During 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 its acquisition of Wilhelmina International and its affiliates in February 2009 (the “Wilhelmina Acquisition”). 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 Wilhelmina Acquisition date, no adjustment was required.
The Company is indemnified by certain of the selling parties in the Wilhelmina Acquisition consisting of Dieter Esch (“Esch”), Lorex Investments AG (“Lorex”), Brad Krassner (“Krassner”) and Krassner Family Investments Limited Partnership (“Krassner L.P.” and together with Esch, Lorex and Krassner, the “Control Sellers”) for losses incurred as a result of such deficiency notice, and the Control Sellersselling parties 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. As of September 30, 2012, the Company hashad paid approximately $1,735,000 of the Company’s earn-out obligations relating to operating results of Wilhelmina Miami, Inc., a subsidiary of the Company (“Wilhelmina Miami”), in connection with the Wilhelmina Acquisition (the “Miami Earnout”), with remaining amounts, net of indemnity claims for which the Control Sellers retainselling parties retained responsibility.
Effective October 1, 2012,
During March 2013, the Company renewedoffset approximately $454,000 of the Company’s remaining approximately $509,000 Miami Earnout obligation (as of December 31, 2012) for losses incurred in the settlement of the foreign withholding claims for tax years 2006 and 2008, leaving a lease agreement for office space located in Miami, Florida. The lease provides for average monthly rental paymentsbalance of approximately $12,500 for a period of 2 years.$55,000 which is owed under the Miami Earnout obligation.
Note 7. Share Capital
The Company has a shareholder’s rights plan (the “Rights Plan”). 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, as amended, 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”). 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). In addition, the Company’s Board of Directors has exempted Newcastle Partners, L.P. (“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. 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.
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. As of November 14, 2012, the Board of Directors has taken no action to effect a reverse stock split.
During the three months ended June 30, 2011,Standstill Agreement
On April 24, 2013, the Company adopted the 2011 Incentive Plan under which directors, officers, consultants, advisors and employeesRonald L. Chez (“Chez”), a shareholder of the Company, are eligible to receive stock option grants. The Company has reserved 6,000,000 shares of its Common Stock for issuanceentered into a letter agreement (the “Standstill Agreement”), pursuant to the 2011 Incentive Plan. Under the 2011 Incentive Plan, options vestwhich Chez 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 nine months ended September 30, 2011, the Company issued to a former employee an option grant of 2,000,000 shares of its Common Stock with an exercise price of $.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 grant of options, the Company recognized compensation expense of approximately $23,000 and $38,000 during the three and nine months ended September 30, 2011, respectively. During the nine months ended September 30, 2012, this option grant was terminated, as provided forhis Affiliates (as defined in the option agreement, as a result ofStandstill Agreement) agreed not to, without the termination of employment of the option holder.
During the three months ended September 30, 2012, the Company issued to the new Chief Executive Officer, Alex Vaickus, an option grant of 2,000,000 shares of its Common Stock with an exercise price of $0.117, a five year vesting schedule (vesting in equal annual increments beginning on the first anniversary of the date of the grant) and a ten year term. In connection with this grant of options, the Company recognized compensation expense of approximately $14,000 during the three and nine months ended September 30, 2012. The option grant was issued under the 2011 Incentive Plan. As the Company's Chief Executive Officer Mr. Vaickus will replace Mark Schwarz, who will remain as Chairmanprior approval of the Board of Directors of the Company, (a) beneficially own in excess of 10,000,000 shares of Common Stock of the Company nor (b) directly or indirectly, make any proposal or offer to acquire (other than pursuant to a confidential proposal to the Board of Directors of the Company), or agree to acquire or to become the beneficial owner of (i) any shares of Common Stock, (ii) any other securities of the Company convertible, exchangeable or exercisable into shares of Common Stock or (iii) any other voting securities of the Company, which, when added together with any such securities beneficially owned by Chez and his Affiliates immediately prior thereto, would provide Chez and his Affiliates with voting power in the aggregate in excess of 10,000,000 shares of Common Stock.
The Company agreed to, within three (3) business days of the execution of the Standstill Agreement promptly execute (and submit for signature by the Rights Agent) an amendment to the Rights Agreement, which amendment provides that Chez shall not be deemed to be an “Acquiring Person” under the Rights Agreement by virtue of (a) the acquisition of shares of Common Stock purchased by Chez and disclosed in the initial Schedule 13D with respect to the Company filed by Chez on March 22, 2013 (the “Initial Chez 13D”) or (b) the acquisition of additional shares of Common Stock in one or more purchases which in the aggregate, when added together with the shares of Common Stock reflected in the Initial Chez 13D, do not exceed 10,000,000 shares of Common Stock.
