UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549





FORM 10-Q





(Mark
One)





xQUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended September 30,
2009




or





oTRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from 
to





Commission File Number:
0-28536





WILHELMINA
      INTERNATIONAL, INC.(Exact
      name of registrant as specified in its
charter)





Delaware
                74-2781950(State
      or other jurisdiction of incorporation or organization)
                (I.R.S.
      Employer Identification
No.)





200
      Crescent Court, Suite 1400, Dallas, Texas
            75201(Address
      of principal executive offices)
            (Zip
      Code)





(214)
      661-7488(Registrant’s
      telephone number, including area code)n/a(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     Yes x     No
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    
Yes o    
No o


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
(Check one):




Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
              Smaller
      reporting company x
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).     Yes o    No
x
  As of
November 13, 2009, the registrant had 129,440,752 shares of common stock
outstanding.







WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES
  Quarterly
Report on Form 10-Q
  For
the Quarter Ended September 30, 2009
  PART I
              FINANCIAL INFORMATION
              1Item 1.
              Financial Statements
              1Condensed Consolidated Balance Sheets - September 30, 2009
      (unaudited) and December 31, 2008
              1Unaudited Condensed Consolidated Statements of Operations -
      for the Three and Nine Months Ended September 30, 2009 and
      2008
              2Unaudited Condensed Consolidated Statements of Cash Flows -
      for the Nine Months Ended September 30, 2009 and
    2008
              3Notes to Unaudited Interim Condensed Consolidated Financial
      Statements
              4Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              18Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              32Item 4T.
              Controls and Procedures
              32PART II
              OTHER
      INFORMATION
              33Item 1.
              Legal Proceedings
              33Item 1.A.
              Risk Factors
              33Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              33Item 3.
              Defaults Upon Senior Securities
              33Item 4.
              Submission of Matters to a Vote of Security Holders
              33Item 5.
              Other Information
              33Item 6.
              Exhibits
              33SIGNATURES
              34
 
 INDEX
 
 PART I
 FINANCIAL
INFORMATION
  Item 1.  Financial Statements
  WILHELMINA
INTERNATIONAL, INC. AND SUBSIDIARIES
 Condensed Consolidated Balance Sheets
  (In
thousands, except share data)
  ASSETS
              
              (Unaudited)September
      30,
                  2009
              
              
              December
      31,
                  2008Current
      assets:Cash
      and cash equivalents
              
              $
              949
              
              
              $
              11,735Accounts
      receivable, net of allowance for doubtful accounts of $54
              
              
              6,353
              
              
              
              -Restricted
      cash-Esch escrow
              
              
              1,750
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              360
              
              
              
              176Total
      current assets
              
              
              9,412
              
              
              
              11,911Property
      and equipment, net of accumulated depreciation of $66 and
    $2
              
              
              300
              
              
              
              -Trademarks
      and intangibles with indefinite lives
              
              
              9,270
              
              
              
              803Other
      intangible assets with finite lives, net of accumulated amortization
      of  $1,159
              
              
              7,178
              
              
              
              -Goodwill
              
              
              12,647
              
              
              
              -Restricted
      cash
              
              
              175
              
              
              
              -Other
      assets
              
              
              130
              
              
              
              -Total
      assets
              
              $
              39,112
              
              
              $
              12,714LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
              
              $
              2,122
              
              
              $
              293Line
      of credit
              
              
              2,000
              
              
              
              -Due
      to models
              
              
              7,141
              
              
              
              -Deferred
      revenue
              
              
              420
              
              
              
              -Esch
      escrow liability
              
              
              1,756
              
              
              
              -Current
      portion of note payable and capital lease obligations
              
              
              119
              
              
              
              -Total
      current liabilities
              
              
              13,558
              
              
              
              293Long
      term liabilitiesOther
              
              
              50
              
              
              
              -Deferred
      revenue, net of current portion
              
              
              406
              
              
              
              -Deferred
      income tax liability
              
              
              1,800
              
              
              
              -Earn
      out-contingent liability
              
              
              2,312
              
              
              
              -Total
      long-term liabilities
              
              
              4,568
              
              
              
              -Commitments
      and contingenciesShareholders’
      equity:Preferred
      stock, $0.01 par value, 10,000,000 shares authorized; none
      outstanding
              
