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 straight-line over the contract period. The Company also has 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. For the three and sixnine months ended JuneSeptember 30, 2009, the Company recognized approximately $89,000 and $136,000,$225,000, respectively, of revenue from product licensing agreements.
On October 5, 2005, the Company made 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.
The Company entered into an agreement (the “Ascendant Agreement”) with Ascendant to acquire an interest in the revenues generated by Ascendant. Ascendant had assets under management of approximately $35,200,000$36,800,000 and $35,600,000 as of JuneSeptember 30, 2009 and December 31, 2008, respectively. The Company has not recorded any revenue or received any revenue sharing payments for the period from July 1, 2006 through JuneSeptember 30, 2009. According to the Ascendant Agreement, if Ascendant acquires the revenue interest from the Company, Ascendant must pay the Company a return on the capital that it invested.
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 JuneSeptember 30, 2009, tena number of the Company’s employees were covered by employment agreements that vary in length from one to three years. Total compensation remaining payable under these agreements approximated $3,532,000.$3,003,000. 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, invoking the non-compete provisions would require the Company to compensate the covered employees during the non-compete period. As of JuneSeptember 30, 2009, total compensation payable under the non-compete provisions approximated $1,716,000.$1,766,000.
The Company, which was formerly known as Billing Concepts Corp. (“BCC”), was incorporated in the state of Delaware in 1996. BCC was previously a wholly owned subsidiary of U.S. Long Distance Corp. (“USLD”) and principally provided third-party billing clearinghouse and information management services to the telecommunications industry (the “Transaction Processing and Software Business”). Upon its spin-off from USLD, BCC became an independent, publicly held company. In October 2000, the Company completed the sale of several wholly owned subsidiaries that comprised the Transaction Processing and Software Business to Platinum Holdings (“Platinum”) for consideration of $49,700,000 (the “Platinum Transaction”).
Under the terms of the Platinum Transaction, all leases and corresponding obligations associated with the Transaction Processing and Software Business were assumed by Platinum. Prior to the Platinum Transaction, the Company guaranteed two operating leases for office space of the divested companies. The first lease was related to office space located in San Antonio, Texas, and expired in 2006. The second lease is related to office space located in Austin, Texas, and expires in 2010. Under the original terms of the second lease, the remaining minimum undiscounted rent payments total approximately $709,000$354,000 at JuneSeptember 30, 2009. In conjunction with the Platinum Transaction, the purchaser agreed to indemnify the Company should the underlying operating companies not perform under the terms of the office leases. The Company can provide no assurance as to the purchaser’s ability, or willingness, to perform its obligations under the indemnification. The Company does not believe it is probable that it will be required to perform under the remaining lease guarantee and, therefore, no liability has been accrued in the Company’s financial statements.
Note 11. Share Capital
On July 10, 2006, as amended on August 25, 2008 and July 20, 2009, the Company entered into a shareholders rights plan (the “Rights Plan”) that replaced the Company’s shareholders 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.
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 2008 Annual Meeting, the Company’s stockholders approved and adopted an amendment to the Certificate of Incorporation to increase the number of authorized shares of Common Stock from 75,000,000 to 250,000,000.
Also, at the 2008 Annual Meeting, the Company’s stockholders approved a proposal granting authority to the Company’s Board of Directors to effect at any time prior to December 31, 2009 a reverse stock split of the Common Stock at a ratio within the range from one-for-ten to one-for-thirty, with the exact ratio to be set at a whole number within this range to be determined by the Company’s Board of Directors in its discretion.
Below is a table showing changes in Common Stock and paid-in capital during the sixnine months ended JuneSeptember 30, 2009 (in thousands, except share data):
| | Additional Paid-in Capital | | | | | | | |
Balance December 31, 2008 | | $ | 75,357 | | | | 53,883,872 | | | $ | 539 | |
Common Stock issued in the Wilhelmina Transaction to Patterson, Control Sellers and their advisors | | | 6,975 | | | | 63,411,131 | | | | 634 | |
| | | | | | | | | | | | |
Newcastle equity issuance cost | | | (139 | ) | | | - | | | | - | |
Common Stock issued to Newcastle under Equity Financing Agreement | | | 2,879 | | | | 12,145,749 | | | | 121 | |
Balance September 30, 2009 | | $ | 85,072 | | | | 129,440,752 | | | $ | 1,294 | |
| | Additional Paid-in Capital | | | | | | | |
Balance December 31, 2008 | | $ | 75,357 | | | | 53,883,872 | | | $ | 539 | |
Common Stock issued in the Wilhelmina Transaction to Patterson, Control Sellers and their advisors | | | 6,975 | | | | 63,411,131 | | | | 634 | |
Newcastle equity issuance cost | | | (139 | ) | | | - | | | | - | |
Common Stock issued to Newcastle under Equity Financing Agreement | | | 2,879 | | | | 12,145,749 | | | | 121 | |
Balance June 30, 2009 | | $ | 85,072 | | | | 129,440,752 | | | $ | 1,294 | |
16
Note 12. Income Taxes
As of December 31, 2008, the Company had a federal income tax loss carryforward of approximately $13,400,000, which begins expiring in 2019. In addition, the Company had a federal capital loss carryforward of approximately $68,500,000 which expires in 2009. 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 acquisition. Ownership changes, as defined in the Internal Revenue Code, may have limited 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.
Note 13. Related Parties
Mark Schwarz, Chief Executive Officer and Chairman of Newcastle Capital Management, L.P. (“NCM”), John Murray, Chief Financial Officer of NCM, and Evan Stone, the former General Counsel of NCM, hold executive officer and board of director positions with the Company as follows: Chairman of the Board and Chief Executive Officer, Director and Chief Financial Officer, and Director and General Counsel and Secretary, respectively, of the Company. NCM is the general partner of Newcastle, which owns 31,526,517 shares of Common Stock.