The restrictions set forth in the Standstill Agreement will addterminate upon the titleearlier of Executive Chairman. Mr. Vaickus, age 53, servedsixty (60) days following the expiration of the Rights Agreement or the earlier termination of the Rights Agreement (including pursuant to a redemption of the outstanding rights in accordance therewith) by the Company.
Amendment to Rights Agreement
On April 25, 2013, the Company entered into a Thirteenth Amendment (the “Thirteenth Amendment”) to the Rights Agreement. The Thirteenth Amendment, among other things, (i) amends the definition of Acquiring Person (as defined in the Rights Agreement) to provide that Chez shall not be deemed to be an Acquiring Person solely by virtue of (a) purchases by Chez, individually and through individual retirement accounts for his benefit, of shares of Common Stock which resulted in his beneficial ownership exceeding 4.99% of the Common Stock outstanding, as Presidentdisclosed in the Initial Chez 13D (the “Reported Chez Purchases”) or (b) purchases by Chez, individually or through individual retirement accounts for his benefit, of Playboy Enterprises Inc. ("PEI"a number of shares of Common Stock which in the aggregate, when added together with the number of shares of Common Stock beneficially owned by Chez as reflected in the Initial Chez 13D (i.e., 6,701,857 shares of common stock), shall not exceed ten million (10,000,000) shares of Common Stock (the “Permitted Additional Chez Purchases”) from 2009, (ii) amends the definition of Triggering Event (as defined in the Rights Agreement) to 2011. Mr. Vaickus served as Presidentprovide that no Triggering Event shall result solely by virtue of PEI's Global Licensing Group from 2000any Reported Chez Purchases or Permitted Additional Chez Purchases, (iii) provides that a Distribution Date (as defined in the Rights Agreement) shall not be deemed to 2011. have occurred solely by virtue of any Reported Chez Purchases or Permitted Additional Chez Purchases and (iv) provides that no Reported Chez Purchases or Permitted Additional Chez Purchases shall be deemed to be events that cause the Rights to become exercisable. The Thirteenth Amendment also provides for certain other conforming and technical amendments to the terms and provisions of the Rights Agreement.
Note 8. Income Taxes
During the nine months ended September 30, 2012, the Company’s combined federal and state effective tax rate was approximately 34%. Generally, the Company’s combined effective tax rate is high relative to reported net income as a result of certain amounts of amortization expense and corporate overhead not being deductible or attributable to states in which it operates. Currently, the majority of taxes being paid by the Company are state taxes not federal. The Company operates in three states which have relatively high tax rates, California, New York and Florida. The Company’s combined (federal and state) effective tax rate would be even higher if it were not for federal net operating loss carryforwards available to offset current federal taxable income. As of September 30, 2012,March 31, 2013, the Company had federal income tax loss carryforwards of approximately $5,700,000,$5,000,000, which begin expiring in 2019. Realization of the Company’s carryforwards is dependent on future taxable income. A portion of the Company’s federal net operating loss carryforwards were utilized to offset federal taxable income generated during the three and nine months ended September 30, 2012 and September 30, 2011.March 31, 2013. 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 9. Related Parties
As of September 30, 2012, Mark Schwarz, the Chairman, Chief Executive Officer and Portfolio Manager of Newcastle Capital Management, L.P. (“NCM”), John Murray, Chief Financial Officer of NCM, and Evan Stone, the former Vice President and General Counsel of NCM, held the following executive officer and board of director positions with the Company: Chairman of the Board and Executive Chairman, Chief Financial Officer, General Counsel and Secretary, respectively. NCM is the General Partner of Newcastle, which owns 48,614,513 shares of Common Stock. At the annual meeting of stockholders of the Company held on January 20, 2011, the stockholders of the Company elected Clinton Coleman (Managing Director at NCM) and James Dvorak (Managing Director at NCM) to serve as directors of the Company.
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 $23,000 for each of the three and nine months ended September 30, 2012 and September 30, 2011, respectively. The Company owed NCM $0 as of September 30, 2012 and 2011, under the services agreement.
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 three and nine months ended September 30, 2012 and September 30, 2011, management fee and rental income from the unconsolidated affiliate amounted to approximately $27,000 and $81,000, respectively.
On July 31, 2012, the Company effected a repurchase of 8,000,000 shares of its Common Stock involving an affiliate (See Note 10).
Note 10. Treasury Stock
On JulyDuring the year ended December 31, 2012, the Company repurchased 8,000,000 shares of its Common Stock at a price of $0.126 per share. The transaction was effected through a broker dealer making a market in the Company’s shares on behalf of an affiliate of the Company.