              
              -
              
              
              
              -Common
      stock, $0.01 par value, 250,000,000 shares authorized; 129,440,752 shares
      issued and outstanding
              
              
              1,294
              
              
              
              539Additional
      paid-in capital
              
              
              85,072
              
              
              
              75,357Accumulated
      deficit
              
              
              (65,380
              )
              
              
              (63,475
              )Total
      shareholders’ equity
              
              
              20,986
              
              
              
              12,421Total
      liabilities and shareholders’ equity
              
              $
              39,112
              
              
              $
              12,714
  The
accompanying notes are an integral part of these condensed consolidated
financial statements
  1
 INDEX
  WILHELMINA
INTERNATIONAL, INC. AND SUBSIDIARIES
 Unaudited Condensed Consolidated Statements of
Operations
  (In
thousands, except per share data)
  Three
      Months Ended
              
              
              Nine Months EndedSeptember
      30,
              
              
              September
      30,
              
              
              September
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008RevenuesRevenues
              
              $
              9,108
              
              
              $
              -
              
              
              $
              22,211
              
              
              $
              -License
      fees and other income
              
              
              277
              
              
              
              -
              
              
              
              538
              
              
              
              -Total
      revenues
              
              
              9,385
              
              
              
              -
              
              
              
              22,749
              
              
              
              -Model
      costs
              
              
              6,527
              
              
              
              -
              
              
              
              15,695
              
              
              
              -Revenues
      net of model costs
              
              
              2,858
              
              
              
              -
              
              
              
              7,054
              
              
              
              -Operating
      expensesSalaries
      and service costs
              
              
              1,756
              
              
              
              -
              
              
              
              4,580
              
              
              
              -Office
      and general expenses
              
              
              629
              
              
              
              -
              
              
              
              1,541
              
              
              
              -Amortization
      and depreciation
              
              
              490
              
              
              
              -
              
              
              
              1,225
              
              
              
              -Corporate
      overhead
              
              
              276
              
              
              
              81
              
              
              
              885
              
              
              
              271Acquisition
      transaction costs
              
              
              13
              
              
              
              -
              
              
              
              673
              
              
              
              -Total
      operating expenses
              
              
              3,164
              
              
              
              81
              
              
              
              8,904
              
              
              
              271Operating
      loss
              
              
              (306
              )
              
              
              (81
              )
              
              
              (1,850
              )
              
              
              (271
              )Other
      income (expense):Interest
      income
              
              
              -
              
              
              
              60
              
              
              
              4
              
              
              
              223Interest
      expense
              
              
              (22
              )
              
              
              -
              
              
              
              (53
              )
              
              
              -Total
      other income (expense)
              
              
              (22
              )
              
              
              60
              
              
              
              (49
              )
              
              
              223Loss
      before provision for income taxes
              
              
              (328
              )
              
              
              (21
              )
              
              
              (1,899
              )
              
              
              (48
              )Provision
      for income taxesCurrent
              
              
              -
              
              
              
              -
              
              
              
              (6
              )
              
              
              -Deferred
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -(6
              )Net
      loss applicable to common stockholders
              
              $
              (328
              )
              
              $
              (21
              )
              
              $
              (1,905
              )
              
              $
              (48
              )Basic
      and diluted net income (loss) per common share
              
              $
              (0.00
              )
              
              $
              (
      0.00
              )
              
              $
              (0.02
              )
              
              $
              (0.00
              )Weighted
      average common shares outstanding
              
              
              129,441
              
              
              
              53,884
              
              
              
              119,842
              
              
              
              53,884
  The
accompanying notes are an integral part of these condensed consolidated
financial statements
  2
 INDEX
  WILHELMINA
INTERNATIONAL, INC. AND SUBSIDIARIES
 Unaudited Condensed Consolidated Statements of Cash
Flows
  (in
thousands)
  Nine
      Months Ended
                  September
      30,2009
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (1,905
              )
              
              $
              (48
              )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Bad
      debt expense
              
              
              90
              
              
              
              -Amortization
      and depreciation
              
              
              1,225
              
              
              
              -Changes
      in operating assets and liabilities:(Increase)
      in accounts receivable
              
              
              (919
              )
              
