenses
Office and general expenses consist of office and equipment rents, advertising and promotion, insurance expenses, administration and technology cost. These costs are less directly linked to changes in the Company’s revenues than are salaries and service costs. During the year ended December 31, 2010,2011, office and general expenses increaseddecreased approximately $567,000,$63,000, or 23.5%2.1%, to approximately $2,975,000,$2,912,000, compared to approximately $2,408,000$2,975,000 during the year ended December 31, 2009.2010. Office and general expenses increaseddecreased due to a decrease in costs associated with professional feesadvertising, promotion and technology.contest related activities.
The amount of office and general expenses represented 6.3%5.3% of revenues for the year ended December 31, 2010,2011, compared to 7.7%6.1% for the year ended December 31, 2009.2010. The majority of fixed asset purchases for the year ended December 31, 2011 related to leasehold improvements and furniture for the new Los Angeles office.
Amortization and Depreciation
Depreciation and amortization expense is incurred with respect to certain assets, including computer hardware, software, office equipment, furniture, and other intangibles. During the year ended December 31, 2010,2011, depreciation and amortization expense totaled $1,919,000$1,642,000 (of which $1,855,000$1,540,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Transaction), compared to $1,708,000$1,919,000 during the year ended December 31, 20092010 (of which $1,624,000$1,855,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Transaction). Fixed asset purchases totaled approximately $105,000$354,000 and $43,000$105,000 during the year ended December 31, 20102011 and December 31, 2009,2010, respectively. The majority of fixed asset purchaser during 2011 related to leasehold improvements and furniture for the Los Angeles office.
Corporate Overhead
Corporate overhead expenses include public company costs, director and executive officer compensation, compensation and consulting fees to Esch, directors’ and officers’ insurance, legal, audit and professional fees, corporate office rent and travel. During the year ended December 31, 2010,2011, corporate overhead approximated $1,390,000,$1,406,000, compared to $1,286,000$1,390,000 for the year ended December 31, 2009.2010. The increase in corporate overhead for the year ended December 31, 20102011 compared to the year ended December 31, 20092010 is mostly attributable to twelve months of executive officers compensation during the year ended December 31, 2010, compared to only nine months of executive officer compensation during the year ended December 31, 2009. The Company commenced payment of compensation to executive officers who filled the roles of chief executive officer, chief financial officerincreases in directors fees and general counsel of the Company following the Wilhelmina Transaction effective April 1, 2009.
stock exchange fees partially offset by decreases in accounting and tax fees.
Miami Earn-Out Adjustment and Settlement Expenses
In connection with the Settlement Agreement reached October 18, 2010, (A) approximately 39% (representing the amount that would otherwise be paid to Krassner L.P.) of the first $2,000,000$2 million of the Miami Earnout was cancelled and (B) approximately 69% (representing the amounts that would otherwise be paid in the aggregate to Krassner L.P. and Lorex) of any such Miami Earnout obligation over $2,000,000$2 million was cancelled. As a result, an adjustment of $249,000 was recorded in the accompanying consolidated statement of operations for the year ended December 31, 2010.
The Miami Earnout, payable in accordance with the Acquisition Agreement isand Settlement Agreement, was to be calculated based on the three year average of audited Wilhelmina Miami EBITDA beginning January 1, 2009 and ending December 31, 2011, multiplied by 7.5, and payable in cash or stock (at the Control Seller’s election).stock. As of December 31, 2010, management’s estimate of the fair value of the Miami Earnout was approximately $2,063,000.
Also in connection with$2,063,000, which management determined based on a number of factors. At December 31, 2011, management computed the Settlement Agreement,actual amount to be paid on the Company reimbursed certain documented legal feesMiami Earnout based on the financial results of the Control Sellers inMiami division for the amount of $300,000, which was recorded in the accompanying consolidated statement of earningsthree years ended December 31, 2011 to be $2,174,000. As a result, for the year ended December 31, 2010.2011, the Company recorded adjustments to the previously estimated fair value of $111,000, of which $36,000 was recorded in the quarter ended December 31, 2011.
Asset Impairment Charge
Each reporting period, the Company assesses whether events or circumstances have occurred which indicate that the carrying amount of an intangible asset exceeds its fair value. If the carrying amount of the intangible asset exceeds its fair value, an asset impairment charge will be recognized in an amount equal to that excess. No asset impairment charges were incurred during the year ended December 31, 2010. During the year ended2011 and December 31, 2009, the Company recognized an asset impairment expense of $803,000 related to the Ascendant revenue interest.2010.
Acquisition Transaction Costs
In a business combination, acquisition transaction costs, such as certain investment banking fees, due diligence costs and attorney fees, are to be recorded as a reduction of earnings in the period incurred. Prior to January 1, 2009, acquisition transaction costs were included in the cost of the acquired business. On February 13, 2009, the Company closed the Wilhelmina Transaction and, therefore, recorded all previously capitalized acquisition transaction costs of approximately $849,000 as an expense for the year ended December 31, 2008.
As of December 31, 2008, the Company had deferred approximately $139,000 of costs associated with the Wilhelmina Transaction, which the Company determined were related to the issuance of equity securities. These costs were reclassified as a reduction of capital when the equity securities were issued at the closing of the acquisition. The Company recorded acquisition transaction costs of $0 and $673,000 for the years ended December 31, 2010 and 2009, respectively.
Interest Income
Interest income totaled approximately $4,000$6,000 and $9,000$4,000 for the years ended December 31, 20102011 and 2009,2010, respectively. The decreaseincrease in interest income is the result of a significant decrease in yields andincreased cash balances.
Interest Expense
Interest expense totaled approximately $28,000 for the year ended December 31, 2011, compared to approximately $64,000 for the year ended December 31, 2010, compared to approximately $74,0002010. The decrease in interest expense for the year ended December 31, 2009. Through January 2010, the Company had in place a credit facility with Signature Bank that included a term note with a fixed annual interest rate of 6.65% and a revolving credit line. Interest on the revolving credit line component of the credit facility with Signature Bank was payable monthly at an annual rate of prime plus one-half percent. In January 2010, pursuant to a demand for payment from Signature Bank, the aggregate principal amount of the note and the balance of the Company’s revolving credit line, in the aggregate amount of $276,000, were repaid together with accrued interest. Effective December 31, 2009, interest expense also includes interest on the Esch Note (as defined below). The decrease in interest for the year ended December 31, 2010,2011, compared to the year ended December 31, 2009,2010, is attributable to the result of declines inprincipal repayment on the balances of the Signature facility and Esch Note due to principal payments.partially offset by the borrowing of $500,000 under the Amegy Credit Agreement. See Liquidity and Capital Resources below for further discussion.discussion Note 4 of the accompanying financial statements for a discussion relating to the repayment of the Esch Note.
Income Tax Expense
During the year ended December 31, 2011, the Company’s combined federal and state effective tax rate was approximately 19%. The Company’s effective tax rate would be substantially higher if it were not for federal net operating loss carryforwards.
As of December 31, 2011, the Company had a federal income tax loss carryforward of approximately $7,400,000, which begins expiring in 2019. Realization of the Company’s carryforwards is dependent on future taxable income and capital gains. A valuation allowance has been recorded to reflect the tax effect of the net loss carryforwards not used to offset a portion of the deferred tax liability resulting from the Wilhelmina Transaction. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.
Liquidity and Capital Resources
The Company’s cash balance decreasedincreased to $3,128,000 at December 31, 2011, from $1,732,000 at December 31, 2010,2010. The increase is primarily attributable to cash flow from $2,129,000 atoperations and borrowings under the Amegy credit facility somewhat offset by principal payments under the Esch Note totaling $600,000 and leasehold improvements costs associated with the new lease for office space located in Los Angeles, CA effective July 1, 2011. The Company’s accounts receivable and due to models balances as of December 31, 2009. The decrease2011 reflect significant increases when compared to the corresponding balances as of December 31, 2010. This increase is attributable to purchases of propertythe growth in revenues and equipment of $105,000model cost during the year ended December 31, 2011 and payments on debtsalso reflects accounts receivable and due to models balances of approximately $1,441,000, offset by approximately $1,149,000 of cash flow$1,300,000 and $1,000,000, respectively, from operations. Cash flow from operations includes $300,000 of settlement expenses.two large customer contract payments which were received and paid shortly after December 31, 2011.
TheCurrently, the Company’s primary liquidity need is to fund the Miami Earnout payment of approximately $2,174,000, which is payable (subject to the provisions of the Acquisition Agreement) in April 2012. The Company expects to fund the earn-out obligation with cash on hand and borrowings under the Amegy credit facility (see below).
Amegy Credit Agreement
On April 29, 2011, the Company closed the Amegy Credit Agreement for a new $500,000 revolving credit facility with Amegy with a maturity date of February 28, 2012. Borrowings under the facility are to be used for working capital and other general business purposes of the Company. During the three months ended September 30, 2011, the Company drew $500,000 under the Amegy Credit Agreement.
On January 12, 2012, the Company executed and closed an amendment (the "Amegy Credit Agreement Amendment") to its revolving Amegy Credit Agreement.
Under the terms of the Amegy Credit Agreement Amendment, which is effective as of January 1, 2012, total availability under the revolving credit facility was increased to $1,500,000. In addition, the maturity date of the facility was extended to December 31, 2012.
Generally, amounts outstanding under the Amegy Credit Agreement shall bear interest at the greater of (a) 5% per annum or (b) the prime rate (which means, for any day, the rate of interest quoted in The Wall Street Journal as the “Prime Rate”) plus 2% per annum. Credit is available under the facility through December 31, 2012 and is limited to a borrowing base equal to 65% of the aggregate value of eligible accounts receivable (as defined in the Amegy Credit Agreement) of the Company.
Earn Out
The Miami Earnout, payable in accordance with the Acquisition Agreement and Settlement Agreement, was to be calculated based on the three year average of audited Wilhelmina Miami EBITDA beginning January 1, 2009 and ending December 31, 2011, multiplied by 7.5, and payable in cash or stock. As of December 31, 2010, the fair value of the Miami Earnout was approximately $2,063,000, which management determined based on a number of factors. At December 31, 2011, management computed the actual amount to be paid on the Miami Earnout based on the financial results of the Miami division for the three years ended December 31, 2011 to be $2,174,000. As a result, for the year ended
December 31, 2011, the Company recorded adjustments to the previously estimated fair value of $111,000, of which $36,000 was recorded in the quarter ended December 31, 2011.
Generally, the Company’s needs for liquidity are for financing working capital associated with the expenses it incurs in performing services under its client contracts. Generally, theThe Company incurs significant operating expenses with payment terms shorter than its average collections on billings.
The Company’s ability to replace its indebtedness, and to fund working capital and planned capital expenditures, will depend on its ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond its control. The Company expectshas historically secured its working capital facility through accounts receivable balances and, therefore, the Company’s ability to continue servicing debt is dependent upon the timely collection of those receivables. The Company believes its operations will provide working capital necessary to fundmeet its operating activities and debt obligations with cash flow from operations.needs.
Employee Termination
During On February 24, 2012, the year ended December 31, 2009,employment of Sean Patterson as President of Wilhelmina International was terminated for cause. Wilhelmina International is the principal operating subsidiary of the Company. Over the course of several weeks following the departure of Sean Patterson, five agents resigned from the Company to pursue other interests. As of March 29, 2012, the Company has hired four new agents to replace all of these positions. As of March 29, 2012, the termination of Sean Patterson has not had a credit facility in place with Signature Bank, which facility provided for a revolving linematerial impact on the results of credit.