During August 2012, the Board of Directors authorized a stock repurchase program, whereby the Company may repurchase up to 10,000,000 shares of its outstanding Common Stock. The shares may be repurchased from time-to-time in the open market or through privately negotiated transactions at prices the Company deems appropriate. The program does not obligate the Company to acquire any particular amount of Common Stock and the program may be modified or suspended at any time at the Company’s discretion. The stock repurchase plan will be funded through the Company’s cash on hand and the Credit Agreement.
Note 11. Subsequent Events
On October 24,During the year ended December 31, 2012, the Company repurchased 9,770,991 shares of Common Stock at an average price of approximately $0.126 per share, for a total of $1,227,000. The repurchase of 8,000,000 of the shares during the year ended December 31, 2012 were effected through a broker dealer making a market in the Company’s shares on behalf of an affiliate of the Company. The remaining 1,770,991 shares were repurchased in the open market. The Company did not repurchase any shares of Common Stock during the three months ended March 31, 2013.
Note 10. Related Parties
As of March 31, 2013, Mark Schwarz, the Chairman, Chief Executive Officer and Portfolio Manager of Newcastle Capital Management, L.P. (“NCM”), John Murray, Chief Financial Officer of NCM, and Evan Stone, the former Vice President and General Counsel of NCM, held the following executive officer and board of director positions with the Company: Chairman of the Board and Executive Chairman, Chief Financial Officer, and General Counsel and Secretary, respectively. NCM is the General Partner of Newcastle, which owns 48,614,513 shares of Common Stock. Clinton Coleman (Managing Director at NCM) and James Dvorak (Managing Director at NCM) also serve as directors of the Company.
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 Second Credit Agreement Amendment. Underparties. Pursuant to the termsservices 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 for the three months ended March 31, 2013 and 2012, respectively. The Company owed NCM $0 as of March 31, 2013 and December 31, 2012, under the services agreement.
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 Second Credit Agreement Amendment, (1) total availability underthree months ended March 31, 2013 and 2012, management fee and rental income from the revolving credit facility was increasedunconsolidated affiliate amounted to $5,000,000 (from $1,500,000), (2) the borrowing base was modified to 75% (from 65%) of eligible accounts receivable (as defined in the Credit Agreement) and (3) the Company’s minimum net worth covenant was increased to $22,000,000 (from $21,250,000). In addition, the maturity date of the facility was extended to October 15, 2015 (from Decemberapproximately $27,000.
On July 31, 2012). As of November 14, 2012, the Company had outstanding borrowingseffected a repurchase of $1,250,000 under the Credit Agreement.8,000,000 shares of Common Stock involving an affiliate (See Note 9).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion of the interim unaudited consolidated financial condition and results of operations for the Company and its subsidiaries for the three and nine months ended September 30, 2012March 31, 2013 and September 30, 2011.March 31, 2012. It should be read in conjunction with the 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, 2011,2012, as amended.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking” statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 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 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, 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 undertake any obligation to publicly update these forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements.
OverviewOVERVIEW
The Company’s 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, best known and largest fashion model management companies in the world. Since its founding, it 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, Thailand and Thailand.Dubai. The Company 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 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.
Wilhelmina believes it has strong brand recognition which enables it to attract and retain top agents and talent to service a broad universe of clients. In order to take advantage of these opportunities and support its continued growth, the Company will need to continue to successfully allocate resources and staffing in a way that enhances its ability to respond to these new opportunities. The Company continues to focus on cutting costs, recruiting top agents when available and scouting and developing new talent.
Although Wilhelmina has a large and diverse client base, as discussed below, it is not immune to global economic conditions. Wilhelmina closely monitors economic conditions, client spending and other factors and continually 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.
Trends and Opportunities
The Company expects that its geographical reach, alongthe 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 its competitors. Accordingly, the Company believes that its market position as a strong industry leader should create new growth opportunities.smaller firms operating in the industry. Similarly, in the segments where Wilhelmina competes with other leading full service agencies, Wilhelmina competed successfully during the first quarter of 2013.
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.
With total advertising expenditures on major media (newspapers, magazines, television, cinema, outdoor and Internet) amounting to approximately $161 billion in 2010 and $165 billion in 2011 and $172 billion 2012, North America is by far the world’s largest advertising market. For the fashion talent management industry, including Wilhelmina, advertising expenditures on magazines, television, Internet and outdoor are of particular relevance.