The Company’s corporate headquarters are located at 200 Crescent Court, Suite 1400, Dallas, Texas 75201, which are also the offices of NCM. The Company occupies a portion of NCM space on a month-to-month basis at $2,500 per month, pursuant to a services agreement entered into between the parties. Pursuant to the services agreement, the Company receives the use of NCM’s facilities and equipment and accounting, legal and administrative services from employees of NCM. The Company incurred expenses pursuant to the services agreement totaling approximately $8,000 and $40,000$48,000 for the three and sixnine months ended JuneSeptember 30, 2009, respectively, and $8,000 and $16,000$24,000 for the three and sixnine months ended JuneSeptember 30, 2008, respectively.
The Company owed NCM approximately $70,000$78,000 and $24,000$69,000 as of JuneSeptember 30, 2009 and 2008, respectively.
On August 25, 2008, concurrently with the execution of the Acquisition Agreement, the Company entered into the Equity Financing Agreement with Newcastle for the purpose of obtaining financing to complete the transactions contemplated by the Acquisition Agreement (see Note 4).
Note 14. Treasury Stock
In 2000, the Company’s Board of Directors approved the adoption of a common stock repurchase program. Under the terms of the program, the Company may purchase an aggregate of $25,000,000 of its Common Stock in the open market or in privately negotiated transactions. The Company records repurchased Common Stock at cost. The Company made no purchases of Common Stock during the quarter ended JuneSeptember 30, 2009. As of JuneSeptember 30, 2009, the Company has purchased an aggregate of $20,100,000, or 8,300,000 shares of Common Stock under the program, which shares have been placed in treasury. The Company does not have any plans to make additional purchases of Common Stock under the program.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion of the interim unaudited condensed consolidated financial condition and results of operations for the Company and its subsidiaries for the three and sixnine months ended JuneSeptember 30, 2009 and JuneSeptember 30, 2008. It should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements of the Company, the notes thereto and other financial information included elsewhere in this report, and the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as amended.
The following discussion of the results of operations for the three and sixnine months ended JuneSeptember 30, 2009, compared to the three and sixnine months ended JuneSeptember 30, 2008, has been separated into two sections.
The first section is a discussion of the Company’s Unaudited Interim Condensed Consolidated Financial Statements included in this report, which takes into account the results of operations, financial condition and cash flows of the Wilhelmina Companies from February 13, 2009 (the closing date of the Wilhelmina Transaction) through JuneSeptember 30, 2009.
The second section is a discussion of pro forma unaudited financial information of the Wilhelmina Companies for the three and sixnine months ended JuneSeptember 30, 2009 and JuneSeptember 30, 2008, which does not take into account any amounts attributable to the Company’s operations at the holding company level during such periods, including corporate overhead, amortization of intangibles, acquisition transaction fees and interest income.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking” statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words “anticipate”, “believe”, “estimate”, “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, the Company’s success in integrating the operations of the Wilhelmina Companies in a timely manner, or at all, the Company’s ability to realize the anticipated benefits of the Wilhelmina Companies to the extent, or in the timeframe, anticipated, competitive factors, general economic conditions, the interest rate environment, governmental regulation and supervision, seasonality, changes in industry practices, one-time events and other factors described herein and in other filings made by the Company with the SEC. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.
Overview
Wilhelmina’s primary business is fashion model management, which activity is headquartered in New York City. Wilhelmina 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. 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 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 Company believes its position in the fashion model management industry provides a platform for organic growth, business line extension, and branded consumer goods and licensing opportunities, as well as acquisitive growth.
The fashion model management industry is highly fragmented, with smaller, local talent management firms frequently competing with a small group of internationally operating talent management firms for client assignments. New York City, Los Angeles and Miami, as well as Paris, Milan and London are considered the most important markets for the fashion talent management industry; most of the leading international firms are headquartered in New York City, which is considered to be the “capital” of the global fashion industry. Apart from Wilhelmina and Paris-based and publicly-listed Elite SA (and now Wilhelmina), all other fashion talent management firms are privately-held. The business of talent management firms such as Wilhelmina is related to the state of the advertising industry, as demand for talent is driven by print, TV and other forms of media 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 led to increasingly volatile capital markets over the course of 2008 and 2009. During recent months, the financial services, automotive and other sectors of the global economy have come under increased pressure, resulting in, among other consequences, extraordinarily difficult conditions in the capital and credit markets and a global economic recession that has negatively impacted Wilhelmina’s clients’ spending on the services that the Company provides.
During the sixnine months ended JuneSeptember 30, 2009, the Wilhelmina Companies experienced a decline in the rate of revenue growth compared to the comparable period of the previous year.year. Additionally, due to the rapidly changing economic conditions, the Company cannot accurately forecast its clients’ spending plans in the near term. The Company intends to continue to closely monitor economic conditions, client spending and other factors, and in response, will take actions to reduce costs, manage working capital and conserve cash. In the current economic environment, there can be no assurance as to the effects on the Company of future economic circumstances, client spending patterns, client credit worthiness and other developments and whether, or to what extent, the Company’s efforts to respond to them will be effective.
Recent Events
On February 13, 2009, the Company closed the Wilhelmina Transaction and acquired the Wilhelmina Companies as discussed in further detail elsewhere in this Form 10-Q. 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, which it acquired on October 5, 2005, represented the Company’s sole operating business. 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.
Ascendant
The Company entered into an agreement (the “Ascendant Agreement”) with Ascendant to acquire an interest in the revenues generated by Ascendant. Ascendant had assets under management of approximately $35,200,000$36,800,000 and $35,600,000 as of JuneSeptember 30, 2009 and December 31, 2008, respectively. The Company has not recorded any revenue or received any revenue sharing payments for the period from July 1, 2006 through JuneSeptember 30, 2009. According to the Ascendant Agreement, if Ascendant acquires the revenue interest from the Company, Ascendant must pay the Company a return on the capital that it invested.
Results of Operations of the Company for the Three and SixNine Months Ended JuneSeptember 30, 2009 Compared to the Three and SixNine Months Ended JuneSeptember 30, 2008
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, Runway, 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,assured; revenues from agent relationships whereby the commissions paid by models as a percentage of their gross earnings and a separate service charge, paid by clients in addition to the booking fees, is calculated as a percentage of the models’ booking fees. While grossGross billings are not formally recorded as a line item in the financial statements, it remains an important business metric that ultimately drives 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.