On February 13, 2009, in order to facilitate the closingoperations or financial position of the Acquisition Agreement, the Company entered into that certain letter agreement with Esch (the “Esch Letter Agreement”), pursuant to which Esch agreed that $1,750,000 of the cash proceeds to be paid to him at the closing of the Acquisition Agreement would instead be held in escrow. Under the terms of the Esch Letter Agreement, all or a portion of such amount held in escrow was required to be used to satisfy Wilhelmina International’s indebtedness to Signature Bank, in connection with its credit facility with Signature Bank, upon the occurrence of specified events including, but not limited to, written notification by Signature Bank to Wilhelmina International of the termination or acceleration of the credit facility. Any amount remaining was required to be released to Esch upon the replacement or extension of Wilhelmina International’s credit facility with Signature Bank, subject to certain requirements set forth in the Esch Letter Agreement. The Esch Letter Agreement also provided that in the event any portion of the proceeds is paid from escrow to Signature Bank, the Company will promptly issue to Esch, in replacement thereof, a promissory note in the principal amount of the amount paid to Signature Bank.
On December 30, 2009, Signature Bank delivered a demand letter (the “Demand Letter”) to the Company and, Wilhelmina International requesting the immediate payment of all outstanding principal and accrued interestbased on current trends in the aggregate amount of approximately $2,019,000 underbusiness, the credit facility.Company does not expect such termination to have a material impact in the future.
The deliveryCompany is engaged in search activities for a new president/chief operating officer for Wilhelmina International. In the interim, the roles and responsibilities of Sean Patterson have been assumed by four senior agents along with the chief financial officer, general counsel and chief executive officer of the Demand Letter requesting mandatory repayment of principal underCompany.
Subsequent to December 31, 2011, an option grant for 2,000,000 shares previously awarded to Sean Patterson terminated, as provided for in the credit facility triggered a “Bank Payoff Event” under the Esch Letter Agreement. As a result, in accordance with the terms of the Esch Letter Agreement, the aggregate amount of $1,750,000 that was held in escrow was released and paid to Signature Bank (the “Escrow Payoff”). Asoption agreement, as a result of the Escrow Payoff, astermination of December 30, 2009, a principal sumemployment of $250,000 plus accrued interest totaling approximately $19,000 remained owing to the bank under the credit facility. During January 2010 the remaining principal and accrued interest of approximately $269,000 was repaid to the bank pursuant to the Demand Letter.
The Esch Letter Agreement provided that in the event of the payment of funds from escrow to Signature Bank, the Company was required to promptly issue to Esch, in replacement of the funds held in escrow, a promissory note in the principal amount of the amount paid to the bank. Accordingly, on December 31, 2009, the Company issued to Esch a promissory note in the principal amount of $1,750,000 (the “Esch Note”). During the year ended December 31, 2010, the effective interest rate of the Esch Note was approximately 3.83%. Principal under the Esch Note was to be repaid in quarterly installments of $250,000 until December 31, 2010 when the unpaid principal and interest thereon became due and payable. On December 7, 2010, the Company and Esch entered into an amendment (the “Esch Amendment”) to the Esch Note. Under the Esch Amendment, (1) the maturity date of the Esch Note has been extended to June 30, 2011 (from December 31, 2010), (2) commencing January 1, 2011, the interest rate on outstanding principal under the Esch Note increased to 9.0% per annum and (3) installment payments of remaining principal under the Esch Note will be paid as follows: (a) $400,000 on March 31, 2011 and (b) $200,000 on June 30, 2011. In addition, $400,000 was paid on December 31, 2010 pursuant to the Esch Amendment.
In the event that the Company closes a new revolving bank or debt facility, which provides the Company with committed working capital financing, the Company is required to pay down the Esch Note in the amount of the funds that the Company is initially permitted to draw under such new facility. The Esch Note is unsecured and may be pre-paid by the Company at any time without penalty or premium.
Off-Balance Sheet Arrangements
At December 31, 20102011 and 2009,2010, the Company had $222,000 and $180,000, respectively, of restricted cash that serves as collateral for the full amount of an irrevocable standby letter of credit. The letter of credit serves as additional security under the lease extension relating to the Company’s office space in New York City that expires in February 2021.
Effect of Inflation
Inflation has not been a material factor affecting the Company’s business. General operating expenses, such as salaries, employee benefits, insurance and occupancy costs, are subject to normal inflationary pressures.
Critical Accounting Policies
Revenue Recognition
In compliance with generally accepted accounting principles (“GAAP”) when reporting revenue gross as a principal versus net as an agent, the Company assesses whether it, the model or the talent is the primary obligor. The Company evaluates the terms of its model, talent and client agreements as part of this assessment. In addition, the Company gives appropriate consideration to other key indicators such as latitude in establishing price, discretion in model or talent selection and credit risk the Company undertakes. The Company operates broadly as a modeling agency and in those relationships with models and talent where the key indicators suggest the Company acts as a principal, the Company records the gross amount billed to the client as revenue when earned and collectability is reasonably assured and the related costs incurred to the model or talent as model or talent cost. In other model and talent relationships, where the Company believes the key indicators suggest it acts as an agent on behalf of the model or talent, the Company records revenue net of pass-through model or talent cost.
The Company also recognizes management fees as revenues for providing services to other modeling agencies as well as consulting income in connection with services provided to a television production network according to the terms of the contract. The Company recognizes royalty income when earned based on terms of the contractual agreement. Revenues received in advance are deferred and amortized using the straight-line method over periods pursuant to the related contract.
The Company also records fees from licensees when the revenues are earned and collectability is reasonably assured.
Advances to models for the cost of producing initial portfolios and other out-of-pocket costs are expensed to model costs as incurred. Any repayments of such costs are credited to model costs in the period received.
Goodwill and Intangible Assets
Goodwill and intangible assets consist primarily of goodwill and buyer relationships resulting from a business acquisition. Goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather to an annual assessment of impairment by applying a fair-value based test.
Management’s assessments of the recoverability and impairment tests of goodwill and intangible assets involve critical accounting estimates. These estimates require significant management judgment, include inherent uncertainties and are often interdependent; therefore, they do not change in isolation. Factors that management must estimate include, among others, the economic life of the asset, sales volume, prices, inflation, cost of capital, marketing spending, tax rates and capital spending. These factors are even more difficult to predict when global financial markets are highly volatile. When performing impairment tests, the Company estimates the fair values of the assets using management's best assumptions, which it believes would be consistent with what a hypothetical marketplace participant would use. Estimates and assumptions used in these tests are evaluated and updated as appropriate. The variability of these factors depends on a number of conditions, including uncertainty about future events,
and thus the accounting estimates may change from period to period. If other assumptions and estimates had been used when these tests were performed, impairment charges could have resulted.
Business Combinations
In a business combination, contingent consideration or earn outs will be recorded at their fair value at the acquisition date. Except in bargain purchase situations, contingent consideration typically will result in additional goodwill being recognized. Contingent consideration classified as an asset or liability will be adjusted to fair value at each reporting date through earnings until the contingency is resolved.
These estimates are subject to change upon the finalization of the valuation of certain assets and liabilities and may be adjusted.
At the date of the Wilhelmina Transaction, GAAP provided that acquisition transaction costs, such as certain investment banking fees, due diligence costs and attorney fees were to be recorded as a reduction of earnings in the period they are incurred. Prior to January 1, 2009, in accordance with GAAP existing at that time, the Company included acquisition transaction costs in the cost of the acquired business. On February 13, 2009, the Company closed the Wilhelmina Transaction, and therefore, recorded all previously capitalized acquisition transaction costs of approximately $849,000 as an expense for the year ended December 31, 2008. The Company incurred acquisition transaction costs of $0 and $673,000 for the years ended December 31, 2011 and 2010, and 2009, respectively.
Management is required to address the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the acquisition date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. A systematic and rational basis for subsequently measuring and accounting for the assets or liabilities is required to be developed depending on their nature.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income 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 income 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 income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company continually assesses the need for a tax valuation allowance based on all available information. As of December 31, 2010,2011, and as a result of this assessment, the Company does not believe that its deferred tax assets are more likely than not to be realized. In addition, the Company continuously evaluates its tax contingencies.
Accounting for uncertainty in income taxes recognized in an enterprise’s financial statements requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Also, consideration should be given to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition. There was no change to the net amount of assets and liabilities recognized in the consolidated balance sheets as a result of the Company’s tax positions.
Basis of Presentation
The financial statements include the consolidated accounts of Wilhelmina and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are accounted for at fair value, do not bear interest and are short-term in nature. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability to collect on accounts receivable. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to the valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company generally does not require collateral.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 amends Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements” (“ASC 820”), to require additional disclosures regarding fair value measurements. OneAny new applicable accounting pronouncements have been listed in Note 2 of the areas concernedConsolidated Financial Statements, which is related to the inclusion of information about purchases, sales, issuances and settlements of recurring Level 3 measurements. Such disclosure requirements will be effective for annual reporting periods beginning after December 15, 2010. The Company is currently evaluating the effect of ASC 2010-06 on its financial statements and results of operation and is currently not yet in a position to determine such effects.
In February 2010, the FASB issued ASU 2010-09, “Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which amends ASC 855, “Subsequent Events” (“ASC 855”). The update provides that SEC filers, as defined in ASU 2010-09, are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The update also requires SEC filers to evaluate subsequent events through the date the financial statements are issued rather than the date the financial statements are available to be issued. The Company adopted ASU 2010-09 upon issuance. This update had no material impact on the financial position, results of operations or cash flows of the Company.
In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The Company believes the adoption of this new guidance will not have a material impact on its financial statements.
ITEM ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and the related report of the Company’s independent registered public accounting firm thereon, are included in this report at the page indicated.
REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Wilhelmina International, Inc.
We have audited the accompanying consolidated balance sheets of Wilhelmina International, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 20102011 and 2009,2010, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wilhelmina International, Inc. and Subsidiaries as of December 31, 20102011 and 2009,2010, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Burton McCumber & Cortez, L.L.P.