              
              -(Increase)
      decrease in prepaid expenses and other current assets
              
              
              107
              
              
              
              (778
              )Increase
      in due to models
              
              
              1,106
              
              
              
              -Increase
      in accounts payable and accrued liabilities
              
              
              829
              
              
              
              106Increase
      in other liabilities
              
              
              125
              
              
              
              129Net
      cash provided by (used in) operating activities
              
              
              658
              
              
              
              (591
              )Cash
      flows from investing activities:Acquisition
      of the Wilhelmina Companies, net of cash acquired
              
              
              (14,763
              )
              
              
              -Purchase
      of property and equipment
              
              
              (16
              )
              
              
              -Net
      cash used in investing activities
              
              
              (14,779
              )
              
              
              -Cash
      flows from financing activitiesProceeds
      from issuance of common stock
              
              
              3,000
              
              
              
              -Proceeds
      from line of credit
              
              
              500
              
              
              
              -Note
      payable and capital lease obligations payments
              
              
              (165
              )
              
              
              -Net
      cash provided by financing activities
              
              
              3,335
              
              
              
              -Net
      decrease in cash and cash equivalents
              
              
              (10,786
              )
              
              
              (591
              )Cash
      and cash equivalents, beginning of period
              
              
              11,735
              
              
              
              12,679Cash
      and cash equivalents, end of period
              
              $
              949
              
              
              $
              12,088Supplemental
      disclosure of cash flow informationCash
      paid for interest
              
              $
              53
              
              
              $
              -Cash
      paid for income taxes
              
              $
              19
              
              
              $
              -Supplemental
      disclosure of non-cash investing and financing activitiesEquity
      issuance cost
              
              $
              139
              
              
              $
              -Common
      stock issued in acquisition of the Wilhelmina Companies
              
              $
              7,609
              
              
              $
              -
  The
accompanying notes are an integral part of these condensed consolidated
financial statements
  3
 INDEX
  WILHELMINA
INTERNATIONAL, INC. AND SUBSIDIARIES
 Notes to the Consolidated Financial Statements
  Note
1.  Basis of Presentation
  The
interim condensed consolidated financial statements included herein have been
prepared by Wilhelmina International, Inc. (“Wilhelmina” or the “Company”) and
subsidiaries without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”).  Although certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to those rules
and regulations, all adjustments considered necessary in order to make the
financial statements not misleading have been included.  In the
opinion of the Company’s management, the accompanying interim condensed
consolidated financial statements reflect all adjustments, of a normal recurring
nature, that are necessary for a fair presentation of the Company’s financial
position, results of operations and cash flows for such periods.  It
is recommended that these interim condensed consolidated financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2008, as amended.  Results of operations for the
interim periods are not necessarily indicative of results that may be expected
for any other interim periods or the full fiscal year.
  Note
2.  Business Activity
  Wilhelmina
Acquisition
  On August
25, 2008, the Company and Wilhelmina Acquisition Corp., a New York corporation
and wholly owned subsidiary of the Company (“Wilhelmina Acquisition”), entered
into an agreement (the “Acquisition Agreement”) with Dieter Esch (“Esch”), Lorex
Investments AG, a Swiss corporation (“Lorex”), Brad Krassner (“Krassner”),
Krassner Family Investments, L.P. (“Krassner L.P.” and together with Esch, Lorex
and Krassner, the “Control Sellers”), Wilhelmina International, Ltd., a New York
corporation (“Wilhelmina International”), Wilhelmina – Miami, Inc., a Florida
corporation (“Wilhelmina Miami”), Wilhelmina Artist Management LLC, a New York
limited liability company (“WAM”), Wilhelmina Licensing LLC, a Delaware limited
liability company (“Wilhelmina Licensing”), and Wilhelmina Film & TV
Productions LLC, a New York limited liability company (“Wilhelmina TV” and
together with Wilhelmina International, Wilhelmina Miami, WAM and Wilhelmina
Licensing, the “Wilhelmina Companies”), Sean Patterson, an executive with the
Wilhelmina Companies (“Patterson”), and the shareholders of Wilhelmina Miami
(the “Miami Holders” and together with the Control Sellers and Patterson, the
“Sellers”).  Pursuant to the Acquisition Agreement, which closed
February 13, 2009, the Company acquired the Wilhelmina Companies subject to the
terms and conditions thereof (the “Wilhelmina Transaction”).  The
Acquisition Agreement provided for (i) the merger of Wilhelmina Acquisition with
and into Wilhelmina International in a stock-for-stock transaction, as a result
of which Wilhelmina International became a wholly owned subsidiary of the
Company and (ii) the Company purchased the outstanding equity interests of the
other Wilhelmina Companies for cash.
  At the
Company’s 2008 Annual Meeting of Stockholders held on February 5, 2009 (the
“2008 Annual Meeting”), the Company’s stockholders approved and adopted an
amendment to the Company’s Amended and Restated Certificate of Incorporation
(the “Certificate of Incorporation”) to change the Company’s name from “New
Century Equity Holdings Corp.” to “Wilhelmina International, Inc.”
  Wilhelmina
is a fashion modeling agency, placing models with clients located principally
throughout the United States. Wilhelmina, which was founded by model Wilhelmina
Cooper, is a broadly diversified full service agency with offices in New York,
Los Angeles and Miami. In addition to its traditional fashion model management
activities, the Company has also expanded into music and sports talent
endorsement, television show production and licensing opportunities for the
Wilhelmina brand name.
  4
 INDEX
  Note
3.  Summary of Significant Accounting Policies
  Principles
of Consolidation and Basis of Presentation
  The
accompanying consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and subsidiaries in which the Company is
deemed to have control for accounting purposes. All significant inter-company
accounts and transactions have been eliminated in consolidation.
  New
Accounting Pronouncement
  In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting
Principles,which establishes the FASB Accounting Standards Codification
as the sole source of authoritative generally accepted accounting principles
(“GAAP”).  The codification did not change GAAP but reorganizes the
literature.  Pursuant to the provisions of FASB ASC 105, the Company
has updated references to GAAP in its financial statements issued for the period
ended September 30, 2009.  The adoption of FASB ASC 105 did not impact
the Company’s
financial position or results of operations.
 