Expense Trends
Prior to the closing of the Wilhelmina Transaction, Krassner and Esch, the former principal equity holders of the Wilhelmina Companies, received salary, bonus and consulting fee payments, under certain agreements, in an amount of approximately $975,000 annually. As neither Krassner nor Esch continuecontinued to serve as officers or directors of the Company as of the closing of the Wilhelmina Transaction, these payments to Krassner and Esch have ceased. Similarly, upon the closing of the Wilhelmina Transaction, a $6,000,000 promissory note, carrying an interest rate of 12.5% for an annual interest payment of $750,000, in favor of Krassner L.P., a Control Seller, was repaid. Taken together, following the closing of the Wilhelmina Transaction, annual operating expenses and interest expense, which have historically included the above willdo not include costs of $1,725,000 due to the elimination of these agreements and the repayment of the promissory note. The
Beginning April 2009, the Company expects to incurbegan incurring compensation expense of approximately $450,000 annually, related to the positions of chief executive officer, chief financial officer and general counsel and could employ certain individuals (including but not limited tocounsel. Also, post transaction, the Company continued the employment of Esch and/or Krassner) in a consulting capacity to facilitate the transition of the Wilhelmina CompaniesCompanies’ business to the executive management team. During the three months ended September 30, 2009, the Company entered into a consulting agreement with Esch which has an annual cost of $150,000. The Company incurred compensation and consulting expenses with Esch totaling approximately $33,000 and $80,000 for the three and nine months ended September 30, 2009, respectively. These costs have been classified as corporate overhead, and along with the executive compensation expenses, would somewhat offset the $1,725,000 from the elimination of the abovementionedabove mentioned agreements.
Gross Billings
During the three and sixnine months ended JuneSeptember 30, 2009, gross billings of the Company were approximately $10,206,000$10,011,000 and $14,878,000,$25,023,000, respectively, compared to $0 during the three and sixnine months ended JuneSeptember 30, 2008. The Company completed the Wilhelmina Transaction on February 13, 2009 and, therefore, recorded gross billings of the Wilhelmina Companies for the period from February 13, 2009 through June 30, 2009.
Revenues
During the three and sixnine months ended JuneSeptember 30, 2009, revenues of the Company were approximately $9,274,000$9,108,000 and $13,103,000,$22,211,000, respectively, compared to $0 during the three and sixnine months ended JuneSeptember 30, 2008. The Company completed the Wilhelmina Transaction on February 13, 2009 and, therefore, recorded revenues of the Wilhelmina Companies for the period from February 13, 2009 through JuneSeptember 30, 2009, in its statementstatements of operations for the sixthree and nine months ended JuneSeptember 30, 2009.
License Fees and Other Income
The Company completed the Wilhelmina Transaction on February 13, 2009 and, therefore, recorded license fees and other income of the Wilhelmina Companies for the period from February 13, 2009 through JuneSeptember 30, 2009, in its statementstatements of operations for the sixthree and nine months ended JuneSeptember 30, 2009.
The Company has an agreement with an unconsolidated affiliate to provide management and administrative services, as well as sharing of space. For the three and sixnine months ended JuneSeptember 30, 2009, management fee income from the unconsolidated affiliate amounted to approximately $27,000$31,000 and $41,000,$72,000, respectively, and $0 for the three and sixnine months ended 2008.
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 three and sixnine months ended JuneSeptember 30, 2009, license fees totaled approximately $45,000$62,000 and $76,000,$138,000, respectively, and $0 for the three and sixnine months ended JuneSeptember 30, 2008.
The Company has entered into two product licensing agreements with two clients (each a “Licensee”) and a related talent (the “Talent”) they represent. Under the first agreement, the Company earns service charges from the Licensee and commissions from the Talent for services performed in connection with the licensing agreement. This licensing agreement has a six-yearnine-year term, which ends March 31, 2014. During the first three years of the agreement, the Talent and the Company are required to render services to the Licensee in exchange for a guaranteed minimum payment. The next three years of the agreement is the sell-off period, as defined. During the sell-off period, the Talent and the Company are not required to render services. The Talent will earn royalties based on a certain percentage of net sales, as defined, and the Company will earn a commission based on a certain percentage of the royalties earned by the Talent. For the three and sixnine months ended JuneSeptember 30, 2009, the Company recognized approximately $37,000$52,000 and $49,000,$101,000, respectively, of revenue from this licensing agreement.
Under the second licensing agreement, the Company earns commissions from the Talent it represents and royalties from the client that are based on a certain percentage of net sales, as defined. The initial term of this second agreement expires on December 31, 2012. The second agreement is renewable for another two years if certain conditions are met. For the three and sixnine months ended JuneSeptember 30, 2009, the Company recognized approximately $52,000$37,000 and $87,000,$124,000, respectively, of revenues from this agreement.
Other income includes mother agency fees that are paid to the Company by another agency when the other agency books a model under contract with the Company for a client engagement. Other income also consists of fees derived from participants in the Company’s model search contests and miscellaneous fees charged to models for various services provided.
contests. Other income also consists of 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 is now in its second season (which began airing in June 2009 on the network channel TV Land Prime). The television series documents the lives of women competing in a modeling competition. The Wilhelmina Companies provided the television series with the talent and the “Wilhelmina” brand image, and will agree to a modeling contract with the winner of the competition, in consideration of a fee per episode produced, plus 15% of Modified Gross Adjusted Receipts by the television network for the series, 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 three and sixnine months ended JuneSeptember 30, 2009, model costs were approximately $6,705,000$6,527,000 and $9,291,000,$15,695,000, respectively, compared to $0 during the three and sixnine months ended JuneSeptember 30, 2008. The Company completed the Wilhelmina Transaction on February 13, 2009 and, therefore, recorded model costs of the Wilhelmina Companies for the period from February 13, 2009 through JuneSeptember 30, 2009, in its statementstatements of operations for the sixthree and nine months ended JuneSeptember 30, 2009.
Operating Expenses
The Company completed the Wilhelmina Transaction on February 13, 2009 and, therefore, recorded operating expenses of the Wilhelmina Companies for the period from February 13, 2009 through JuneSeptember 30, 2009, in its statementstatements of operations for the sixthree and nine months ended JuneSeptember 30, 2009.