Brownsville, Texas
March 31, 201129, 2012
WILHELMINAWILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share data)
ASSETS | | | | | | |
| | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 3,128 | | | $ | 1,732 | |
Accounts receivable, net of allowance for doubtful accounts of $760 and $623 | | | 11,460 | | | | 8,525 | |
Indemnification receivable | | | 428 | | | | 726 | |
Prepaid expenses and other current assets | | | 251 | | | | 211 | |
Total current assets | | | 15,267 | | | | 11,194 | |
| | | | | | | | |
Property and equipment, net of accumulated depreciation of $226 and $124 | | | 579 | | | | 326 | |
| | | | | | | | |
Trademarks and trade names with indefinite lives | | | 8,467 | | | | 8,467 | |
Other intangibles with finite lives, net of accumulated amortization of $5,019 and $3,479 | | | 3,318 | | | | 4,858 | |
Goodwill | | | 12,563 | | | | 12,647 | |
Restricted cash | | | 222 | | | | 222 | |
Other assets | | | 285 | | | | 239 | |
| | | | | | | | |
Total assets | | $ | 40,701 | | | $ | 37,953 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 3,528 | | | $ | 3,810 | |
Due to models | | | 9,564 | | | | 7,374 | |
Deferred revenue | | | 295 | | | | 778 | |
Foreign withholding claim subject to indemnification | | | 428 | | | | 726 | |
Amegy credit facility | | | 500 | | | | - | |
Esch promissory note | | | - | | | | 600 | |
Earn out liability | | | 2,174 | | | | - | |
Total current liabilities | | | 16,489 | | | | 13,288 | |
| | | | | | | | |
Long term liabilities | | | | | | | | |
Deferred revenue, net of current portion | | | 245 | | | | 265 | |
Deferred income tax liability | | | 1,800 | | | | 1,800 | |
Earn out-contingent liability | | | - | | | | 2,063 | |
Total long-term liabilities | | | 2,045 | | | | 4,128 | |
| | | | | | | | |
Commitments and contingencies | | | - | | | | - | |
Shareholders’ equity: | | | | | | | | |
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none outstanding | | | - | | | | - | |
Common stock, $0.01 par value, 250,000,000 shares authorized; 129,440,752 shares issued and outstanding in 2011 and 2010 | | | 1,294 | | | | 1,294 | |
Additional paid-in capital | | | 85,133 | | | | 85,072 | |
Accumulated deficit | | | (64,260 | ) | | | (65,829 | ) |
Total shareholders’ equity | | | 22,167 | | | | 20,537 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 40,701 | | | $ | 37,953 | |
The accompanying notes are an integral part of these consolidated financial statements
ASSETS | | | | | | |
| | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 1,732 | | | $ | 2,129 | |
Accounts receivable, net of allowance for doubtful accounts of $623 and $323 | | | 8,525 | | | | 6,378 | |
Indemnification receivable | | | 726 | | | | - | |
Prepaid expenses and other current assets | | | 211 | | | | 231 | |
Total current assets | | | 11,194 | | | | 8,738 | |
| | | | | | | | |
Property and equipment, net of accumulated depreciation of $118 and $84 | | | 326 | | | | 284 | |
| | | | | | | | |
Trademarks and trade names with indefinite lives | | | 8,467 | | | | 8,467 | |
Other intangibles with finite lives, net of accumulated amortization of $3,479 and $1,624 | | | 4,858 | | | | 6,713 | |
Goodwill | | | 12,647 | | | | 12,647 | |
Restricted cash | | | 222 | | | | 180 | |
Other assets | | | 239 | | | | 70 | |
| | | | | | | | |
Total assets | | $ | 37,953 | | | $ | 37,099 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 3,810 | | | $ | 2,724 | |
Line of credit | | | - | | | | 250 | |
Due to models | | | 7,374 | | | | 7,271 | |
Deferred revenue | | | 778 | | | | 689 | |
Foreign withholding claim subject to indemnification | | | 726 | | | | - | |
Esch promissory note | | | 600 | | | | 1,750 | |
Current portion of long-term obligations | | | - | | | | 41 | |
Total current liabilities | | | 13,288 | | | | 12,725 | |
| | | | | | | | |
Long term liabilities | | | | | | | | |
Other | | | - | | | | 40 | |
Deferred revenue, net of current portion | | | 265 | | | | 669 | |
Deferred income tax liability | | | 1,800 | | | | 1,800 | |
Earn out-contingent liability | | | 2,063 | | | | 2,312 | |
Total long-term liabilities | | | 4,128 | | | | 4,821 | |
| | | | | | | | |
Commitments and contingencies | | | - | | | | - | |
Shareholders’ equity: | | | | | | | | |
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none outstanding | | | - | | | | - | |
Common stock, $0.01 par value, 250,000,000 shares authorized; | | | | | | | | |
129,440,752 shares issued and outstanding in 2010 and 2009 | | | 1,294 | | | | 1,294 | |
Additional paid-in capital | | | 85,072 | | | | 85,072 | |
Accumulated deficit | | | (65,829 | ) | | | (66,813 | ) |
Total shareholders’ equity | | | 20,537 | | | | 19,553 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 37,953 | | | $ | 37,099 | |
22
WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations
Years ended December 31,
(In thousands, except per share data)
| | | |
| | | | | | |
Revenues | | | | | | |
Revenues | | $ | 54,119 | | | $ | 47,428 | |
License fees and other income | | | 1,347 | | | | 1,491 | |
Total revenues | | | 55,466 | | | | 48,919 | |
| | | | | | | | |
Model costs | | | 37,552 | | | | 32,838 | |
| | | | | | | | |
Revenues net of model costs | | | 17,914 | | | | 16,081 | |
| | | | | | | | |
Operating expenses | | | | | | | | |
Salaries and service costs | | | 9,502 | | | | 8,312 | |
Office and general expenses | | | 2,912 | | | | 2,975 | |
Amortization and depreciation | | | 1,642 | | | | 1,919 | |
Corporate overhead | | | 1,406 | | | | 1,390 | |
Total operating expenses | | | 15,462 | | | | 14,596 | |
Operating income | | | 2,452 | | | | 1,485 | |
| | | | | | | | |
Other income (expense): | | | | | | | | |
Miami earn-out fair value adjustment | | | (111 | ) | | | 249 | |
Equity Earnings in Wilhelmina Kids & Creative Mgmt, LLC | | | 25 | | | | 46 | |
Settlement expense | | | - | | | | (300 | ) |
Interest income | | | 6 | | | | 4 | |
Interest expense | | | (28 | ) | | | (64 | ) |
Total other expense | | | (108 | ) | | | (65 | ) |
| | | | | | | | |
Income before provision for income taxes | | | 2,344 | | | | 1,420 | |
| | | | | | | | |
Provision for income taxes | | | | | | | | |
Current | | | (775 | ) | | | (436 | ) |
Deferred | | | - | | | | - | |
| | | (775 | ) | | | (436 | ) |
| | | | | | | | |
Net income applicable to common stockholders | | $ | 1,569 | | | $ | 984 | |
| | | | | | | | |
| | | | | | | | |
Basic and diluted income per common share | | $ | 0.01 | | | $ | 0.01 | |
| | | | | | | | |
Weighted average common shares outstanding | | | 129,441 | | | | 129,441 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements
WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2011 and 2010
(In thousands)
| | | Common Stock | | | | | | | | | | | | | |
| | | Shares | | | | Amount | | | | Additional Paid-in | | | | Accumulated Deficit | | | | Total | |
Balances at December 31, 2009 | | | 129,441 | | | $ | 1,294 | | | $ | 85,072 | | | $ | (66,813 | ) | | $ | 19,553 | |
| | | | | | | | | | | | | | | | | | | | |
Net income applicable to common shareholders | | | - | | | | - | | | | - | | | | 984 | | | | 984 | |
Balances at December 31, 2010 | | | 129,441 | | | | 1,294 | | | | 85,072 | | | | (65,829 | ) | | | 20,537 | |
Share based payment expense | | | - | | | | - | | | | 61 | | | | - | | | | 61 | |
Net income applicable to common shareholders | | | - | | | | - | | | | - | | | | 1,569 | | | | 1,569 | |
Balances at December 31, 2011 | | | 129,441 | | | $ | 1,294 | | | $ | 85,133 | | | $ | (64,260 | ) | | $ | 22,167 | |
The accompanying notes are an integral part of these consolidated financial statements
WILHELMINAWILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Consolidated Statements of Operations
Years ended December 31,
(In thousands, except per share data)in thousands)
| | | | | | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 1,569 | | | $ | 984 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Bad debt expense | | | 66 | | | | 116 | |
Amortization and depreciation | | | 1,642 | | | | 1,919 | |
Miami earn-out fair value adjustment | | | 111 | | | | (249 | ) |
Share based payment expense | | | 61 | | | | - | |
Changes in operating assets and liabilities: | | | | | | | | |
(Increase) in accounts receivable | | | (3,002 | ) | | | (2,263 | ) |
(Increase) in prepaid expenses and other current assets | | | (89 | ) | | | (191 | ) |
Indemnification receivable | | | 298 | | | | (726 | ) |
Increase in due to models | | | 2,189 | | | | 103 | |
(Decrease) increase in accounts payable and accrued liabilities | | | (194 | ) | | | 1,086 | |
Foreign withholding claim subject to indemnification | | | (298 | ) | | | 726 | |
(Decrease) in other liabilities | | | (503 | ) | | | (356 | ) |
Net cash provided by operating activities | | | 1,850 | | | | 1,149 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchase of property and equipment | | | (354 | ) | | | (105 | ) |
Net cash used in investing activities | | | (354 | ) | | | (105 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Proceeds from Amegy credit facility | | | 500 | | | | - | |
Repayment of line of credit | | | - | | | | (250 | ) |
Repayment of Esch promissory note | | | (600 | ) | | | (1,150 | ) |
Payments of debt | | | - | | | | (41 | ) |
Net cash used in financing activities | | | (100 | ) | | | (1,441 | ) |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 1,396 | | | | (397 | ) |
Cash and cash equivalents, beginning of period | | | 1,732 | | | | 2,129 | |
Cash and cash equivalents, end of period | | $ | 3,128 | | | $ | 1,732 | |
| | | | | | | | |
Supplemental disclosures of cash flow information | | | | | | | | |
Cash paid for interest | | $ | 28 | | | $ | 66 | |
Cash paid for income taxes | | $ | 632 | | | $ | 161 | |
| | | | | | | | |
| | | |
| | | | | | |
Revenues | | | | | | |
Revenues | | $ | 47,428 | | | $ | 31,264 | |
License fees and other income | | | 1,537 | | | | 755 | |
Total revenues | | | 48,965 | | | | 32,019 | |
| | | | | | | | |
Model costs | | | 32,838 | | | | 21,895 | |
| | | | | | | | |
Revenues net of model costs | | | 16,127 | | | | 10,124 | |
| | | | | | | | |
Operating expenses | | | | | | | | |
Salaries and service costs | | | 8,312 | | | | 6,505 | |
Office and general expenses | | | 2,975 | | | | 2,408 | |
Amortization and depreciation | | | 1,919 | | | | 1,708 | |
Corporate overhead | | | 1,390 | | | | 1,286 | |
Asset impairment | | | - | | | | 803 | |
Total operating expenses | | | 14,596 | | | | 12,710 | |
Operating income (loss) | | | 1,531 | | | | (2,586 | ) |
| | | | | | | | |
Other income (expense): | | | | | | | | |
Miami earn-out fair value adjustment | | | 249 | | | | - | |
Settlement expense | | | (300 | ) | | | - | |
Acquisition transaction costs | | | - | | | | (673 | ) |
Interest income | | | 4 | | | | 9 | |
Interest expense | | | (64 | ) | | | (74 | ) |
Total other expense | | | (111 | ) | | | (738 | ) |
| | | | | | | | |
Income (loss) before provision for income taxes | | | 1,420 | | | | (3,324 | ) |
| | | | | | | | |
Provision for income taxes | | | | | | | | |
Current | | | (436 | ) | | | (14 | ) |
Deferred | | | - | | | | - | |
| | | (436 | ) | | | (14 | ) |
| | | | | | | | |
Net income (loss) applicable to common stockholders | | $ | 984 | | | $ | (3,338 | ) |
| | | | | | | | |
| | | | | | | | |
Basic and diluted income (loss) per common share | | $ | 0.01 | | | $ | (0.03 | ) |
| | | | | | | | |
Weighted average common shares outstanding | | | 129,441 | | | | 119,996 | |
The accompanying notes are an integral part of these consolidated financial statements
WILHELMINAWILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2010 and 2009
(In thousands)
| | | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Total | |
| | | |
| | | | | | | | | | | | | | | |
Balances at December 31, 2008 | | | 53,884 | | | $ | 539 | | | $ | 75,357 | | | $ | (63,475 | ) | | $ | 12,421 | |
| | | | | | | | | | | | | | | | | | | | |
Common Stock issued in the Wilhelmina Transaction to Patterson, Control Sellers and their advisors | | | 63,411 | | | | 634 | | | | 6,975 | | | | | | | | 7,609 | |
Common Stock issued to Newcastle under the Equity Financing Agreement | | | 12,146 | | | | 121 | | | | 2,879 | | | | | | | | 3,000 | |
Newcastle equity issuance cost | | | | | | | | | | | (139 | ) | | | | | | | (139 | ) |
Net loss applicable to common shareholders | | | - | | | | - | | | | - | | | | (3,338 | ) | | | (3,338 | ) |
Balances at December 31, 2009 | | | 129,441 | | | | 1,294 | | | | 85,072 | | | | (66,813 | ) | | | 19,553 | |
Net income applicable to common shareholders | | | - | | | | - | | | | - | | | | 984 | | | | 984 | |
Balances at December 31, 2010 | | | 129,441 | | | $ | 1,294 | | | $ | 85,072 | | | $ | (65,829 | ) | | $ | 20,537 | |
The accompanying notes are an integral part of these consolidated financial statements
WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in thousands)
| | | | | | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 984 | | | $ | (3,338 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
Bad debt expense | | | 116 | | | | 323 | |
Loss on disposal of fixed assets | | | - | | | | 39 | |
Asset impairment charge | | | - | | | | 803 | |
Amortization and depreciation | | | 1,919 | | | | 1,708 | |
Miami earn-out fair value adjustment | | | (249 | ) | | | - | |