Due to the increasing ubiquity of the Internet as a standard business tool, the Company has increasingly sought to harness the opportunities of the Internet and other digital media to improve its communications with clients and to facilitate the effective exchange of fashion model and talent information. The Company continues 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 Company, including (i) the decline in traditional print advertising which is potentially being caused by the Internet and (ii) pricing pressures with respect to online/Internet photo shoots and client engagements.Strategy
Management’s strategy is to increase value to shareholders through the following initiatives:
| · | expanding the women’s high end fashion board; |
• expand the women’s high end fashion board;
| · | continuing to invest in the Wilhelmina Artist Management LLC (“WAM”) business; |
| · | strategic acquisitions; |
| · | licensing the “Wilhelmina” name to leading, local model management agencies; |
| · | exploring the use of the “Wilhelmina” brand in connection with consumer products, cosmetics and other beauty products; |
| · | partnering on television shows and promoting model search contests. |
Wilhelmina Acquisition
On February 13, 2009, the Company closed• expand the Wilhelmina AcquisitionArtist Management LLC (“WAM”) business;
• strategic acquisitions;
• licensing the “Wilhelmina” name to leading model management agencies;
• licensing the “Wilhelmina” brand in connection with consumer products, cosmetics and acquired Wilhelmina International, Wilhelmina Miami, WAM, Wilhelmina Licensing LLCother beauty products;
• promoting model search contests, and Wilhelmina Film & TV Productions LLC (together, the “Wilhelmina Companies”events and partnering on media projects (television, film, books, etc.). As of the closing of the Wilhelmina Acquisition, the business of Wilhelmina represents the Company’s primary operating business. Prior to closing of the Wilhelmina Acquisition, the Company’s interest in ACP Investments, L.P. (d/b/a Ascendant Capital Partners) (“Ascendant”), acquired on October 5, 2005, represented the Company’s sole operating business.
Ascendant
On October 5, 2005, the Company acquired an interest in the revenues generated by 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 $78,400,000 and $73,400,000 as of September 30, 2012 and September 30, 2011, respectively.
During 2009, the Company determined that the present value of expected cash flows from the Ascendant revenue interest was nominal and therefore the revenue interest is carried at $0 in the accompanying balance sheets.
RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012MARCH 31, 2013 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011MARCH 31, 2012
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 thatwhich specializes by the type of model it represents (Women, Men, Select, Media, 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, which isare 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, below.Recognition. Gross billings are an important business metric that ultimately drivesdrive revenues, profits and cash flows. Not all gross billings recorded by the Company are collected and therefore remitted to the talent. Some contracts are structured whereby payments are paid directly to the Company, and therefore, the Company remits the appropriate amount to the talent. Other contracts are structured whereby amounts are paid by the customer directly to the talent and Wilhelmina for their respective proceeds of the contract.
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 requiredT&E (travel, meals and entertainment) to deliver the Company’s services and to enable new business development activities.
Analysis of Consolidated Statements of Operations and Gross Billings
| | | March 31, | | | March 31, | | | Percent Change | |
| Three Months Ended | | 2013 | | | 2012 | | | 2013 vs 2012 | |
| | | | | | | | | | |
| GROSS BILLINGS | | $ | 14,890,000 | | | $ | 15,320,000 | | | | (2.8 | %) |
| | | | | | | | | | | | | |
| Revenues | | | 13,915,000 | | | | 13,092,000 | | | | 6.3 | % |
| License fees and other income | | | 201,000 | | | | 386,000 | | | | (47.9 | %) |
| TOTAL REVENUES | | | 14,116,000 | | | | 13,478,000 | | | | 4.7 | % |
| Model costs | | | 9,816,000 | | | | 9,158,000 | | | | 7.2 | % |
| REVENUES NET OF MODEL COSTS | | | 4,300,000 | | | | 4,320,000 | | | | (0.5 | %) |
| GROSS PROFIT MARGIN | | | 30.5 | % | | | 32.1 | % | | | | |
| Salaries and service costs | | | 2,797,000 | | | | 2,392,000 | | | | 17.1 | % |
| Office and general expenses | | | 818,000 | | | | 791,000 | | | | 3.4 | % |
| Amortization and depreciation | | | 390,000 | | | | 396,000 | | | | (1.5 | %) |
| Corporate overhead | | | 320,000 | | | | 408,000 | | | | (21.6 | %) |
| OPERATING INCOME | | | (25,000 | ) | | | 333,000 | | | | (108.7 | %) |
| OPERATING MARGIN | | | -0.2 | % | | | 2.5 | % | | | | |
| Interest income | | | 2,000 | | | | 2,000 | | | | 0.0 | % |
| Interest expense | | | (12,000 | ) | | | (7,000 | ) | | | 71.4 | % |
| Equity Earnings in affiliate | | | 17,000 | | | | 4,000 | | | | 325.0 | % |