  Revenue
Recognition
  In
compliance with GAAP, when reporting revenue gross as a principal versus
net as an agent, the Company assesses whether the Company, the model or 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, when the revenues are earned and collectability is reasonably
assured, 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 the Company acts as an agent on behalf of the model or artist the
Company records revenue, when the revenues are earned and collectability is
reasonably assured, 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.
  Use
of Estimates
  The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates that affect the amounts reported in the
consolidated financial statements and the accompanying
notes.  Accounting estimates and assumptions are those that management
considers to be the most critical to an understanding of the consolidated
financial statements because they inherently involve significant judgments and
uncertainties.  All of these estimates reflect management’s judgment
about current economic and market conditions and their effects based on
information available as of the date of these consolidated financial
statements.  If such conditions persist longer or deteriorate further
than expected, it is reasonably possible that the judgments and estimates could
change, which may result in future impairments of assets among other
effects.
  5
 INDEX
  Cash
Equivalents
  The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
  Accounts
Receivable and Allowance for Doubtful Accounts
  Accounts
receivable are accounted for at fair value, do not bear interest and are
short-term in nature.  The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the inability to collect on
accounts receivable.  Based on management’s assessment, the Company
provides for estimated uncollectible amounts through a charge to earnings and a
credit to the valuation allowance.  Balances that remain outstanding
after the Company has used reasonable collection efforts are written off through
a charge to the valuation allowance and a credit to accounts
receivable.  The Company generally does not require
collateral.
  Concentrations
of Credit Risk
  Certain
balance sheet items that potentially subject the Company to concentrations of
credit risk are primarily cash and cash equivalents and accounts receivable. The
Company maintains its cash balances in four different financial institutions in
New York, Los Angeles and Miami. Balances are insured up to FDIC limits of
$250,000 per institution. At September 30, 2009, the Company had cash balances
in financial institutions of approximately $536,000 in excess of such insurance.
Concentrations of credit risk with accounts receivable are mitigated by the
Company’s large number of clients and their dispersion across different
industries and geographical areas. The Company performs ongoing credit
evaluations of its clients and maintains an allowance for doubtful accounts
based upon the expected collectability of all accounts receivable.
  Property
and Equipment
  Property
and equipment are stated at cost. Depreciation and amortization, based upon the
estimated useful lives (ranging from 2-7 years) of the assets or terms of the
leases, are computed by use of the straight-line method. Leasehold improvements
are amortized based upon the shorter of the terms of the leases or asset lives.
When property and equipment are retired or sold, the cost and accumulated
depreciation and amortization are eliminated from the related accounts and gains
or losses, if any, are reflected in the consolidated statement of
operations.
  The
Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If it is determined that an
impairment has occurred, the amount of the impairment is charged to
operations.
  6
 INDEX
  Goodwill
and Intangible Assets
  Goodwill
and intangible assets consist primarily of goodwill and buyer relationships
resulting from the Wilhelmina Transaction and the revenue interest in Ascendant
(defined below) acquired in 2005. Goodwill and intangible assets with indefinite
lives are no longer subject to amortization, but rather to an annual assessment
of impairment by applying a fair-value based test. A significant amount of
judgment is required in estimating fair value and performing goodwill impairment
tests. Intangible assets with finite lives are amortized over useful lives
ranging from 2 to 7 years.
  The
Company annually assesses whether the carrying value of its intangible assets
exceeds its fair value, and records an impairment loss equal to any such
excess.
  