Changes in operating assets and liabilities: | | | | | | | | |
(Increase) in accounts receivable | | | (2,263 | ) | | | (1,046 | ) |
(Increase) decrease in prepaid expenses and other current assets | | | (191 | ) | | | 288 | |
Indemnification receivable | | | (726 | ) | | | - | |
Increase in due to models | | | 103 | | | | 1,236 | |
Increase in accounts payable and accrued liabilities | | | 1,086 | | | | 1,425 | |
Foreign withholding claim subject to indemnification | | | 726 | | | | - | |
Increase (decrease) in other liabilities | | | (356 | ) | | | 515 | |
Net cash provided by operating activities | | | 1,149 | | | | 1,953 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Acquisition of the Wilhelmina Companies, net of cash acquired | | | - | | | | (14,763 | ) |
Purchase of property and equipment | | | (105 | ) | | | (43 | ) |
Net cash used in investing activities | | | (105 | ) | | | (14,806 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Proceeds from issuance of common stock | | | - | | | | 3,000 | |
Proceeds from line of credit | | | - | | | | 500 | |
Repayment of line of credit | | | (250 | ) | | | (1,750 | ) |
Proceeds from Esch escrow | | | - | | | | 1,750 | |
Repayment of Esch promissory note | | | (1,150 | ) | | | - | |
Payments of debt | | | (41 | ) | �� | | (253 | ) |
Net cash provided by (used in) financing activities | | | (1,441 | ) | | | 3,247 | |
| | | | | | | | |
Net decrease in cash and cash equivalents | | | (397 | ) | | | (9,606 | ) |
Cash and cash equivalents, beginning of period | | | 2,129 | | | | 11,735 | |
Cash and cash equivalents, end of period | | $ | 1,732 | | | $ | 2,129 | |
| | | | | | | | |
Supplemental disclosures of cash flow information | | | | | | | | |
Cash paid for interest | | $ | 66 | | | $ | 56 | |
Cash paid for income taxes | | $ | 161 | | | $ | 24 | |
| | | | | | | | |
Supplemental disclosures of non-cash investing and financing activities | | | | | | | | |
Equity issuance costs | | $ | - | | | $ | 139 | |
Common stock issued in acquisition of the Wilhelmina Companies | | $ | - | | | $ | 7,609 | |
The accompanying notes are an integral part of these consolidated financial statements
WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20102011 and 20092010
Note 1. Business Activity
Overview
Wilhelmina International, Inc.’s (“Wilhelmina” or the “Company”) primary business is fashion model management, which is headquartered in New York City. The Company’s predecessor was founded in 1967 by Wilhelmina Cooper, a renowned fashion model, and is one of the oldest and largest fashion model management companies in the world. Since its founding, Wilhelmina has grown to include operations located in Los Angeles and Miami, as well as a growing network of licensees comprising leading modeling agencies in various local markets across the U.S. as well as in Panama and in Panama.Thailand. Wilhelmina provides traditional, full-service fashion model and talent management services, specializing in the representation and management of models, entertainers, artists, athletes and other talent to various customers and clients, including retailers, designers, advertising agencies and catalog companies.
Wilhelmina Transaction
On August 25, 2008, the Company and Wilhelmina Acquisition Corp., a New York corporation and wholly owned subsidiary of the Company (“Wilhelmina Acquisition”), entered into an agreement (the “Acquisition Agreement”) with Dieter Esch (“Esch”), Lorex Investments AG, a Swiss corporation (“Lorex”), Brad Krassner (“Krassner”), Krassner Family Investments Limited Partnership, a Nevada limited partnership (“Krassner L.P.” and together with Esch, Lorex and Krassner, the “Control Sellers”), Wilhelmina International, Ltd., a New York corporation (“Wilhelmina International”), Wilhelmina – Miami, Inc., a Florida corporation (“Wilhelmina Miami”), Wilhelmina Artist Management LLC, a New York limited liability company (“WAM”), Wilhelmina Licensing LLC, a Delaware limited liability company (“Wilhelmina Licensing”), Wilhelmina Film & TV Productions LLC, a New York limited liability company (“Wilhelmina TV” and together with Wilhelmina International, Wilhelmina Miami, WAM and Wilhelmina Licensing, the “Wilhelmina Companies”), Sean Patterson, an executive with the Wilhelmina Companies (“Patterson”), and the shareholders of Wilhelmina Miami (the “Miami Holders” and together with the Control Sellers and Patterson, the “Sellers”). Pursuant to the Acquisition Agreement, which closed February 13, 2009, the Company acquired the Wilhelmina Companies subject to the terms and conditions thereof (the “Wilhelmina Transaction”). The Acquisition Agreement provided for (i) the merger of Wilhelmina Acquisition with and into Wilhelmina International in a stock-for-stock transaction, as a result of which Wilhelmina International became a wholly owned subsidiary of the Company and (ii) the Company’s purchase of the outstanding equity interests of the other Wilhelmina Companies for cash.
The Company completed the Wilhelmina Transaction on February 13, 2009 and, therefore the results of operations of the Company for the year ended December 31, 2009 only include operating results of the Wilhelmina Companies for the period from February 13, 2009 through December 31, 2009.
Pre-Wilhelmina
Wilhelmina, formerly known as New Century Equity Holdings Corp. (“NCEH”) and Billing Concepts Corp., was incorporated in the state of Delaware in 1996.
Until the closing of the Wilhelmina Transaction in February 2009, the Company was in a transition period during which it sought to redeploy its assets to enhance shareholder value by evaluating potential acquisition and merger candidates. During this transition period, the Company’s sole operating business was represented by an investment in ACP Investments, L.P. (d/b/a Ascendant Capital Partners) (“Ascendant”). Ascendant is a Berwyn, Pennsylvania based alternative asset management company whose funds have investments in long/short equity funds and which distributes its registered funds primarily through various financial intermediaries and related channels (see Note 8).channels.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The financial statements include the consolidated accounts of Wilhelmina and its wholly owned subsidiaries. Wilhelmina also owns a non-consolidated 50% interest in Wilhelmina Kids & Creative Management LLC which is accounted for under the equity method of accounting. All significant inter-company accounts and transactions have been eliminated in the consolidation.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
New Accounting Pronouncement
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 amends Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements” (“ASC 820”), to require additional disclosures regarding fair value measurements. One of the areas concerned is related to the inclusion of information about purchases, sales, issuances and settlements of recurring Level 3 measurements. Such disclosure requirements will be effective for annual reporting periods beginning after December 15, 2010. The Company is currently evaluating the effect of ASC 2010-06 on its financial statements and results of operations and is not yet in a position to determine such effects.
In February 2010, the FASB issued ASU 2010-09, “Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which amends ASC 855, “Subsequent Events” (“ASC 855”). The update provides that Securities and Exchange Commission (“SEC”) filers, as defined in ASU 2010-09, are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The update also requires SEC filers to evaluate subsequent events through the date the financial statements are issued rather than the date the financial statements are available to be issued. The Company adopted ASU 2010-09 upon issuance. This update had no material impact on the financial position, results of operations or cash flows of the Company.
In October 2009,2011, the FASB issued authoritativeAccounting Standards Update 2011-05, Presentation of Comprehensive Income (the “ASU”), which amended guidance for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive incomes, or in two separate, but consecutive statements. The current option to report other comprehensive incomes and its components in the statement of stockholders’ equity will be eliminated. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance. The ASU is effective for us in the first quarter 2012 and retrospective application will be required. The Company does not expect this ASU to change our financial statement presentation, and also, will not impact our net income, financial position, or cash flows.
In September 2011, the FASB issued an amendment to ASC 350, Intangibles—Goodwill and Other (ASC 350), which simplifies how entities test goodwill for impairment. Previous guidance under ASC 350 required an entity to test goodwill for impairment using a two-step process on revenue recognitionat least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that becameit is more likely than not that its fair value is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under ASC 350. The amendments are effective infor annual and interim goodwill impairment tests performed for fiscal years beginning on or after June 15, 2010, with earlierJanuary 1, 2012, and early adoption is permitted. UnderThe Company has elected to adopt this amendment for the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionalityyear ended December 31, 2011. The adoption of the tangible product will no longer be within the scopeprovisions of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The Company believes the adoption of this new guidance willASC 350 did not have a material impact on itsthe Company’s consolidated financial statements.
FASB “Accounting Standards Codification™” (the “Codification”)
The Codification is the single source of authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB, to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC, under authority of federal securities laws, are also sources of authoritative GAAP for SEC registrants. The Codification became effective for interim and annual periods ending after September 15, 2009 and superseded all previously existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification is non-authoritative. All of the Company’s references to GAAP now use the specific Codification Topic or Section rather than prior accounting and reporting standards. The Codification did not change existing GAAP and, therefore, did not affect the Company’s financial position or results of operations.
Revenue Recognition
In compliance with GAAP, when reporting revenue gross as a principal versus net as an agent, the Company assesses whether the Company, the model or the talent is the primary obligor. The Company evaluates the terms of its model, talent and client agreements as part of this assessment. In addition, the Company gives appropriate consideration to other key indicators such as latitude in establishing price, discretion in model or talent selection and credit risk the Company undertakes. The Company operates broadly as a modeling agency and in those relationships with models and talents where the key indicators suggest the Company acts as a principal, the Company records the gross amount billed to the client as revenue, when the revenues are earned and collectability is reasonably assured, and the related costs incurred to the model or talent as model or talent cost. In other model and talent relationships, where the Company believes the key indicators suggest the Company acts as an agent on behalf of the model or talent, the Company records revenue, when the revenues are earned and collectability is reasonably assured, net of pass-through model or talent cost.
The Company also recognizes management fees as revenues for providing services to other modeling agencies as well as consulting income in connection with services provided to a television production network according to the terms of the contract. The Company recognizes royalty income when earned based on terms of the contractual agreement. Revenues received in advance are deferred and amortized using the straight-line method over periods pursuant to the related contract.
The Company also records fees from licensees when the revenues are earned and collectability is reasonably assured.
Advances to models for the cost of initial portfolios and other out-of-pocket costs, which are reimbursable only from collections from the Company’s customers as a result of future work, are expensed to model costs as incurred. Any repayments of such costs are credited to model costs in the period received.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect management’s judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in future impairments of assets among other effects.
Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are accounted for at fair value, do not bear interest and are short-term in nature. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability to collect on accounts receivable. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to the valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company generally does not require collateral.