Operating expenses consist of costs that support the operations of the Company, including payroll, rent, overhead, insurance, travel, professional fees, amortization and depreciation, acquisition transaction costs and corporate overhead. During the three and sixnine months ended JuneSeptember 30, 2009, operating expenses increased approximately $3,381,000$3,083,000 and $5,550,000,$8,633,000, to approximately $3,476,000$3,164,000 and $5,740,000,$8,904,000, respectively, compared to approximately $95,000$81,000 and $190,000$271,000 during the three and sixnine months ended JuneSeptember 30, 2008, respectively. All operating costs except corporate overhead expenses are attributable to the Wilhelmina Companies and are discussed below.
Salaries and Service Costs
Salaries and service costs are comprised of payroll and related costs and travel costs required to deliver the Company’s services to the customers and models. During the three and sixnine months ended JuneSeptember 30, 2009, salaries and service costs were approximately $1,859,000$1,756,000 and $2,874,000,$4,580,000, respectively, compared to $0 during the three and sixnine months ended JuneSeptember 30, 2008. The Company completed the Wilhelmina Transaction on February 13, 2009 and, therefore, recorded salaries and service costs of the Wilhelmina Companies for the period from February 13, 2009 through JuneSeptember 30, 2009, in its statementstatements of operations for the sixthree and nine months ended JuneSeptember 30, 2009.
Office and General Expenses
Office and general expenses are comprised of office and equipment rents, advertising and promotion, insurance expenses, administration and technology cost. These costs are less directly linked to changes in the Wilhelmina Companies’ revenues than are salaries and service costs. During the three and sixnine months ended JuneSeptember 30, 2009, office and general expenses were approximately $634,000$629,000 and $912,000,$1,541,000, respectively, compared to $0 during the three and sixnine months ended JuneSeptember 30, 2008. The Company completed the Wilhelmina Transaction on February 13, 2009 and, therefore, recorded office and general expenses of the Wilhelmina Companies for the period from February 13, 2009 through JuneSeptember 30, 2009, in its statementstatements of operations for the sixthree and nine months ended JuneSeptember 30, 2009.
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 three and sixnine months ended JuneSeptember 30, 2009, depreciation and amortization expense totaled $535,000$490,000 (of which $509,000$463,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Transaction) and $735,000$1,225,000 (of which $696,000$1,159,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Transaction), respectively, compared to $0 during the three and sixnine months ended JuneSeptember 30, 2008. The Company made approximately $1,000$16,000 and $0 of fixed asset purchases during the sixnine months ended JuneSeptember 30, 2009 and 2008, respectively.
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 and professional fees, corporate office rent and travel. During the three and sixnine months ended JuneSeptember 30, 2009, corporate overhead approximated $433,000$276,000 and $559,000,$885,000, respectively, compared to $95,000$81,000 and $190,000$271,000 for the three and sixnine months ended JuneSeptember 30, 2008, respectively. The increase in corporate overhead is the result of compensation and consulting fees to Esch, officer compensation (see Expense Trends discussion above) for executive officers who filled the roles of chief executive officer, chief financial officer and general counsel for the Company following the Wilhelmina Transaction and additional legal and professional fees incurred to meet public company reporting requirements.
Acquisition Transaction Costs
In December 2007, the FASB released SFAS 141(R), which changed many well-establisheda business combination, accounting practices and significantly affects how acquisition transactions are reflected in the financial statements. Additionally, SFAS 141(R) will affect how companies negotiate and structure transactions, model financial projections of acquisitions and communicate to stakeholders. SFAS 141(R) must be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. In accordance with SFAS 141(R), 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 they are incurred. Prior to January 1, 2009, the effective date of SFAS 141(R) for the Company, acquisition transaction costs were included in the cost of the acquired business. On February 13, 2009, the Company closed the Wilhelmina Transaction, and therefore, in accordance with the Company’s interpretation of SFAS 141(R) transition rules, recorded all previously capitalized acquisition transaction costs of approximately $849,000 as a reduction of earnings 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 has determined relate 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. For the three and sixnine months ended JuneSeptember 30, 2009, the Company recorded acquisition transaction costs of approximately $15,000$13,000 and $660,000,$673,000, respectively.
Interest Income
Interest income totaled approximately $0 and $4,000 during the three and sixnine months ended JuneSeptember 30, 2009, respectively, compared to approximately $62,000$60,000 and $163,000$223,000 during the three and sixnine months ended JuneSeptember 30, 2008, respectively. The decrease in interest income is the result of a significant decrease in yields on cash balances and the full utilization of the Company’s cash balances to fund the closing of the Wilhelmina Transaction on February 13, 2009.
Interest Expense
Interest expense totaled approximately $22,000 and $53,000 during the three and nine months ended September 30, 2009, respectively, compared to $0 during the three and nine months ended September 30, 2008. The term note (in the aggregate principal amount of approximately $96,000 at September 30, 2009) has a fixed annual interest rate of 6.65% and matures December 2009. Interest on the revolving credit line is payable monthly at an annual rate of prime plus one-half percent which equaled to 3.75% at September 30, 2009. The balance of the Company’s revolving credit line was $2,000,000 as of September 30, 2009.
Pro Forma Results of Operations of the Wilhelmina Companies for the Quarter Ended JuneSeptember 30, 2009 Compared to the Quarter Ended JuneSeptember 30, 2008
The Company is providing the unaudited pro forma financial information and discussion below relating solely to the Wilhelmina Companies, without taking into account amortization and depreciation, corporate overhead (any amounts attributable to the Company’s operations at the holding company level), and acquisition transaction cost, to aid you in your analysis of the Company’s financial performance. Certain adjustments have been made to the historical information for the quarter and nine months ended September 30, 2008, to adjust for expenses incurred by the Wilhelmina Companies in connection with the Wilhelmina Transaction. Such information and discussion should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements of the Company and the notes thereto included in this report. The unaudited pro forma information and discussion below is not necessarily indicative of the current or future financial position or operating results of the Company.