| INCOME BEFORE INCOME TAXES | | | (18,000 | ) | | | 332,000 | | | | (106.6 | %) |
| Income taxes | | | 38,000 | | | | 122,000 | | | | (68.9 | %) |
| Effective tax rate | | | - | | | | 36.7 | % | | | | |
| NET INCOME | | $ | (56,000 | ) | | $ | 210,000 | | | | (128.6 | %) |
Gross Billings
Gross billings forGenerally, the three months ended September 30, 2012 increased approximately $1,890,000, or 13.2%, to approximately $16,195,000, compared to approximately $14,305,000 for the three months ended September 30, 2011. Generally, trends inCompany’s gross billings follow the Company’sfluctuate in response to its clients’ spendingwillingness to spend on advertising and the Company’s ability of the Company to have the desired talent available to its clients.available. During the three months ended September 30, 2012,March 31, 2013, the Company experienced a slight decrease6% increase in gross billings across the core modeling business, of approximately 2% and an increasewhich was more than offset by a 53% decrease in the gross billings inof the WAM business, of approximately 173%when compared to the gross billings generated byacross the respective divisions during thecore modeling and WAM businesses for three months ended September 30, 2011.March 31, 2012. Gross billings of the WAM business decreased due to reduced fixed payments earned under a product licensing agreement (per the terms of the contract) and due to the expiration of another product licensing agreement (per the terms of the contract), which the Company was a party to, with a former talent. Management expects gross billings and operating results from the WAM business to continue to decline in 2013 as compared to 2012, as a result of existing product licensing agreements expiring over the next twelve to fifteen months. Management cannot estimate the impact of any new product licensing agreements, which would offset this trend. Gross billings of the WAM division represented approximately 21%7% of total gross billings for the three months ended September 30, 2012,March 31, 2013, compared to approximately 9%15% for the three months ended September 30, 2011.March 31, 2012. During the three months ended September 30, 2012,March 31, 2013, gross billings of the various boards of the core modeling business experienced positive growth ranging from 5%8% to 58%46%, and certainthree boards experienced negative growth ranging from -1%(10%) to -42%(36%), compared to the three months ended September 30, 2011.March 31, 2012.
Gross billings for the nine months ended September 30, 2012 increased approximately $4,122,000, or 9.4%, to approximately $47,968,000, compared to approximately $43,846,000 for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, the Company experienced a slight decrease in gross billings across the core modeling business of approximately 2% and an increase in gross billings in the WAM business of approximately 142% compared to gross billings generated by the respective divisions during the nine months ended September 30, 2011. Gross billings of the WAM division represented approximately 17% of total gross billings for the nine months ended September 30, 2012, compared to approximately 8% for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, gross billings of the various boards of the core modeling business experienced positive growth ranging from 1% to 61% and certain boards experienced negative growth ranging from -7% to -31%, compared to the nine months ended September 30, 2011.
Revenues
DuringThe increase in revenues for the three months ended September 30, 2012, revenues decreased approximately $294,000, or 2.2%,March 31, 2013 is attributable to approximately $12,964,000, compared to approximately $13,258,000 during the three months ended September 30, 2011. During the nine months ended September 30, 2012, revenues decreased approximately $115,000, or 0.3%, to approximately $40,923,000, compared to approximately $41,038,000 during the nine months ended September 30, 2011.
During the three and nine months ended September 30, 2012, the Company experienced a decrease in revenues as a result of a decline in core gross billings, somewhat offset by recognizing revenues which were previously deferred of approximately $716,000, of which approximately $385,000 were scheduled to be recognized during the nine months ended September 30, 2012. The Company recognized the previously deferred revenues as the result of an agreement with a former talent with respect to the modification of payment direction terms under various contracts negotiated by the Company between such talent, certain customers and, in some cases, the Company. Without the recognition of the previously deferred revenues, revenues were down slightly due to the 2% decrease6% increase in gross billings in the core modeling business.
In addition, gross billings increased atbusiness, somewhat offset by a rate greater than the rate of increasedecline in revenues during the nine months ended September 30, 2012, as a result of a larger percentage of total revenues being derived from relationships which required the reporting of revenues netlicensing fees (as an agent) versus gross (as a principal)discussed above).