Concentrations of Credit Risk
The balance sheet items that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. The Company maintains its cash balances in fourseveral different financial institutions in New York, Los Angeles and Miami. Balances in accounts other than “noninterest-bearing transaction accounts” are insured up to Federal Deposit Insurance Corporation (“FDIC”) limits of $250,000 per institution. Noninterest-bearing transaction accounts have unlimited FDIC insurance coverage through December 31, 2012. At December 31, 2010,2011, the Company had approximately $463,000 ofdid not have any cash balances in financial institutions in excess of such insurance.FDIC insurance coverage. Concentrations of credit risk with accounts receivable are mitigated by the Company’s large number of clients and their dispersion across different industries and geographical areas. The Company performs ongoing credit evaluations of its clients and maintains an allowance for doubtful accounts based upon the expected collectability of all accounts receivable.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization, based upon the estimated useful lives (ranging from 2 to 7 years) of the assets or terms of the leases, are computed by use of the straight-line method. Leasehold improvements are amortized based upon the shorter of the terms of the leases or asset lives. When property and equipment are retired or sold, the cost and accumulated depreciation and amortization are eliminated from the related accounts and gains or losses, if any, are reflected in the consolidated statement of operations.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an impairment has occurred, the amount of the impairment is charged to operations.
Depreciation expense totaled $73,000$102,000 and $84,000$73,000 for the years ended December 31, 20102011 and 2009,2010, respectively.
Goodwill and Intangible Assets
Goodwill and intangible assets consist primarily of goodwill and buyer relationships resulting from the Wilhelmina Transaction and the revenue interest in Ascendant acquired in 2005 (see Note 8).2005. Goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather to an annual assessment of impairment by applying a fair-value based test. A significant amount of judgment is required in estimating fair value and performing goodwill impairment tests. Intangible assets with finite lives are amortized over useful lives ranging from 2 to 7 years.
The Company annually assesses whether the carrying value of its intangible assets exceeds its fair value and, if necessary, records an impairment loss equal to any such excess.
Each reporting period, the Company assesses whether events or circumstances have occurred which indicate that the carrying amount of an intangible asset exceeds its fair value. If the carrying amount of the intangible asset exceeds its fair value, an asset impairment charge will be recognized in an amount equal to that excess. No asset impairment charges were incurred during the yearyears ended December 31, 2011 and 2010. During the year ended December 31, 2009, the Company recognized an asset impairment expense of $803,000 related to the Ascendant revenue interest.
Deferred Cost and Revenue
The Company has deferred model cost paid in advance in connection with talent related contracts. Deferred revenue consists of royalties, commissions and service charges received in advance of being earned, pursuant to product licensing agreements and talent related contracts (see Note 7).
Advertising
The Company expenses all advertising costs as incurred. Advertising expense for the year ended December 31, 20102011 approximated $206,000$165,000 compared to $134,000$206,000 for the year ended December 31, 2009.2010.
Financial Instruments
The estimated fair value of the Company’s financial instruments approximates their carrying value as reflected in the accompanying consolidated balance sheets due to (i) the short-term nature of financial instruments included in the current assets and liabilities or (ii) for non-short term financial instruments, the recording of such financial instruments at fair value.
Business Combinations
Effective January 1, 2009, the Company adopted the new provisions of ASC 805, “Business Combinations” (“ASC 805”), which address the recognition and measurement of (i) identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree, and (ii) goodwill acquired or gain from a bargain purchase. In addition, acquisition-related costs are accounted for as expenses in the period in which the costs are incurred and the services are received. These provisions were applied to the acquisition of the Wilhelmina Companies in the first quarter of 2009, which is discussed in Note 3.
In a business combination, contingent consideration or earn outs are recorded at fair value at the acquisition date. Except in bargain purchase situations, contingent consideration typically results in additional goodwill being recognized. Contingent consideration classified as an asset or liability will be adjusted to fair value at each reporting date through earnings until the contingency is resolved.
At the date of the Wilhelmina Transaction, GAAP provided that acquisition transaction costs, such as certain investment banking fees, due diligence costs and attorney fees were to be recorded as a reduction of earnings in the period they are incurred. Prior to January 1, 2009, in accordance with GAAP existing at that time, the Company included acquisition transaction costs in the cost of the acquired business. On February 13, 2009, the Company closed the Wilhelmina Transaction and, therefore, recorded all previously capitalized acquisition transaction costs of approximately $849,000 as an expense for the year ended December 31, 2008. The Company incurred acquisition transaction costs of $0 for the year ended December 31, 2010,2011, compared to $673,000 for the year ended December 31, 2009.2010.
Management is required to address the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the acquisition date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. A systematic and rational basis for subsequently measuring and accounting for the assets or liabilities is required to be developed depending on their nature.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income 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 income 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 income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company continually assesses the need for a tax valuation allowance based on all available information. As of December 31, 2010,2011, and as a result of this assessment, the Company does not believe that its deferred tax assets are more likely than not to be realized. In addition, the Company continuously evaluates its tax contingencies.
Accounting for uncertainty in income taxes recognized in an enterprise’s financial statements requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Also, consideration should be given to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no change to the net amount of assets and liabilities recognized in the consolidated balance sheets as a result of the Company’s tax positions.
Net Income (loss) Per Common Share
For the years ended December 31, 20102011 and 2009,2010, diluted earnings per share (“EPS”(“EPS”) equals basic EPS, as potentially dilutive common stock equivalents were anti-dilutive.
Stock-Based Compensation
The Company records compensation expense for all awards granted. After assessing alternative valuation models and amortization assumptions, the Company will continue using both the Black-Scholes valuation model and straight-line amortization of compensation expense over the requisite service period for each separately vesting portion of the grant. The Company will reconsider use of this model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. The Company utilizes stock-based awards as a form of compensation for employees, officers and directors.
During the year ended December 31, 2011, the Company adopted the 2011 Incentive Plan under which directors, officers, consultants, advisors and employees of the Company are eligible to receive stock option grants. The Company has reserved 6,000,000 shares of its Common Stock for issuance pursuant to the 2011 Incentive Plan. Under the 2011 Incentive Plan, options vest and expire pursuant to individual award agreements; however, the expiration date of unexercised options may not exceed ten years from the date of grant. During the three months ended June 30, 2011, the Company issued to a former employee an option grant for 2,000,000 shares of its Common Stock with an exercise price of $0.21, a five year vesting schedule (vesting in equal increments in years three, four and five) and a ten year term. In connection with this option grant, the Company recognized compensation expense of approximately $61,000 during the year ended December 31, 2011. Subsequent to December 31, 2011, this option grant was terminated, as provided for in the option agreement, as a result of the termination of employment of the option holder.
The Company did not award stock based compensation during the yearsyear ended December 31, 2010 and 2009.2010.
Fair Value Measurements
Effective January 1, 2008, the Company adopted the provisions of ASC 820, “Fair Value Measurements” (“ASC 820”), for financial assets and financial liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosure about fair value measurements. ASC 820 applies to all financial instruments that are being measured and reported on a fair value basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three levels:
| · | Level 1 Inputs-Unadjusted quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 Inputs-Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
· | · | Level 3 Inputs-Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
In February 2008, ASC 820 was modified to delay the effective date for applying fair value measurement disclosures for nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 18, 2008. The implementation of this provision of ASC 820 for these assets and liabilities effective January 1, 2009, did not affect the Company’s financial position or results of operations but did result in additional disclosures.
In August 2009, the FASB modified ASC 820 to address the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available. In such circumstances, a reporting entity is required to measure fair value using one or more of the following techniques: (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset, or the quoted prices for similar liabilities or similar liabilities when traded as assets; or (ii) another valuation technique that is consistent with ASC 820. The FASB also clarified that when estimating the fair value of the liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This modification also clarified that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This guidance is effective for the first reporting period (including interim periods) beginning after issuance, the adoption of which in the fourth quarter of 2009 did not affect the Company’s financial position or results of operations.32
Subsequent Events
In May 2009, ASC 855 was issued, which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, guidance was provided regarding (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures that an entity should make about events or transactions that occur after the balance sheet date. The provisions of ASC 855 are to be applied prospectively and are effective for interim or annual financial periods ending after June 15, 2009. The adoption of the provisions of ASC 855 in the second quarter of 2009 did not affect the Company’s financial position or results of operations but did result in additional disclosures.
The Company has evaluated subsequent events that occurred after December 31, 20102011 through the filing of this Form 10-K. Any material subsequent events that occurred during this time have been properly recognized or disclosed in the Company’s financial statements.
Note 3. Wilhelmina Acquisition
On August 25, 2008, in conjunction with the Company’s strategy to redeploy its assets to enhance stockholder value, the Company entered into the Acquisition Agreement to acquire the Wilhelmina Companies. At the closing of the Wilhelmina Transaction on February 13, 2009, the Company paid an aggregate purchase price of approximately $22,432,000 in connection therewith, of which approximately $16,432,000 was paid for the outstanding equity interests of the Wilhelmina Companies and $6,000,000 in cash repaid the outstanding balance of a note held by a Control Seller. The purchase price included approximately $7,609,000 (63,411,131 shares) of the Company’s common stock, par value $0.01 per share (“Common Stock”), valued at $0.12 per share (representing the closing price of the Common Stock on February 13, 2009) that was issued in connection with the merger of Wilhelmina Acquisition with and into Wilhelmina International. Approximately $8,823,000 was paid to acquire the equity interests of the remaining Wilhelmina Companies. Upon the closing of the Wilhelmina Transaction, the Control Sellers and Patterson obtained certain demand and piggyback registration rights pursuant to a registration rights agreement with respect to the Common Stock issued to them under the Acquisition Agreement. The registration rights agreement contains certain indemnification provisions for the benefit of the Company and the registration rights holders, as well as certain other customary provisions.
The purchase price was subject to certain post-closing adjustments, which were to be effected against a total of 19,229,746 shares of Common Stock (valued at approximately $2,307,000 on February 13, 2009) (the “Restricted Shares”) that were held in escrow pursuant to the Acquisition Agreement. The Restricted Shares held in escrow were intended to support earn-out offsets and indemnification obligations of the Sellers. The Control Sellers were required to leave in escrow, through 2011, any stock “earned” following resolution of “core” adjustment,adjustments, up to a total value of $1,000,000. Losses at WAM and Wilhelmina Miami, respectively, could be offset against any positive earn-out with respect to the other company. Losses in excess of earn-out amounts could also result in the repurchase of the remaining shares of Common Stock held in escrow for a nominal amount. Working capital deficiencies could also reduce positive earn-out amounts.
After the closing, the parties became engaged in a dispute relating to a purchase price adjustment being sought by the Company in connection with the Wilhelmina Transaction and other related matters.
On October 18, 2010, the Company, together with Newcastle Partners, L.P. (“Newcastle”) and the Control Sellers entered into a Global Settlement Agreement (the “Settlement Agreement”). Under the Settlement Agreement, (i) a total of 18,811,686 Restricted Shares were released to the Control Sellers, (ii) all the Company’s future earn-out obligations relating to the operating results of WAM under the Acquisition Agreement were cancelled and (iii) (A) approximately 39% (representing the amount that would otherwise be paid to Krassner L.P.) of the first $2 million of the Company’s earn-out obligations relating to the operating results of Wilhelmina Miami under the Acquisition Agreement (the “Miami Earnout”) was cancelled and (B) approximately 69% (representing the amounts that would otherwise be paid in the aggregate to Krassner L.P. and Lorex) of any such Miami Earnout obligation over $2 million was cancelled. With respect to any portion of the Miami Earnout that may become payable, the Company further agreed not to assert any setoff thereto in respect of (1) any negative closing net asset adjustment determined under the Acquisition Agreement or (2) any divisional loss in respect of WAM. The Company also reimbursed certain documented legal fees of the Control Sellers in the amount of $300,000, which amount was recorded as settlement expense in the accompanying consolidated statement of operations for the year ended December 31, 2010.