Pro Forma Operating Income of the Wilhelmina Companies compared to the historical information for the quarter ended JuneSeptember 30, 2008 for the Wilhelmina Companies acquired on February 13, 2009:
Quarter ended June 30,
(in thousands)
| | | | | | |
| | | $ | | | % of Revenues net of model costs | | | | | | | $ | | | % of Revenues net of model costs | | | | |
Total revenues | | $ | 9,467 | | | | | | | | | $ | 11,629 | | | | | | | |
Model costs | | | 6,705 | | | | | | | | | | 8,236 | | | | | | | |
Revenues net of model costs | | | 2,762 | | | | | | | | | | 3,393 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Salaries and service costs | | | 1,859 | | | | 67.3 | % | | | 74.6 | % | | | 1,776 | | | | 52.3 | % | | | 65.2 | % |
Office and general expenses | | | 634 | | | | 22.9 | % | | | 25.4 | % | | | 947 | | | | 27.9 | % | | | 34.8 | % |
Total operating expenses | | | 2,493 | | | | 90.2 | % | | | 100.0 | % | | | 2,723 | | | | 80.2 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pro forma operating income | | $ | 269 | | | | | | | | | | | $ | 670 | | | | | | | | | |
| | Quarter ended September 30, (in thousands) | |
| | | | | | |
| | | | | | |
| | $ | | | % of Revenues net of model costs | | | | | | $ | | | % of Revenues net of model costs | | | | |
Total revenues | | $ | 9,385 | | | | | | | | | $ | 10,119 | | | | | | | |
Model costs | | | 6,527 | | | | | | | | | | 7,152 | | | | | | | |
Revenues net of model costs | | | 2,858 | | | | | | | | | | 2,967 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Salaries and service costs | | | 1,756 | | | | 61.2 | % | | | 73.7 | % | | | 1,970 | | | | 66.4 | % | | | 78.5 | % |
Office and general expenses | | | 629 | | | | 21.8 | % | | | 26.3 | % | | | 541 | | | | 18.2 | % | | | 21.5 | % |
Total operating expenses | | | 2,385 | | | | 83.0 | % | | | 100.0 | % | | | 2,511 | | | | 84.6 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pro forma operating income | | $ | 473 | | | | | | | | | | | $ | 456 | | | | | | | | | |
Gross Billings
During the quarter ended JuneSeptember 30, 2009, gross billings of the Wilhelmina Companies decreased approximately $640,000,$1,882,000, or 5.9%15.8%, to approximately $10,206,000,$10,011,000, compared to approximately $10,846,000$11,893,000 during the quarter ended JuneSeptember 30, 2008. The Wilhelmina Companies experienced decreases in gross billings across all lines of the core modeling business as a result of a decrease in spending by its clients due to the global economic recession, somewhat offset by an increase in gross billings in the artist management business.
recession.
Revenues net of model costs
During the quarter ended JuneSeptember 30, 2009, revenues net of model costs of the Wilhelmina Companies decreased approximately $631,000,$109,000, or 18.6%3.6%, to approximately $2,762,000,$2,858,000, compared to approximately $3,393,000$2,967,000 during the quarter ended JuneSeptember 30, 2008. The Wilhelmina Companies experienced decreasesyear-over-year decline in gross billings for the quarter ended September 30, 2009, as compared to the quarter ended September 30, 2008, did not have a significant impact on revenues net of model costs acrossfor the core modeling business as a resultquarter ended September 30, 2009, since $1,200,000 of a decreasegross billings for the quarter ended September 30, 2008 resulted in spending by its clients due to the global economic recession, somewhat offset by an increase in revenues, net of model costs, in the artist management business.
deferred revenue.
Operating Expenses
Operating expenses consist of costs that support the operations of the Wilhelmina Companies, including payroll, rent, insurance, travel and professional fees. During the quarter ended JuneSeptember 30, 2009, operating expenses decreased approximately $230,000,$126,000, or 8.4%5.0%, to approximately $2,493,000,$2,385,000, compared to approximately $2,723,000$2,511,000 during the quarter ended JuneSeptember 30, 2008. The decrease in operating expense was primarily attributable to a decline in officesalaries and general expensesservice costs as described below.
Salaries and Service Costs
During the quarter ended JuneSeptember 30, 2009, salaries and service costs increaseddecreased approximately $83,000,$214,000, or 4.7%10.9%, to approximately $1,859,000,$1,756,000, compared to approximately $1,776,000$1,970,000 during the quarter ended JuneSeptember 30, 2008. The approximately $83,000 increasedecrease in salaries and service costs was associated with certain management changes frommostly attributable to a decrease in travel costs incurred by employees when delivering the prior year that resulted in higher salaries for certain key managers.Company’s services to customers and models. Salaries and service costs as a percentage of total operating expenses were 74.6%73.7% and 65.2%78.5% for the quarters ended JuneSeptember 30, 2009 and 2008, respectively.
Office and General Expenses
Office and general expenses are comprised of office and equipment rents, advertising and promotion, overhead expenses, insurance expenses, professional fees and technology cost. These costs are less directly linked to changes in the Wilhelmina Companies’ revenues than salaries and service costs. During the quarter ended JuneSeptember 30, 2009, office and general expenses decreasedincreased approximately $313,000,$88,000, or 33.1%16.2%, to approximately $634,000,$629,000, compared to approximately $947,000$541,000 during the quarter ended JuneSeptember 30, 2008. During the quarter ended June 30, 2008, office and general expenses included a significant amount of accounting and legal expenses associated with the Agreement and preparation of financial information which was included in the proxy statement filed with the notice of the 2008 annual meeting to stockholders. Office and general expenses, as a percentage of total operating expenses, were 25.4%26.3% for the quarter ended JuneSeptember 30, 2009 and 34.8%21.5% for the quarter ended JuneSeptember 30, 2008.
Pro Forma Operating Income
During the quarter ended JuneSeptember 30, 2009, pro forma operating income was approximately $269,000$473,000 compared to operating income of approximately $670,000$456,000 during the quarter ended JuneSeptember 30, 2008, a declinean increase of $401,000,$17,000, or 59.9%3.7%. The declineincrease in pro forma operating income was mostly attributable to a declinethe recognition of certain revenues deferred in revenues which was caused byprior periods and a decrease in spendingtravel related cost incurred by employees during the clients of the Wilhelmina Companies duequarter ended September 30, 2009 as compared to the worldwide economic recession.
quarter ended September 30, 2008.