License Fees and Other Income
The Company has an agreement with an unconsolidated affiliate to provide managementLicense fees and administrative services, as well as sharing of space. Forother income include the three and nine months ended September 30, 2012, management fee income from the unconsolidated affiliate amounted to approximately $27,000 and $81,000, respectively.following:
· | Product licensing agreements between the Company, its clients and talent, whereby the Company participates in the sharing of royalties. During the three months ended March 31, 2013, royalties from these licensing agreements totaled approximately $72,000, compared to $240,000 for the three months ended March 31, 2012. |
· | An agreement between the Company and an unconsolidated affiliate to provide management and administrative services, as well as sharing of space. For each of the three months ended March 31, 2013 and March 31, 2012, management fee and rental income from the unconsolidated affiliate amounted to approximately $27,000. |
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 Company. During the three and nine months ended September 30, 2012, license fees totaled approximately $65,000 and $189,000, respectively, compared to $62,000 and $126,000 for the three and nine months ended September 30, 2011, respectively.· | Franchise revenues from independently owned model agencies that use the Wilhelmina trademark name and various services provided by the Company. During the three months ended March 31, 2013, franchise fees totaled approximately $102,000, compared to $66,000 for the three months ended March 31, 2012. |
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 three and nine months ended September 30, 2012, revenues from these licensing agreements totaled approximately $543,000 and $978,000, respectively, compared to $137,000 and $562,000 for the three and nine months ended September 30, 2011, respectively.
Other income includes fees derived from participants in the Company’s model search contests and sponsors of such contests, television syndication royalties and production series contracts.
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.
Model costs also include 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, and are expensed to model costs as incurred. Any repayments of such costs are credited to model costs in the period received. The Company also classifies commissions (in the industry known as “mother agency fees”) paid to other agencies as model costs.
During the three months ended September 30, 2012, model costs decreased approximately $52,000, or 0.6%, to approximately $9,226,000, compared to approximately $9,278,000 during the three months ended September 30, 2011. Model costs as a percentage of revenues increased slightly compared to the prior year quarter as a result of a decrease in the recovery of certain fixed model costs and an increase in mother agency fees.
During the nine months ended September 30, 2012, model costs decreased approximately $18,000, or 0.1%, to approximately $28,614,000, compared to approximately $28,632,000 during the nine months ended September 30, 2011. During the nine months ended September 30, 2012, model costs as a percentage of revenues were approximately 69.9% compared to 69.8% during the three months ended September 30, 2011. Margins were relatively unchanged from the prior year period.
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 three months ended September 30, 2012, operating expenses increased approximately $158,000, or 4.1%, to approximately $4,011,000, compared to approximately $3,853,000 during the three months ended September 30, 2011. The increase in operating expenses is attributable to increases in office and general expenses.
During the nine months ended September 30, 2012, operating expenses increased approximately $925,000, or 8.1%, to approximately $12,318,000 compared to approximately $11,393,000 during the nine months ended September 30, 2011. The increase in operating expenses is attributable to increases in salaries and service costs, office and general expenses and corporate overhead, somewhat offset by decreases in amortization and depreciation.· | Fees derived from participants in the Company’s model search contests, events and television syndication royalties. |
AllGross Profit Margin
Fluctuations in gross profit margin, between periods, is predominantly due to the following:
| · | The mix of revenues being derived from talent relationships, which require the reporting of revenues gross (as a principal) versus net (as an agent). Model costs consist of costs associated with relationships with models where the key indicators suggest that the Company acts as a principal. |
| · | An increase or decrease in mother agency fees, relative to model costs. |
· | An increase or decrease in the rate of recovery of advances to models (for the cost of producing initial portfolios and other out-of-pocket costs). These costs are expensed as incurred and repayments of such costs are credited to model costs in the period received. |
During the three months ended March 31, 2013, the rate of recovery of certain costs advanced to models declined slightly for the three months ended March 31, 2013 when compared to the three months ended March 31, 2012. Also a decrease in revenues reported on a net basis declined for the three months ended March 31, 2013 when compared to the three months ended March 31, 2012. The decrease in net revenues is attributable to a decline in the operating costs areresults of the WAM business, as discussed below.above.
Salaries and Service Costs
Salaries and service costs consist of payroll and related costs and travelT&E (travel, meals and entertainment) costs required to deliver the Company’s services to theits customers and models.