Pursuant to the Settlement Agreement, the parties agreed to dismiss the litigation then pending in the U.S. District Court, Southern District of New York concerning the Restricted Shares. The parties also agreed to customary mutual releases and further agreed to withdraw their respective indemnification claims under the Acquisition Agreement, except that the Company preserved indemnification rights with respect to certain specified matters.
With respect to corporate governance matters, the Settlement Agreement required that (i) Newcastle and the Control Sellers concurrently enter into an amendment to that certain Mutual Support Agreement dated August 25, 2008, which amendment providesprovided for the addition of two (2) independent directors to the Company’s Board of Directors, subject to a pre-determined selection process, and (ii) within six months following the execution of the Settlement Agreement, the Board mustwas required to evaluate and consider updates and/or clarifications to the Company’s Bylaws, whichwith such updates shallto address (a) the advance notice procedures for nominations and stockholder proposals, (b) the Company’s fiscal year and (c) such other matters as the Board determines.determined. The Company also agreed to enter into an amendment to its Rights Agreement to, among other things, rescind the designation of the Control Sellers as Acquiring Persons thereunder.
The Miami Earnout, payable in 2012, is calculated based on the three year average of audited Wilhelmina Miami EBITDA beginning January 1, 2009, multiplied by 7.5, payable in cash or stock (at the Control Sellers’ election). The fair value of the Miami Earnout was determined using the Company’s estimate (Level 3 inputs) that Wilhelmina Miami has a 75% probability of achieving the average EBITDA.
DuringThe Miami Earnout, payable in accordance with the quarter ended September 30,Acquisition Agreement and Settlement Agreement, was to be calculated based on the three year average of audited Wilhelmina Miami EBITDA beginning January 1, 2009 and ending December 31, 2011, multiplied by 7.5, and payable in cash or stock. As of December 31, 2010, management’s estimate of the fair value of the Miami Earnout was reduced by $249,000approximately $2,063,000, which management determined based on a number of factors. At December 31, 2011, management computed the actual amount to $2,063,000, asbe paid on the Miami Earnout based on the financial results of the Miami division for the three years ended December 31, 2011 to be $2,174,000. As a result, of a fair value adjustment, which was computed using level 3 inputs, and recorded in the accompanying consolidated statement of operations for the year ended December 31, 2010. 2011, the Company recorded adjustments to the previously estimated fair value of $111,000, of which $36,000 was recorded in the quarter ended December 31, 2011.
Certain continuing indemnification obligations of the Control Sellers under the Acquisition Agreement are subject to offset against the Miami Earnout.
On February 13, 2009, in order to facilitate the closing of the Acquisition Agreement, the Company entered into that certain letter agreement with Esch (the “Esch Letter Agreement”), pursuant to which Esch agreed that $1,750,000 of the cash proceeds to be paid to him at the closing of the Acquisition Agreement would instead be held in escrow. Under the terms of the Esch Letter Agreement, all or a portion of such amount held in escrow was required to be used to satisfy Wilhelmina International’s indebtedness to Signature Bank, in connection with its then existing credit facility with Signature Bank, upon the occurrence of specified events including, but not limited to, written notification by Signature Bank to Wilhelmina International of the termination or acceleration of the credit facility. Any amount remaining was required to be released to Esch upon the replacement or extension of Wilhelmina International’s credit facility with Signature Bank, subject to certain requirements set forth in the Esch Letter Agreement. The Esch Letter Agreement also provided that in the event any portion of the proceeds iswas paid from escrow to Signature Bank, the Company willwould promptly issue to Esch, in replacement thereof, a promissory note in the principal amount of the amount paid to Signature Bank (see Note 4).
Concurrently with the execution of the Acquisition Agreement, the Company entered into a purchase agreement (the “Equity Financing Agreement”) with Newcastle, which at that time owned 19,380,768 shares, or approximately 36% of the outstanding Common Stock, for the purpose of obtaining financing to complete the transactions contemplated by the Acquisition Agreement. Pursuant to the Equity Financing Agreement, upon the closing of the Wilhelmina Transaction, the Company sold to Newcastle $3,000,000 (12,145,749 shares) of Common Stock at $0.247 per share, or approximately (but slightly higher than) the per share price applicable to the Common Stock issuable under the Acquisition Agreement. As a result, Newcastle now owns 31,526,51734,064,466 shares of Common Stock, or approximately 24% of the Company’s outstanding Common Stock. Upon the closing of the Equity Financing Agreement, Newcastle obtained certain demand and piggyback registration rights with respect to the Common Stock it holds, including the Common Stock issued under the Equity Financing Agreement. The registration rights agreement contains certain indemnification provisions for the benefit of the Company and Newcastle, as well as certain other customary provisions.
The Wilhelmina Transaction was accounted for using the acquisition method required by ASC 805.Accounting Standards Codification 805, “Business Combinations.” The fair value methods used for identifiable intangible assets were based on Level 3 inputs making use of discounted cash flows using a weighted average cost of capital. The fair values of current assets and other assumed liabilities were based on the present value of contractual amounts. Contractual amounts of accounts receivable, estimated uncollectible amounts and fair value totaled $6,188,000, $487,000 and $5,701,000, respectively, as of February 13, 2009.
Goodwill has been measured as the excess of the total consideration over the fair values of identifiable assets acquired and liabilities assumed.
The intangible assets acquired include intangible assets with indefinite lives, such as the Wilhelmina brand/trademarks and intangible assets with finite lives, such as customer relationships, model contracts, talent contracts, noncompetition agreements and license agreements, and the remainder of any intangible assets not meeting the above criteria has been allocated to goodwill. Some of these assets, such as goodwill and the Wilhelmina brand/trademarks, are non-amortizable. Other intangible assets, such as customer relationships, model contracts, talent contracts, noncompetition agreements and license agreements, are being amortized on a straight line basis over their estimated useful lives which range from 2 to 7 years.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108"), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 requires the use of both the “iron curtain” and “rollover” approach in quantifying the materiality of misstatements. SAB 108 provides transitional guidance for the correction of errors in prior periods.
In accordance with the application of SAB 108, the Company evaluated the uncorrected financial statement misstatements that were previously considered immaterial under the “rollover” method using the dual methodology required by SAB 108. As a result of this dual methodology approach of SAB 108, the Company corrected the cumulative error in its accounting for liabilities related to foreign withholding of taxes for the quarter ended June 30, 2011, by relieving a liability of approximately $84,000 with a corresponding reduction of goodwill.
Note 4. Line of Credit, Note Payable and Esch Escrow
In January 2008, Wilhelmina International renewed a revolving line of credit (the “Credit Facility”) with Signature Bank with an increase in borrowing capacity to $2,000,000, with availability subject to a borrowing base computation. Interest on the revolving credit note was payable monthly at an annual rate of prime plus one-half percent. The revolving line of credit expired on January 31, 2009. On March 31, 2009, the Company entered into a modification and extension agreement with Signature Bank that extended the maturity date to April 30, 2009. On June 10, 2009, the Company entered into a modification and extension agreement with Signature Bank that extended the maturity date to July 15, 2009. On August 21, 2009, the Company entered into a modification and extension agreement with the bank that extended the maturity date to October 5, 2009.
On December 30, 2009, Signature Bank delivered a demand letter (the “Demand Letter”) to the Company and Wilhelmina International requesting the immediate payment of all outstanding principal and accrued interest in the aggregate amount of approximately $2,019,000 under the Credit Facility.
The delivery of the Demand Letter requesting mandatory repayment of principal under the Credit Facility triggered a “Bank Payoff Event” under the Esch Letter Agreement (see Note 2). As a result, in accordance with the terms of the Esch Letter Agreement, the aggregate amount of $1,750,000 that was held in escrow was released and paid to Signature Bank (the “Escrow Payoff”). As a result of the Escrow Payoff, as of December 30, 2009, a principal sum of $250,000 plus accrued interest totaling approximately $19,000 remained owing to the bank under the Credit Facility. During January 2010, the remaining principal and accrued interest of approximately $269,000 was repaid to the bank pursuant to the Demand Letter.
The Esch Letter Agreement provided that in the event of the payment of funds from escrow to Signature Bank, the Company was required to promptly issue to Esch, in replacement of the funds held in escrow, a promissory note in the principal amount of the amount paid to the bank. Accordingly, on December 31, 2009, the Company issued to Esch a promissory note in the principal amount of $1,750,000 (the “Esch Note”). Interest on the outstanding principal balance of the Esch Note accrued at the “Weighted Average Loan Document Rate” (as defined below) and was payable in arrears on a monthly basis. The “Weighted Average Loan Document Rate” was calculated using a weighted average formula based on the rates applicable to the principal amounts outstanding for each of the two components of the Credit Facility - revolver ($2,000,000 principal outstanding at December 30, 2009 at a rate of prime plus 0.5%) and term loan ($26,000 principal outstanding at December 30, 2009 at a rate of 6.65%) - prior to release of the escrow. Therefore, during the year ended December 31, 2010, the effective interest rate of the Esch Note was prime plus approximately 0.58%, or approximately 3.83%. Principal under the Esch Note was repaid in quarterly installments of $250,000 until December 31, 2010 when the unpaid principal and interest thereon were to have become due and payable. On December 7, 2010, the Company and Esch entered into an amendment (the “Esch Amendment”) to the Esch Note. Under the Esch Amendment, (1) the maturity date of the Esch Note has beenwas extended to June 30, 2011 (from December 31, 2010) and (2) commencing January 1, 2011, the interest rate on outstanding principal under the Esch Note increased to 9.0% per annum and (3) installment payments of remaining principal under the Esch Note is payable as follows: (a) $400,000 on March 31, 2011 and (b) $200,000 on June 30, 2011. annum. In addition, $400,000 was paid on December 31, 2010 and March 31, 2011 and $200,000 was paid on June 30, 2011, pursuant to the Esch Amendment. The Esch Note has been paid in full.
On April 29, 2011, the Company closed a credit agreement (the “Credit Agreement”) for a new $500,000 revolving credit facility with Amegy Bank National Association (“Amegy”). Borrowings under the facility are to be used for working capital and other general business purposes of the Company.
During the three months ended September 30, 2011, the Company drew $500,000 under the Credit Agreement. Generally, amounts outstanding under the Credit Agreement shall bear interest at the greater of Contents(a) 5% per annum or (b) the prime rate (which means, for any day, the rate of interest quoted in The Wall Street Journal as the “Prime Rate”) plus 2% per annum.
The Credit Agreement contains certain representations and warranties and affirmative and negative covenants. Amounts outstanding under the Credit Agreement may be accelerated and become immediately due and payable upon the occurrence of an event of default. All indebtedness and other obligations of the Company under the Credit Agreement are secured by all of the assets of the Company and its subsidiaries, provided, however, that the collateral does not include the intellectual property of the Company or the stock or equity interests in the Company’s subsidiaries.
Credit was available under the facility through February 28, 2012.
In the event thatOn January 12, 2012, the Company closes a newexecuted and closed an amendment (the "Credit Agreement Amendment") to its revolving bank or debtCredit Agreement with Amegy.