Pro Forma Results of Operations of the Wilhelmina Companies for the SixNine Months Ended JuneSeptember 30, 2009 Compared to the SixNine Months Ended JuneSeptember 30, 2008
The Company is providing the unaudited pro forma financial information and discussion below relating solely to the Wilhelmina Companies, without taking into account amortization and depreciation, corporate overhead (any amounts attributable to the Company’s operations on the holding company level), and acquisition transaction costs, to aid you in your analysis of the Company’s financial performance. Such information and discussion should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements of the Company and the notes thereto included in this report. The unaudited pro forma information and discussion below is not necessarily indicative of the current or future financial position or operating results of the Company.
Pro Forma Operating Income of the Wilhelmina Companies compared to the historical information for the sixnine months ended JuneSeptember 30, 2008 for the Wilhelmina Companies acquired on February 13, 2009:
Six months ended June 30,
(in thousands)
| | | | | | |
| | | $ | | | % of Revenues net of model costs | | | | | | | $ | | | % of Revenues net of model costs | | | | |
Total revenues | | $ | 17,859 | | | | | | | | | $ | 21,658 | | | | | | | |
Model costs | | | 12,565 | | | | | | | | | | 15,302 | | | | | | | |
Revenues net of model costs | | | 5,294 | | | | | | | | | | 6,356 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Salaries and service costs | | | 3,787 | | | | 71.5 | % | | | 75.4 | % | | | 3,532 | | | | 55.5 | % | | | 69.6 | % |
Office and general expenses | | | 1,237 | | | | 23.8 | % | | | 24.6 | % | | | 1,544 | | | | 24.2 | % | | | 30.4 | % |
Total operating expenses | | | 5,024 | | | | 95.3 | % | | | 100.0 | % | | | 5,076 | | | | 79.7 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pro forma operating income | | $ | 270 | | | | | | | | | | | $ | 1,280 | | | | | | | | | |
| | Nine months ended September 30, (in thousands) | |
| | | |
| | | | | | |
| | $ | | | | % of Revenues net of model costs | | | | | | $ | | | | % of Revenues net of model costs | | | | |
Total revenues | | $ | 27,244 | | | | | | | | | $ | 30,267 | | | | | | | |
Model costs | | | 19,092 | | | | | | | | | | 20,945 | | | | | | | |
Revenues net of model costs | | | 8,152 | | | | | | | | | | 9,322 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Salaries and service costs | | | 5,493 | | | | 67.4 | % | | | 74.7 | % | | | 5,502 | | | | 59.0 | % | | | 74.4 | % |
Office and general expenses | | | 1,866 | | | | 22.8 | % | | | 25.3 | % | | | 1,885 | | | | 20.2 | % | | | 25.6 | % |
Total operating expenses | | | 7,359 | | | | 90.2 | % | | | 100.0 | % | | | 7,387 | | | | 79.2 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pro forma operating income | | $ | 793 | | | | | | | | | | | $ | 1,935 | | | | | | | | | |
Gross Billings
During the sixnine months ended JuneSeptember 30, 2009, gross billings of the Wilhelmina Companies decreased approximately $2,390,000,$4,272,000, or 10.8%12.6%, to approximately $19,691,000,$29,702,000, compared to approximately $22,081,000$33,974,000 during the sixnine months ended JuneSeptember 30, 2008. The Wilhelmina Companies experienced decreases in gross billings across the core modeling business as a result of a decrease in spending by its clients due to the global economic recession, somewhat offset by an increase in gross billings in the artist management business.recession.
Revenues net of model costs
During the sixnine months ended JuneSeptember 30, 2009, revenues net of model costs of the Wilhelmina Companies decreased approximately $1,062,000,$1,170,000, or 16.7%12.5%, to approximately $5,294,000,$8,152,000, compared to approximately $6,356,000$9,322,000 during the sixnine months ended JuneSeptember 30, 2008. The Wilhelmina Companies experienced decreases in revenues, net of model costs, across the core modeling business as a result of a decrease in spending by its clients due to the global economic recession somewhat offset by an increase in revenues, net of model costs, in the artist management business.
recession.
Operating Expenses
Operating expenses consist of costs that support the operations of the Wilhelmina Companies, including payroll, rent, insurance, travel and professional fees. During the sixnine months ended JuneSeptember 30, 2009, operating expenses decreased approximately $52,000,$28,000, or 1.0%0.4%, to approximately $5,024,000,$7,359,000, compared to approximately $5,076,000$7,387,000 during the sixnine months ended JuneSeptember 30, 2008. The decline inOperating expenses have remained relatively unchanged as management has focused on managing operating expenses was due to a decrease in officecosts and general expenses which was mostly offset by an increase in salaries and service costs, as more fully described below.
maintaining profitable operating results.
Salaries and Service Costs
During the sixnine months ended JuneSeptember 30, 2009, salaries and service costs increaseddecreased approximately $255,000,$9,000, or 7.2%0.2%, to approximately $3,787,000,$5,493,000, compared to approximately $3,532,000$5,502,000 during the sixnine months ended JuneSeptember 30, 2008. The Wilhelmina Companies continue to invest in professional personnel and pursue new business. The increasebusiness but have been able to reduce travel costs to more than offset the increases in salaries and service costs was associated with management changes from the prior year that resulted in higher salaries for certain key managers.cost. Salaries and service costs as a percentage of total operating expenses were 75.4%74.7% and 69.6%74.4% for the sixnine months ended JuneSeptember 30, 2009 and 2008, respectively.
Office and General Expenses
Office and general expenses are comprised of office and equipment rents, advertising and promotion, overhead expenses, insurance expenses, professional fees and technology cost. These costs are less directly linked to changes in the Wilhelmina Companies’ revenues than salaries and service costs. During the sixnine months ended JuneSeptember 30, 2009, office and general expenses decreased approximately $307,000,$19,000, or 19.9%1.0%, to approximately $1,237,000,$1,866,000, compared to approximately $1,544,000$1,885,000 during the sixnine months ended JuneSeptember 30, 2008. During the six months ended June 30, 2008, office and general expenses included a significant amount of accounting and legal expenses associated with the Acquisition Agreement and preparation of financial information which was included in the proxy statement filed in connection with the 2008 Annual Meeting. Office and general expenses, as a percentage of total operating expenses, were 24.6%25.3% for the sixnine months ended JuneSeptember 30, 2009 and 30.4%25.6% for the sixnine months ended JuneSeptember 30, 2008.