 Deferred
Cost and Revenue
  The
Company has deferred model cost paid in advance  in connection with
talent related contracts. Deferred revenue consists of royalties, commissions
and service charges received in advance of being earned, that are in connection
with product licensing agreements and talent related contracts (see Note
8).
  Advertising
  The
Company expenses all advertising costs as incurred. Advertising costs
approximated $38,000and $88,000 for the three and nine months ended September 30, 2009,
respectively.
  Financial
Instruments
  The
Company is required to disclose the fair value of information about financial
instruments, whether or not recognized on the balance sheet, for those financial
instruments which it is practicable to estimate the
value.  Accordingly, the aggregate fair market value amounts are not
intended to represent the underlying value of the Company.  The
carrying amounts of cash and cash equivalents, current receivables and current
liabilities approximate fair value because of the nature of these
instruments.
  7
 INDEX
 Business
Combinations
 In a
business combination, contingent consideration or earn outs are recorded at fair
value at the acquisition date.  Except in bargain purchase situations,
contingent consideration typically results in additional goodwill being
recognized.  Contingent consideration classified as an asset or
liability will be adjusted to fair value at each reporting date through earnings
until the contingency is resolved.
  These
estimates are subject to change upon the finalization of the valuation of
certain assets and liabilities and may be adjusted.
  At the
date of the Wilhelmina Transaction, GAAP provided that acquisition transaction
costs, such as certain investment banking fees, due diligence costs and attorney
fees were to be recorded as a reduction of earnings in the period they are
incurred.  Prior to January 1, 2009, in accordance with GAAP existing
at that time, the Company included acquisition transaction costs in the
cost of the acquired business. On February 13, 2009, the Company closed the
Wilhelmina Transaction and, therefore recorded all previously capitalized
acquisition transaction costs of approximately $849,000 as a reduction of
earnings for the year ended December 31, 2008. The Company incurred acquisition
transaction costs of approximately $13,000 and $673,000 for the three and nine
months ended September 30, 2009, respectively.
  Management
is required to address the initial recognition, measurement and subsequent
accounting for assets and liabilities arising from contingencies in a business
combination, and requires that such assets acquired or liabilities assumed be
initially recognized at fair value at the acquisition date if fair value can be
determined during the measurement period. If the acquisition date fair value
cannot be determined, the asset acquired or liability assumed arising from a
contingency is recognized only if certain criteria are met. A systematic and
rational basis for subsequently measuring and accounting for the assets or
liabilities is required to be developed depending on their nature.
  Income
Taxes
  Income
taxes are accounted for under the asset and liability
method.  Deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards.  Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  The effect on deferred income tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.  The Company continually assesses the need for a tax
valuation allowance based on all available information.  As of
December 31, 2008, 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.
  8
 INDEX
  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 statement of
financial condition as a result of the Company’s tax positions.
  Net
Income (loss) Per Common Share
  For the
three and nine months ended September 30, 2009 and 2008, diluted EPS equals
basic EPS, as potentially dilutive common stock equivalents were
anti-dilutive.
  Stock-Based
Compensation
  The
Company records compensation expense for all awards granted. After assessing
alternative valuation models and amortization assumptions, the Company will
continue using both the Black-Scholes valuation model and straight-line
amortization of compensation expense over the requisite service period for each
separately vesting portion of the grant.  The Company will reconsider
use of this model if additional information becomes available in the future that
indicates another model would be more appropriate, or if grants issued in future
periods have characteristics that cannot be reasonably estimated using this
model.  The Company utilizes stock-based awards as a form of
compensation for employees, officers and directors.
  The fair
value of the stock option grants included in the Company’s statement of
operations totaled $0 for the three and nine months ended September 30, 2009 and
2008.
  Note
4.  Wilhelmina Acquisition
  On August
25, 2008, in conjunction with the Company’s strategy to redeploy its assets to
enhance stockholder value, the Company entered into the Acquisition Agreement to
acquire the Wilhelmina Companies. At the closing of the Wilhelmina Transaction,
on February 13, 2009, the Company paid an aggregate purchase price of
approximately $22,432,000 in connection therewith, of which approximately
$16,432,000 was paid for the outstanding equity interests of the Wilhelmina
Companies and $6,000,000 in cash repaid the outstanding balance of a note held
by a Control Seller.  The purchase price included approximately
$7,609,000 (63,411,131 shares) of the Company’s common stock, par value $0.01
per share (“Common Stock”), valued at $0.12 per share (representing the closing