Duringtalent. The following factors contributed to the changes in salaries and services costs when comparing the three months ended September 30, 2012, salaries and service costs decreased approximately $46,000, or 0.2%,March 31, 2013 to approximately $2,456,000, compared to approximately $2,502,000 during the three months ended September 30, 2011. The Company experienced a decrease in travel costs mostly offset by an increase in compensation costs in connection with employment contracts for certain former employees. During the three and nine months ended September 30, 2012, the Company paid compensation costs of approximately $168,000 and $515,000, respectively, in conjunction with certain non-compete and contractual arrangements of former employees.March 31, 2012:
| · | The Company has hired additional key personnel to execute the Company’s strategy to increase value to shareholders through the initiatives discussed in the “Strategy” section above. |
During the nine months ended September 30, 2012, salaries and service costs increased approximately $397,000, or 5.6%, to approximately $7,464,000, compared to approximately $7,067,000 during the nine months ended September 30, 2011. As previously mentioned, the Company experienced increased salary costs in connection with the compensation costs associated with employment contracts for certain former employees, somewhat offset by a decrease in travel costs. The Company has also experienced a slight increase in overall salary costs, including certain payroll related costs such as healthcare.| · | During the three months ended March 31, 2013, the Company experienced a slight decrease in T&E costs in connection with delivering services to its customers and models. |
During the nine months ended September 30, 2012, salaries and service costs as a percentage of revenues were approximately 17.6% (16.4% after deducting compensation costs in connection with employment contracts for certain former employees), compared to approximately 16.8% during the nine months ended September 30, 2011.· | During the three months ended March 31, 2013 and March 31, 2012, the Company paid compensation costs of approximately $0 and $95,000, respectively, in connection with certain non-compete and contractual arrangements of former employees. |
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 three months ended September 30, 2012,March 31, 2013, office and general expenses increased, approximately $244,000, or 39.2%, to approximately $867,000,when compared to approximately $623,000 during the three months ended September 30, 2011. Office and general expenses increasedMarch 31, 2012, due to costs associated with legal and professional fees, technology, promotion, and leases associated with equipment and property. The Company continues to invest in technology, equipment and equipmentproperty to improve delivery of model management services to its talent.
During the nine months ended September 30, 2012, office and general expenses increased approximately $357,000, or 16.3%, to approximately $2,538,000, compared to approximately $2,181,000 during the nine months ended September 30, 2011. Office and general expenses increased due to costs associated with contract employees, technology and leases associated with equipment and property. During the nine months ended September 30, 2012,The amount of office and general expenses as a percentage of revenues were approximately 6.4%,revenue remained relatively flat at 5.8% for the three months ended March 31, 2013 and March 31, 2012.
Operating Margin
Operating margins declined for the three months ended March 31, 2013, when compared to approximately 5.2% during the ninethree months ended September 30, 2011. The Company continually works to leverage its resourcesMarch 31, 2012, mostly as a result of increases in salaries and reduceservice costs, when available.somewhat offset by a decrease in corporate overhead.
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 nine months ended September 30, 2012,March 31, 2013, depreciation and amortization expense totaled $387,000 and $1,172,000$390,000 (of which $357,000 and $1,082,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Acquisition), respectively, compared to $401,000 and $1,238,000$396,000 during the three months ended March 31, 2012 (of which $374,000 and $1,166,000$368,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Acquisition) during the three and nine months ended September 30, 2011, respectively. During the nine months ended September 30, 2012 and September 30, 2011, fixed. Fixed asset purchases totaled approximately $90,000$34,000 and $279,000, respectively. Fixed assets purchases$64,000 during the ninethree months ended September 30, 2012 mostly relate to technology infrastructureMarch 31, 2013 and equipment. The majority of the fixed asset purchases incurred during the ninethree months ended September 30, 2011 relate to leasehold improvements, furniture and equipment for the Company’s new office space in Los Angeles. In connection with this new office space the Company entered into a 5 year lease effective July 1, 2011.March 31, 2012, respectively.
Corporate Overhead
Corporate overhead expenses include public company costs, director and executive officer compensation, directors’ and officers’ insurance, legal, audit and professional fees, corporate office rent and travel. During the three and nine months ended September 30, 2012, corporateCorporate overhead approximated $301,000 and $1,144,000 compared to $327,000 and $907,000decreased for the three and nine months ended September 30, 2011, respectively. The increase in corporate overhead forMarch 31, 2013, when compared to the ninethree months ended September 30,March 31, 2012 compareddue to nine months ended September 30, 2011 is primarily attributable to increased director’s fees, stock exchange fees and professional anda decline in legal fees in connection(which were associated with the filingpreparation of a resale registration statement on Form S-1.during the three months ended March 31, 2012).
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 three and nine months ended September 30, 2012March 31, 2013 and 2011.March 31, 2012.