Under the terms of the Credit Agreement Amendment, which is effective as of January 1, 2012, (1) total availability under the revolving credit facility which provideswas increased to $1,500,000 (from $500,000), (2) the Company with committed working capital financing, the Company is requiredborrowing base was modified to pay down the Esch Note65% (from 80%) of eligible accounts receivable (as defined in the amountCredit Agreement) and (3) the Company's minimum net worth covenant was increased to $21,250,000 (from $20,000,000). In addition, the maturity date of the funds thatfacility was extended to December 31, 2012. The parties also executed an amendment to their pledge and security agreement ("Security Agreement Amendment") to reflect the Company is initially permittedexecution of the Credit Agreement Amendment. The Company's obligation to drawrepay advances under such new facility. The Esch Note is unsecuredthe amended facility will be evidenced by an amended and may be pre-paid by the Company at any time without penalty or premium.restated promissory note.
Note 5. Restricted Cash
At December 31, 20102011 and 2009,2010, the Company had approximately $222,000 and $180,000, respectively, of restricted cash that serves as collateral for the full amount of an irrevocable standby letter of credit. The letter of credit serves as additional security under the lease extension relating to the Company’s office space in New York that expires in February 2021.
Note 6. Operating Leases
The Company is obligated under non-cancelable lease agreements for the rental of office space and various other lease agreements for the leasing of office equipment. These operating leases expire at various dates through 2021. In addition to the minimum base rent, the office space lease agreements provide that the Company shall pay its pro-rata share of real estate taxes and operating costs as defined in the lease agreement.
During June 2010,Effective July 1, 2011, the Company signedentered into a ten-yearfive-year lease for its New York City office located at 300 Park Avenue South, with an effective date of January 1, 2011.Los Angeles office. The lease commits the Company to rental payments of approximately $41,000$15,000 per month during the term of the lease.
The Company also leases, pursuant to a services agreement (see Note 12)11), certain corporate office space.
Future minimum payments under the lease agreements are summarized as follows:
Years Ending December 31, | | | | | | | |
| | | | | | | |
2011 | | $ | 782 | | |
2012 | | | 442 | | | $ | 812 | | |
2013 | | | 388 | | | | 603 | | |
2014 | | | 478 | | | | 666 | | |
2015 | | | 426 | | | | 619 | | |
2016 | | | | 638 | | |
Thereafter | | | 2,944 | | | | 2,403 | | |
| | | | | | | | | |
| | $ | 5,460 | | | $ | 5,741 | | |
Rent expense totaled approximately $1,081,000$1,062,000 and $910,000$1,081,000 for the years ended December 31, 20102011 and 2009,2010, respectively.
Note 7. Licensing Agreements and Deferred Revenue
The Company is a party to various contracts by virtue of its relationship with certain talent. The various contracts contain terms and conditions which require the revenue and the associated talent cost to be recognized on a straight-line basis over the contract period. The Company has also entered into product licensing agreements with talent it represents. Under the product licensing agreements, the Company will either earn a commission based on a certain percentage of the royalties earned by the talent or earn royalties from the licensee that is based on a certain percentage of net sales, as defined. The Company recognized revenue from product licensing agreements of approximately $780,000$880,000 and $324,000$780,000 for the years ended December 31, 20102011 and 2009,2010, respectively.
Note 8. Revenue Interest
On October 5, 2005, the Company made an investment in Ascendant, a Berwyn, Pennsylvania based alternative asset management company whose funds have investments in long/short equity funds and which distributes its registered funds primarily through various financial intermediaries and related channels. Ascendant had assets under management of approximately $59,100,000 and $37,600,000 as of December 31, 2010 and December 31, 2009, respectively. Prior to closing the Wilhelmina Transaction, the Company’s interest in Ascendant represented the Company’s sole operating business.
The Company entered into the Ascendant Agreement with Ascendant to acquire an interest in the revenues generated by Ascendant. Pursuant to the Ascendant Agreement, the Company is entitled to a 50% interest, subject to certain adjustments, in the revenues of Ascendant, which interest declines if the assets under management of Ascendant reach certain levels. The Company also agreed to provide various marketing services to Ascendant. The total potential purchase price of $1,550,000 under the terms of the Ascendant Agreement was payable in four installments. On April 5, 2006, the Company elected not to make the final two installment payments. The Company believed that it was not required to make the payments because Ascendant did not satisfy all of the conditions in the Ascendant Agreement.
Subject to the terms of the Ascendant Agreement, if the Company does not make an installment payment and Ascendant is not in breach of the Ascendant Agreement, Ascendant has the right to acquire the Company’s revenue interest at a price that would yield a 10% annualized return to the Company. The Company has been notified by Ascendant that Ascendant is exercising this right as a result of the Company’s election not to make the final two installment payments. The Company believes that Ascendant has not satisfied the requisite conditions to repurchase the Company’s revenue interest.
The Company has not recorded any revenue or received any revenue sharing payments pursuant to the Ascendant Agreement since July 1, 2006.
Based on recent discussions with the management of Ascendant and an assessment of the future near-term expected cash flows from the revenue interest, the Company has determined that the present value of expected cash flows from the Ascendant revenue interest is nominal. Therefore, the Company has recognized an asset impairment charge of $803,000 for the year ended December 31, 2009.
Note 9.8. Commitments and Contingencies
The Company is engaged in various legal proceedings that are routine in nature and incidental to its business. None of these proceedings, either individually or in the aggregate, is believed, in the Company’s opinion, to have a material adverse effect on either its consolidated financial position or its consolidated results of operations.
As of December 31, 2010,2011, a number of the Company’s employees were covered by employment agreements that vary in length from one to three years. As of December 31, 2010,2011, total compensation payable under the remaining contractual term of these agreements was approximately $2,878,000.$3,883,000. In general, the employment agreements contain non-compete provisions ranging from six months to one year following the term of the applicable agreement. Subject to certain exceptions, as of December 31, 2010,2011, invoking the non-compete provisions would require the Company to compensate the covered employees during the non-compete period in the amount of approximately $1,411,000.
During the three months ended June 30, 2010, the Company received IRS notices totaling approximately $726,000 related to foreign withholding claims for tax years 2006 and 2008. As part of settlement negotiations with the IRS, the Company determined that approximately $197,000 of the foreign withholding claim for 2008 related to tax liabilities which the Company assumed upon the Wilhelmina Transaction. To satisfy this liability, the Company paid the IRS, including penalties and interest of $26,000, a total of $223,000 during the year ended December 31, 2011. Since this amount was previously accrued as a liability at the Acquisition date, no adjustment was required.
Also during the year ended December 31, 2011, the Company filed a net operating loss carryback claim for the 2008 tax year which resulted in a refund of approximately $163,000. The IRS has not released these funds, which are pending resolution of the foreign withholding claims for 2006 and 2008.
As of December 31, 2011, the Company’s estimate of the foreign withholding claims for tax years 2006 and 2008 is approximately $428,000, which includes approximately $88,000 of additional interest and penalties incurred since June 2010 when the IRS notices were received.
The Company is indemnified by the Control Sellers under the Acquisition Agreement for losses incurred as a result of such deficiency notice, and the Control Sellers have confirmed such responsibility to the Company. Such indemnification is required to be satisfied in cash and/or, at the election of the Company, by offset to future earn-out payments.
Note 10.9. Share Capital
On July 10, 2006, as amended on August 25, 2008, July 20, 2009, February 9, 2010, March 26, 2010, April 29, 2010, June 2, 2010, July 2, 2010, August 2, 2010, September 2, 2010, October 1, 2010, October 18, 2010 and December 8, 2010, the Company entered into a shareholder’s rights plan (the “Rights Plan”) that replaced the Company’s shareholder’s rights plan dated July 10, 1996 (the “Old Rights Plan”) that expired according to its terms on July 10, 2006. The Rights Plan provides for a dividend distribution of one preferred share purchase right (a “Right”) for each outstanding share of Common Stock. The terms of the Rights and the Rights Plan are set forth in a Rights Agreement, dated as of July 10, 2006, by and between the Company and The Bank of New York Trust Company, N.A., now known as The Bank of New York Mellon Trust Company, N.A., as Rights Agent (the “Rights Agreement”).
The Company’s Board of Directors adopted the Rights Plan to protect shareholder value by protecting the Company’s ability to realize the benefits of its net operating loss carryforwards (“NOLs”) and capital loss carryforwards. In general terms, the Rights Plan imposes a significant penalty upon any person or group that acquires 5% or more of the outstanding Common Stock without the prior approval of the Company’s Board of Directors. Shareholders that own 5% or more of the outstanding Common Stock as of the close of business on the Record Date (as defined in the Rights Agreement) may acquire up to an additional 1% of the outstanding Common Stock without penalty so long as they maintain their ownership above the 5% level (such increase subject to downward adjustment by the Company’s Board of Directors if it determines that such increase will endanger the availability of the Company’s NOLs and/or its capital loss carryforwards). In addition, the Company’s Board of Directors has exempted Newcastle, the Company’s largest shareholder, and may exempt any person or group that owns 5% or more if the Board of Directors determines that the person’s or group’s ownership will not endanger the availability of the Company’s NOLs and/or its capital loss carryforwards. A person or group that acquires a percentage of Common Stock in excess of the applicable threshold is called an “Acquiring Person”. Any Rights held by an Acquiring Person are void and may not be exercised. The Company’s Board of Directors authorized the issuance of one Right per each share of Common Stock outstanding on the Record Date. If the Rights become exercisable, each Right would allow its holder to purchase from the Company one one-hundredth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.01 (the “Preferred Stock”), for a purchase price of $10.00. Each fractional share of Preferred Stock would give the shareholder approximately the same dividend, voting and liquidation rights as does one share of Common Stock. Prior to exercise, however, a Right does not give its holder any dividend, voting or liquidation rights.
On August 25, 2008, in connection with the Wilhelmina Transaction, the Company entered into an amendment to the Rights Agreement (the “Rights Agreement Amendment”). The Rights Agreement Amendment, among other things, (i) provides that the execution of the Acquisition Agreement, the acquisition of shares of Common Stock pursuant to the Acquisition Agreement, the consummation of the other transactions contemplated by the Acquisition Agreement and the issuance of stock options to the Sellers or the exercise thereof, will not be deemed to be events that cause the Rights to become exercisable, (ii) amends the definition of Acquiring Person to provide that the Sellers and their existing or future Affiliates and Associates (each as defined in the Rights Agreement) will not be deemed to be an Acquiring Person solely by virtue of the execution of the Acquisition Agreement, the acquisition of Common Stock pursuant to the Acquisition Agreement, the consummation of the other transactions contemplated by the Acquisition Agreement or the issuance of stock options to the Sellers or the exercise thereof and (iii) amends the Rights Agreement to provide that a Distribution Date (as defined below) shall not be deemed to have occurred solely by virtue of the execution of the Acquisition Agreement, the acquisition of Common Stock pursuant to the Acquisition Agreement, the consummation of the other transactions contemplated by the Acquisition Agreement or the issuance of stock options to the Sellers or the exercise thereof. The Rights Agreement Amendment also provides for certain other conforming amendments to the terms and provisions of the Rights Agreement. The date that the Rights become exercisable is known as the “Distribution Date.”
On July 20, 2009, the Company entered into a second amendment to the Rights Agreement (the “Second Rights Agreement Amendment”). The Second Rights Agreement Amendment, among other things, (i) provides that those certain purchases of shares of Common Stock by Krassner L.P. reported on Statements of Change in Beneficial Ownership on Form 4 filed with the SEC on June 3, 2009, June 12, 2009 and June 26, 2009 (the “Krassner Purchases”) will not be deemed to be events that cause the Rights to become exercisable, (ii) amends the definition of Acquiring Person to provide that neither Krassner L.P. nor any of its existing or future Affiliates or Associates (as defined in the Rights Agreement) will be deemed to be an Acquiring Person solely by virtue of the Krassner Purchases and (iii) amends the Rights Agreement to provide that the Distribution Date will not be deemed to have occurred solely by virtue of the Krassner Purchases. The Second Rights Agreement Amendment also provides for certain other conforming amendments to the terms and provisions of the Rights Agreement.