price of the Common Stock on February 13, 2009) that was issued in connection
with the merger of Wilhelmina Acquisition with and into Wilhelmina
International.  Approximately $8,822,000 of the remaining cash was
paid to acquire the equity interests of the remaining Wilhelmina
Companies.
  9
 INDEX
  The
purchase price is subject to certain post-closing adjustments, which may be
effected against a total of 19,229,746 shares of Common Stock (valued at
approximately $2,307,000 on February 13, 2009) (the “Restricted Shares”) that
are being held in escrow pursuant to the Acquisition Agreement.  The
approximately $22,432,000 paid at closing, less the Restricted Shares held in
escrow in respect of the purchase price adjustment pursuant to the terms of the
Acquisition Agreement, provides for a floor purchase price of approximately
$20,125,000 (which amount may be further reduced in connection with certain
indemnification matters).  The Restricted Shares held in escrow may be
repurchased by the Company for a nominal amount, subject to certain earnouts and
offsets.
  Upon the
closing of the Wilhelmina Transaction, the Control Sellers and Patterson
obtained certain demand and piggyback registration rights pursuant to a
registration rights agreement with respect to the Common Stock issued to them
under the Acquisition Agreement.  The registration rights agreement
contains certain indemnification provisions for the benefit of the Company and
the registration rights holders, as well as certain other customary
provisions.
  The
shares of Common Stock held in escrow support earnout offsets and
indemnification obligations of the Sellers.  The Control Sellers are
required to leave in escrow, through 2011, any stock “earned” following
resolution of “core” adjustment, up to a total value of
$1,000,000.  Losses at WAM and Wilhelmina Miami, respectively, can be
offset against any positive earnout with respect to the other
company.  Losses in excess of earn out amounts could also result in
the repurchase of the remaining shares of Common Stock held in escrow for a
nominal amount.  Working capital deficiencies may also reduce positive
earn out amounts.  The earn outs, which are payable in 2012, are
calculated as follows: (i) the WAM earn out is based on the three year average
of audited WAM EBITDA beginning January 1, 2009 multiplied by 5, payable in cash
or stock (at the Control Seller’s election), provided that the total payment
will not exceed $10,000,000; and (ii) the Miami earn out is based on the three
year average of audited Wilhelmina Miami EBITDA beginning January 1, 2009
multiplied by 7.5, payable in cash or stock (at the Control Seller’s election).
As of February 13, 2009, management’s estimate of the combined fair value of the
WAM and Miami earn outs approximated $2,312,000.
  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 fourth quarter of fiscal 2009.
  10
 INDEX
  Concurrently
with the execution of the Acquisition Agreement, the Company entered into a
purchase agreement (the “Equity Financing Agreement”) with Newcastle Partners,
L.P., a Texas limited partnership (“Newcastle”), which at that time owned
19,380,768 shares or approximately 36% of the outstanding Common Stock, for the
purpose of obtaining financing to complete the transactions contemplated by the
Acquisition Agreement.  Pursuant to the Equity Financing Agreement,
upon the closing of the Wilhelmina Transaction, the Company sold to Newcastle
$3,000,000 (12,145,749 shares) of Common Stock at $0.247 per share, or
approximately (but slightly higher than) the per share price applicable to the
Common Stock issuable under the Acquisition Agreement.  As a result,
Newcastle now owns 31,526,517 shares of Common Stock or approximately 24% of the
Company’s outstanding Common Stock.  In addition, under the Equity
Financing Agreement, Newcastle committed to purchase, at the Company’s election
at any time or times prior to nine months following the closing, up to an
additional $2,000,000 (8,097,166 shares) of Common Stock on the same terms. The
Company’s election right expired on August 13, 2009. Upon the closing of the
Equity Financing Agreement, Newcastle obtained certain demand and piggyback
registration rights with respect to the Common Stock it holds, including the
Common Stock issuable under the Equity Financing Agreement.  The
registration rights agreement contains certain indemnification provisions for
the benefit of the Company and Newcastle, as well as certain other customary
provisions.
  Under the
purchase method of accounting, the purchase price has been allocated to the net
tangible and intangible assets acquired and liabilities assumed, based on the
fair value of the assets and liabilities of the Wilhelmina Companies in
accordance with GAAP.
  The
intangible assets acquired include intangible assets with indefinite lives, such
as the Wilhelmina brand/trademarks  and intangible assets with finite
lives, such as customer relationships, model contracts, talent contracts,
noncompetition agreements and license agreements, and the remainder of any
intangible assets not meeting the above criteria has been allocated to
goodwill.  Some of these assets, such as goodwill and the Wilhelmina
brand/trademarks, are non-amortizable.  Other assets, such as customer
relationships, model contracts, talent contracts, noncompetition agreements and
license agreements, are being amortized on a straight line basis over their
estimated useful lives which range from 3-7 years. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed as of September 30, 2009:
  11
 INDEX
  (in
      thousands)
                  