Interest Expense
Interest expense totaled approximately $11,000 and $26,000, respectively, for the three and nine months ended September 30, 2012 compared to $2,000 and $21,000 for the three and nine months ended September 30, 2011, respectively. The increase in interest expense for the three and nine months ended September 30, 2012,March 31, 2013, when compared to the three and nine months ended September 30, 2011,March 31, 2012, is the result of an increase in average borrowings somewhatunder the Credit Agreement.
Income Taxes
Generally, the Company’s combined effective tax rate is high relative to reported net income as a result of certain amounts of amortization expense and corporate overhead not being deductible or attributable to states in which it operates. Currently, the majority of taxes being paid by the Company are state taxes not federal taxes. The Company operates in three states which have relatively high tax rates, California, New York and Florida. The Company’s combined (federal and state) effective tax rate would be even higher if it were not for federal net operating loss carryforwards available to offset by lower borrowing costs.current federal taxable income. As of March 31, 2013, the Company had federal income tax loss carryforwards of approximately $5,000,000, which begin expiring in 2019. Realization of the Company’s carryforwards is dependent on future taxable income. A portion of the Company’s federal net operating loss carryforwards were utilized to offset federal taxable income generated during the three months ended March 31, 2013. 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.
Liquidity and Capital Resources
The Company’s cash balance decreased to $3,094,000$603,000 at September 30, 2012,March 31, 2013, from $3,128,000$1,145,000 at December 31, 2011.2012. For the ninethree months ended September 30, 2012March 31, 2013, cash flow from operationsflows were mostly offsetimpacted by an amountthe payment of approximately $1,735,000 paid towards$454,000 in settlement of foreign withholding tax claims for tax years 2006 and 2008 and payment of incentive compensation and bonuses related to the year ended December 31, 2012.
The Company offset approximately $454,000 of the Company’s remaining approximately $509,000 Miami Earnout obligation (as of December 31, 2012), for losses incurred in the settlement of these foreign withholding claims for tax years 2006 and 2008, leaving a balance of approximately $55,000 which is owed under the Miami Earnout obligation.
Also during the quarterthree months ended September 30, 2012,March 31, 2013, the Company borrowed approximately $1,000,000increased its net borrowings under the Credit Agreement the proceeds of which were used to repurchase approximately 8,000,000 shares of its Common Stock, at a price of $0.126 per share, for a total of approximately $1,008,000.with Amegy by $250,000.
The Company’s primary liquidity needs are for financing working capital associated with the expenses it incurs in performing services under its client contracts. Generally, the Company incurs significant operating expenses with payment terms shorter than its average collections on billings.
Amegy Credit Agreement
On April 29, 2011, the Company closed the Credit Agreement for a new $500,000 revolving credit facility with Amegy. Borrowings under the facility are to be used for working capital and other general business purposes of the Company.
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.
On October 24, 2012, the Company executed and closed the second amendment (“the Second Credit Agreement AmendmentAmendment”) to its revolving Credit Agreement with Amegy, which among other things, increased total availability underamended and replaced the revolving credit facility to $1,500,000.
terms amended by the Credit Agreement Amendment. Under the terms of the Second Credit Agreement Amendment, (1) total availability under the revolving credit facility was increased tois $5,000,000, (from $1,500,000), (2) the borrowing base was modified tois 75% (from 65%) of eligible accounts receivable (as defined in the Credit Agreement) and (3) the Company’s minimum net worth covenant was increased to $22,000,000 (from $21,250,000). In addition, theis $22,000,000. The maturity date of the facility was extended tois October 15, 2015 (from December 31, 2012)2015. Under the terms of the Second Amended and Restated Promissory Note, the interest rate on borrowings is prime rate plus 1%.
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.
In compliance with generally accepted accounting principles 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 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.
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.
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.
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 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.
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 September 30, 2012,March 31, 2013, 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.
Not applicable.
As of the end of the period covered by this report, the Company’s principal executive officer and principal financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s principal executive officer and principal financial officer, with the participation of management, have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2012March 31, 2013 to ensure that information required to be disclosed by the Company in the reports that it 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 and (b) accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Given these and other inherent limitations of control systems, there is only reasonable assurance that the Company’s controls will succeed in achieving their stated goals under all potential future conditions. The Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2012.March 31, 2013.
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.
In October 2012, two subsidiaries of the Company received a Summons with Notice in connection with a purported class action lawsuit. According to the Notice accompanying the Summons, the purported claims arise out of, among other things, the handling and reporting of funds on behalf of models and the use of model images. Two of the Company's subsidiaries, along with a number of other model management companies, advertising firms and others, are named as defendants. NeitherThe Company believes these claims are without merit and intends to vigorously defend itself.
Not applicable.
Not applicable.
None.
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.