On February 9, 2010, the Company entered into a third amendment to the Rights Agreement (the “Third Rights Agreement Amendment”). The Third Rights Agreement Amendment amended the definition of Distribution Date to provide that the Distribution Date corresponding to the Share Acquisition Date (as defined in the Rights Agreement) that occurred on February 2, 2010 as a result of the Company’s public announcement on such date that Esch, Lorex, Krassner and Krassner L.P. were Acquiring Persons (as defined in the Rights Agreement) under the Rights Agreement (the “Esch-Krassner Acquiring Event”) would be the close of business on April 3, 2010. The Third Rights Agreement Amendment also provided that the Company would be required to give written notice to the Rights Agent and stockholders of the Company of the occurrence of the Esch-Krassner Acquiring Event under the Rights Agreement as soon as practicable after any corresponding Distribution Date.
On March 26, 2010, the Company entered into a fourth amendment to the Rights Agreement (the “Fourth Rights Agreement Amendment”). The Fourth Rights Agreement Amendment further amended the definition of Distribution Date to provide that the Distribution Date corresponding to the Share Acquisition Date that occurred on February 2, 2010, as a result of the Company’s public announcement on such date of the Esch-Krassner Acquiring Event, would be the close of business on May 3, 2010.
On April 29, 2010, the Company entered into a fifth amendment to the Rights Agreement (the “Fifth Rights Agreement Amendment”). The Fifth Rights Agreement Amendment further amended the definition of Distribution Date to provide that the Distribution Date corresponding to the Share Acquisition Date that occurred on February 2, 2010, as a result of the Company’s public announcement on such date of the Esch-Krassner Acquiring Event, would be the close of business on June 3, 2010.
On June 2, 2010, the Company entered into a sixth amendment to the Rights Agreement (the “Sixth Rights Agreement Amendment”). The Sixth Rights Agreement Amendment further amended the definition of Distribution Date to provide that the Distribution Date corresponding to the Share Acquisition Date that occurred on February 2, 2010, as a result of the Company’s public announcement on such date of the Esch-Krassner Acquiring Event, would be the close of business on July 3, 2010.
On July 2, 2010, the Company entered into a seventh amendment to the Rights Agreement (the “Seventh Rights Agreement Amendment”). The Seventh Rights Agreement Amendment further amended the definition of Distribution Date to provide that the Distribution Date corresponding to the Share Acquisition Date that occurred on February 2, 2010, as a result of the Company’s public announcement on such date of the Esch-Krassner Acquiring Event, would be the close of business on August 3, 2010.
On August 2, 2010, the Company entered into an eighth amendment to the Rights Agreement (the “Eighth Rights Agreement Amendment”). The Eighth Rights Agreement Amendment further amended the definition of Distribution Date to provide that the Distribution Date corresponding to the Share Acquisition Date that occurred on February 2, 2010, as a result of the Company’s public announcement on such date of the Esch-Krassner Acquiring Event, would be the close of business on September 3, 2010.
On September 2, 2010, the Company entered into a ninth amendment to the Rights Agreement (the “Ninth Rights Agreement Amendment”). The Ninth Rights Agreement Amendment further amended the definition of Distribution Date to provide that the Distribution Date corresponding to the Share Acquisition Date that occurred on February 2, 2010, as a result of the Company’s public announcement on such date of the Esch-Krassner Acquiring Event, would be the close of business on October 3, 2010.
On October 1, 2010, the Company entered into a tenth amendment to the Rights Agreement (the “Tenth Rights Agreement Amendment”). The Tenth Rights Agreement Amendment further amended the definition of Distribution Date to provide that the Distribution Date corresponding to the Share Acquisition Date that occurred on February 2, 2010, as a result of the Company’s public announcement on such date of the Esch-Krassner Acquiring Event, would be the close of business on November 3, 2010.
On October 18, 2010, the Company entered into an eleventh amendment to the Rights Agreement (the “Eleventh Rights Agreement Amendment”). The Eleventh Rights Agreement Amendment, entered into in connection with the Settlement Agreement, amends the definition of Distribution Date to provide that the Distribution Date shall not occur with respect to the Share Acquisition Date that occurred on February 2, 2010, as a result of the Company’s public announcement on such date of the Esch-Krassner Acquiring Event. The Eleventh Rights Agreement Amendment also provides that the rights under the Rights Agreement shall not be affected by (i) those certain prior coordination activities among the Control Sellers which preceded the Company’s declaration of the Esch-Krassner Acquiring Event and which did not involve any acquisition of record or beneficial ownership of the Company’s securities other than any deemed acquisition of beneficial ownership by one Control Seller of Company securities owned of record by another Control Seller (including, without limitation, the specific activities described in the Schedules 13D (a) filed by Lorex, Esch and Peter Marty on November 20, 2009 and March 17, 2010 and (b) filed by Krassner L.P., Krassner and Krassner Investments, Inc. on November 20, 2009 and March 16, 2010) and (ii) similar past or future coordination activities between or among any Control Sellers which do not involve any acquisition of record or beneficial ownership of the Company’s securities other than any deemed acquisition of beneficial ownership by one Control Seller of Company securities owned of record by another Control Seller, whether or not reported on any Schedule 13D, including but not limited to (a) holding or expressing similar opinions regarding any matter affecting the Company or (b) coordinating activities as directors or stockholders of the Company (the foregoing clauses (i) and (ii), the “Wilhelmina Control Seller Coordination Activities”). Specifically, the Eleventh Rights Agreement Amendment (i) amends the definition of Acquiring Person to provide that the Control Sellers shall not be deemed to be Acquiring Persons solely by virtue of any Wilhelmina Control Seller Coordination Activities, (ii) provides that a Distribution Date shall not be deemed to have occurred solely by virtue of any Wilhelmina Control Seller Coordination Activities, (iii) provides that Control Seller Coordination Activities shall not be deemed to be events that cause the Rights to become exercisable and (iv) amends the definition of Triggering Event to provide that no Triggering Event shall result solely by virtue of any Wilhelmina Control Seller Coordination Activities.
On December 8, 2010, the Company entered into a twelfth amendment to the Rights Agreement (the “Twelfth Rights Agreement Amendment”). The Twelfth Rights Agreement Amendment, among other things, (i) amends the definition of Acquiring Person to provide that none of Esch, Lorex, Krassner or Krassner L.P. shall be deemed to be an Acquiring Person solely by virtue of purchases by each of Lorex and Krassner L.P. of up to 500,000 shares of Common Stock in the aggregate, in each case, during the period commencing on December 8, 2010 and ending on November 30, 2011 (“Permitted Purchases”), (ii) amends the definition of Triggering Event to provide that no Triggering Event shall result solely by virtue of any Permitted Purchases, (iii) provides that a Distribution Date shall not be deemed to have occurred solely by virtue of any Permitted Purchases and (iv) provides that, effective as of the date of the Twelfth Rights Agreement Amendment, no Permitted Purchases shall be deemed to be events that cause the Rights to become exercisable. The Twelfth Rights Agreement Amendment also provides for certain other conforming and technical amendments to the terms and provisions of the Rights Agreement.
In connection with the Wilhelmina Transaction, the Company issued 12,145,749 shares of Common Stock to Newcastle and 63,411,131 shares to Patterson, the Control Sellers and their advisor.
At the Company’s annual meeting of stockholders held on February 7, 2012, the stockholders of the Company approved a proposal to grant authority to the Company's Board of Directors to effect at any time prior to December 31, 2012 a reverse stock split of the Company's common stock at a ratio within the range from one-for-ten to one-for-forty, with the exact ratio to be set at a whole number within this range to be determined by the Board of Directors in its discretion.
Note 11.10. Income Taxes
The income tax expense is comprised of the following:
| | Year Ended December 31, 2010 | | | Year Ended December 31, 2009 | | | Year Ended December 31, 2011 | | | Year Ended December 31, 2010 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 51 | | | $ | - | | | $ | 70 | | | $ | 51 | |
State | | | 385 | | | | 54 | | | | 705 | | | | 385 | |
Total | | | 436 | | | | 54 | | | | 775 | | | | 436 | |
Deferred: | | | | | | | | | | | | | | | | |
Federal | | | 53 | | | | - | | | | 25 | | | | 53 | |
State | | | (53 | ) | | | - | | | | (25 | ) | | | (53 | ) |
Total | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 436 | | | $ | 54 | | | $ | 775 | | | $ | 436 | |
The income tax expense differs from the amount computed by applying the statutory federal and state income tax rate of 35%rates to the net income (loss) before income tax benefit. The reasons for these differences were as follows (in thousands):
| | Year Ended December 31, 2010 | | | Year Ended December 31, 2009 | |
Computed income tax expense (benefit) at statutory rate | | $ | 497 | | | $ | (608 | ) |
(Decrease) increase in taxes resulting from: | | | | | | | | |
Permanent and other deductions, net | | | 66 | | | | (517 | ) |
State income taxes, net of federal benefit | | | 209 | | | | 106 | |
Acquisition of Wilhelmina | | | - | | | | 1,365 | |
Valuation allowance | | | (336 | ) | | | (24,270 | ) |
Expiration of capital loss carryforward | | | - | | | | 23,978 | |
Total income tax expense (benefit) | | $ | 436 | | | $ | 54 | |
| | Year Ended December 31, 2011 | | | Year Ended December 31, 2010 | |
Computed income tax expense at statutory rate | | $ | 820 | | | $ | 497 | |
Increase in taxes resulting from: | | | | | | | | |
Permanent and other deductions, net | | | 115 | | | | 66 | |
State income taxes, net of federal benefit | | | 456 | | | | 209 | |
Valuation allowance | | | (616 | ) | | | (336 | ) |
Total income tax expense | | $ | 775 | | | $ | 436 | |
The tax effect of significant temporary differences, which comprise the deferred tax liability, is as follows (in thousands):
| | | | | | | | | | | | |
Deferred tax asset: | | | | | | | | | | | | |
Net operating loss carryforward | | $ | 4,495 | | | $ | 5,335 | | | $ | 2,443 | | | $ | 4,495 | |
AMT credits | | | | 124 | | | | - | |
Accrued expenses | | | 334 | | | | 358 | | | | 771 | | | | 334 | |
Property and equipment principally due to differences in depreciation | | | 44 | | | | 54 | | | | 50 | | | | 44 | |
Allowance for doubtful accounts | | | 193 | | | | 161 | | | | 294 | | | | 193 | |
Intangible assets | | | 1,585 | | | | 735 | | | | 1,601 | | | | 1,585 | |
Other | | | 50 | | | | 295 | | |
Asset impairment | | | | 281 | | | | 50 | |
Less: Valuation allowance | | | (4,383 | ) | | | (4,719 | ) | | | (3,153 | ) | | | (4,383 | ) |
Net deferred income tax asset | | $ | 2,318 | | | $ | 2,219 | | | $ | 2,411 | | | $ | 2,318 | |
Deferred tax liability: | | | | | | | | | | | | | | | | |
Intangible assets-brand name | | | (1,800 | ) | | | (1,800 | ) | | | (1,800 | ) | | | (1,800 | ) |
Intangible assets-other | | | (2,318 | ) | | | (2,219 | ) | | | (2,411 | ) | | | (2,318 | ) |
Net deferred tax liability | | | (4,118 | ) | | | (4,019 | ) | | | (4,211 | ) | | | (4,118 | ) |
Net deferred tax asset/(liability) | | $ | (1,800 | ) | | $ | (1,800 | ) | | $ | (1,800 | ) | | $ | (1,800 | ) |