Pro Forma Operating Income
During the sixnine months ended JuneSeptember 30, 2009, the pro forma operating income was approximately $270,000$793,000 compared to operating income of approximately $1,280,000$1,935,000 during the sixnine months ended JuneSeptember 30, 2008, representing a decline of $1,010,000,$1,142,000, or 78.9%59.0%. The decline in pro forma operating income was caused by a decline in revenues in the core modeling business which was attributable to decreased spending by the clients of the Wilhelmina Companies due to the worldwide economic recession.
Liquidity and Capital Resources
The Company’s cash balance decreased to $934,000$949,000 at JuneSeptember 30, 2009, from $11,735,000 at December 31, 2008. The decrease is attributable to the funding of the acquisition of the Wilhelmina Companies and the associated acquisition transaction costs.
On February 13, 2009, the Company closed the Wilhelmina Transaction and funded approximately $13,066,000 to the various parties involved in accordance with the Acquisition Agreement and $1,756,000 associated with the escrow facility discussed below. Cash on hand and the $3,000,000 in proceeds from Newcastle under the Equity Financing Agreement were used to fund the closing amounts.
Signature Bank Credit Facility
The Company’s primary liquidity needs are for financing working capital associated with the expenses it incurs in performing services under its client contracts. The Company has in place a credit facility with Signature Bank (the “Credit Facility”), which includes a term loan with a balance of approximately $165,000$96,000 as of JuneSeptember 30, 2009, and a revolving line of credit with a balance of $2,000,000 as of JuneSeptember 30, 2009, that allows the Company to manage its cash flows. The revolving line under the Credit Facility expired on January 31, 2009, was subsequently extended, and expired on 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. The Company is currently negotiating with the bank to further extend the line of credit. Signature Bank has not requested repayment of the line, which as of AugustNovember 14, 2009 had an unpaid balance of $2,000,000. The term note is payable in monthly installments of $23,784 including interest at a fixed rate of 6.65% per annum and matures in December 2009. Interest on the revolving credit note was payable monthly at an annual rate of prime plus 0.5% (3.75% at JuneSeptember 30, 2009). Availability under the revolving line of credit is subject to a borrowing base computation. The line of credit and term note are collateralized by all of the assets of the Wilhelmina Companies, cross collateralized by the combined and consolidated Wilhelmina Companies and are guaranteed by a stockholder of the Company.
The Company’s ability to make payments on the Credit Facility, 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 has 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.
As the revolving line under the Credit Facility expired, and in order to facilitate the closing of the Wilhelmina Transaction on February 13, 2009, the Company entered into an agreement with Esch (the “Letter Agreement”), pursuant to which Esch agreed that $1,756,000 of the cash proceeds to be paid to him at the closing of the Wilhelmina Transaction would instead be held in escrow. All or a portion of such amount held in escrow will be used to satisfy the Company’s indebtedness in connection with the Credit Facility upon the occurrence of specified events including, but not limited to, written notification to the Company of the termination of the Credit Facility. Any amount remaining in escrow under the Letter Agreement will be released to Esch upon the renewal, extension or replacement of the Credit Facility, subject to certain requirements set forth in the Letter Agreement. In the event any portion of the proceeds is paid from escrow to pay off the Credit Facility, the Company will promptly issue to Esch, in replacement thereof, a promissory note in the principal amount of the amount paid.
Newcastle Financing Arrangement
Concurrently with the execution of the Acquisition Agreement, the Company entered into the Equity Financing Agreement with Newcastle whereby Newcastle committed to purchase, at the Company’s election at any time or times prior to sixnine months following the closing, up to an additional $2,000,000 (8,097,166 shares at $0.247 per share) of Common Stock. The Company’s election right expired on August 13, 2009.
Purchase Price Adjustment under Acquisition Agreement
The aggregate purchase price under the Acquisition Agreement is subject to certain purchase price adjustments related to “core business” EBITDA calculations. Depending on the outcome of these purchase price adjustments, the Control Sellers may have the option to pay to the Company in cash, such amount of the adjustments, not to exceed $4,500,000.
The Company has notified the Control Sellers of a required $6,193,400 post-closing downward adjustment to the purchase price in connection with the Wilhelmina Transaction based on “core business” EBITDA calculations made by the Company in accordance with the applicable provisions of the Acquisition Agreement. The Company notified the Control Sellers that based on the amount of the purchase price adjustment, each of Esch and Krassner are required to pay (or cause Lorex and Krassner L.P. to pay) to the Company $2,250,000 in cash (or $4,500,000 in the aggregate) and if either Esch or Krassner fails to timely make (or cause Lorex or Krassner L.P. to timely make) the required cash payment, the Company has the right under the Acquisition Agreement to promptly repurchase for $.0001 per share 50% of such number of Restricted Shares determined based on a specified formula (or a total of 100% of such number of shares in the event both Esch and Krassner fail to timely make the cash payments). The Company believes that, based on its purchase price adjustment calculation, it will have the right to repurchase all 19,229,746 Restricted Shares in the event the Control Sellers fail to make the required cash payments. The Control Sellers responded that they did not believe the Company gave timely notice of its calculations of the purchase price adjustment in accordance with the provisions of the Acquisition Agreement and that they disagree with certain of the Company’s calculations. The Company believes its calculations of the purchase price adjustment are accurate and were timely submitted to the Control Sellers in accordance with the provisions of the Acquisition Agreement. After the parties failed to resolve their dispute regarding the calculation of the purchase price adjustment, the parties retained RSM McGladrey, Inc. (“McGladrey”) in accordance with the terms of the Acquisition Agreement to make a final determination as to the purchase price adjustment based on the calculations and supporting documentation submitted by the respective parties. The Company anticipates that McGladrey will make its final determination during the thirdfourth quarter of fiscal 2009.
Lease Guarantees
Under the terms of the Platinum Transaction, all leases and corresponding obligations associated with the Transaction Processing and Software Business were assumed by Platinum. Prior to the Platinum Transaction, the Company guaranteed two operating leases for office space of the divested companies. The first lease was related to office space located in San Antonio, Texas, and expired in 2006. The second lease is related to office space located in Austin, Texas, and expires in 2010. Under the original terms of the second lease, the remaining minimum undiscounted rent payments total approximately $709,000$354,000 at JuneSeptember 30, 2009. In conjunction with the Platinum Transaction, Platinum agreed to indemnify the Company should the underlying operating companies not perform under the terms of the office leases. The Company can provide no assurance as to Platinum’s ability, or willingness, to perform its obligations under the indemnification. The Company does not believe it is probable that it will be required to perform under the remaining lease guarantee and, therefore, no liability has been accrued in the Company’s financial statements.
Off-Balance Sheet Arrangements
The Company guaranteed two operating leases for office space for certain of its wholly owned subsidiaries prior to the Platinum Transaction (see Liquidity and Capital Resources – Lease Guarantees above). One such lease expired in 2006.
Critical Accounting Policies
Revenue Recognition
In compliance with Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue GrossGAAP when reporting revenue gross as a Principalprincipal versus Netnet as an Agent,”agent, the Company assesses whether it, the model or artist is the primary obligor. The Company evaluates the terms of its model, artist 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 artist selection and credit risk the Company undertakes. The Company operates broadly as a modeling agency and in those relationships with models and artists where the key indicators suggest the Company acts as a principal, the Company records the gross amount billed to the client as revenue and the related costs incurred to the model as model cost. In other model and artist relationships where the Company believes the key indicators suggest it acts as an agent on behalf of the model or artist the Company records revenue net of pass-through model or artist 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.
Wilhelmina and its subsidiaries also record fees from licensees when the revenues are earned and collectability is reasonably assured.
Goodwill and Intangible Assets
Goodwill and intangible assets consist primarily of goodwill and buyer relationships resulting from a business acquisition. According to SFAS 142, goodwillGoodwill 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.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS 142. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. The Company adopted FSP 142-3 on January 1, 2009. The adoption of FSP 142-3 did not have a material impact on the consolidated financial statements.
The Company has determined that its revenue interest meets the indefinite life criteria outlined in SFAS 142, and, therefore, annually assesses whether the carrying value of the asset exceeds its fair value, and records an impairment loss equal to any such excess.
Business Combinations
In December 2007, the FASB released SFAS 141(R), which changes many well-establisheda business combination, accounting practices and significantly affects how acquisition transactions are reflected in the financial statements. Additionally, SFAS 141(R) will affect how companies negotiate and structure transactions, model financial projections of acquisitions and communicate to stakeholders. SFAS 141(R) must be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Under SFAS 141(R), contingent consideration or earn outs will be recorded at their fair value at the acquisition date. Except in bargain purchase situations, contingent considerations 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 in accordance with SFAS 141(R).adjusted.
In accordance with SFAS 141(R),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 arewere to be recorded as a reduction of earnings in the period they are incurred. Prior to January 1, 2009, the effective date of SFAS 141(R) forin accordance with GAAP existing at that time, the Company included acquisition transaction costs were included in the cost of the acquired business. On February 13, 2009, the Company closed the Wilhelmina Transaction and therefore in accordance with the Company’s interpretation of SFAS 141(R) transition rules, recorded all previously capitalized acquisition transaction costs of approximately $849,000 as a reduction of earnings for the year ended December 31, 2008. The Company incurred acquisition transaction costs of approximately $645,000$673,000 for the sixnine months ended JuneSeptember 30, 2009.
In April 2009, the FASB issued FSP 141(R)-1Management is required to amend SFAS 141 (revised 2007) “Business Combinations.” FSP 141(R)-1 addressesaddress 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. FSP 141(R)-1 also requires that aA systematic and rational basis for subsequently measuring and accounting for the assets or liabilities is required to be developed depending on their nature. FSP 141(R)-1 will be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is after December 31, 2008. The provisions of FSP 141(R)-1 were considered in connection with the Wilhelmina Transaction.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
ItIteem 4.m 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in the Company’s reports under the Exchange Act, such as this Form 10-Q, is reported in accordance with the rules of the SEC. Disclosure controls are also designed with the objective of ensuring that such information is accumulated appropriately and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosures.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of JuneSeptember 30, 2009 to ensure that information required to be disclosed by the Company (including its consolidated subsidiaries) in the reports that the Company files or submits under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms(b) accumulated and are operating in an effective manner.communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
As a result of the closing of the Wilhelmina Transaction, during the six months ended June 30, 2009, certain employees of the Wilhelmina Companies were integrated into the Company’s financial reporting process, which materially affected the Company’s internal control over financial reporting.
Except as stated above, as of the end of the period covered by this report, there were no changes in the Company’s internal controls over financial reporting, or in other factors that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Internal Control
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
OTHER INFORMATION
ItIteemm 1. Legal Proceedings.
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 its consolidated financial position or its results of operations.
ItIteemm 1.A. Risk Factors.
Not applicable.
ItIteemm 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
ItIteemm 3. Defaults Upon Senior Securities.
None.
ItIteemm 4. Submission of Matters to a Vote of Security Holders.
None.
ItIteemm 5. Other Information.
None.
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31.1 | | Certification of Principal Executive Officer in Accordance with Section 302 of the Sarbanes-Oxley Act.* |
31.2 | | Certification of Principal Financial Officer in Accordance with Section 302 of the Sarbanes-Oxley Act.* |
32.1 | | Certification of Principal Executive Officer in Accordance with Section 906 of the Sarbanes-Oxley Act.* |
32.2 | | Certification of Principal Financial Officer in Accordance with Section 906 of the Sarbanes-Oxley Act.* |
* Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WILHELMINA INTERNATIONAL, INC. |
| (Registrant) |
| |
| |
Date: August 18,November 16, 2009 | By: | |
| Name: | John P. Murray |
| Title: | Chief Financial Officer (Duly Authorized and Principal Financial Officer) |