                  
                  
                  
                  
                  
                  
                  As
      adjusted September 30, 2009Current
      assets
                  
                  
                  
                  
                  
                  
                  
                  $
                  6,034Property,
      plant and equipment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  364Trademarks
      and intangibles with indefinite lives
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,467Other
      intangible assets with finite lives
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,337Goodwill
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  12,647Other
      assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  289Total
      assets acquired
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  36,138Earn
      out-contingent liability
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,312
                  )Deferred
      income tax liability
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,800
                  )Other
      liabilities assumed
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (9,594
                  )Total
      liabilities assumed
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (13,706
                  )Net
      assets acquired
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  22,432
 These
estimates are subject to change until the finalization of the valuation of
certain assets and liabilities and may be adjusted in accordance with
GAAP.  Approximately $8,971,000 of the purchase price results in tax
deductible goodwill which will be amortized straight-line over 15 years for
income tax purposes.
  The
results of operations for the Wilhelmina Companies are included in the Company’s
consolidated results from the effective date of the acquisition. The following
table sets forth certain unaudited pro forma consolidated statement of
operations data for the nine months ended September 30, 2009 and 2008, as if the
acquisition had occurred at January 1, 2009 and 2008 and was consummated on the
same terms.  Amounts are in thousands, except earnings per
share.
  September
      30,2009
                
                
                2008Total
      revenues
                
                $
                27,244
                
                
                $
                30,267Net
      loss
                
                $
                (2,124
                )
                
                $
                (982
                )Loss
      per common share
                
                $
                (0.02
                )
                
                $
                (0.01
                )
  Note
5.  Line of Credit, Note Payable and Esch Escrow
  In
January 2008, Wilhelmina International renewed a revolving line of credit with a
bank with an increase in borrowing capacity to $2,000,000, with availability
subject to a borrowing base computation. Interest on the revolving credit note
is payable monthly at an annual rate of prime plus one-half percent which
equaled to 3.75% at September 30, 2009. The revolving line of credit expired on
January 31, 2009.  On March 31, 2009, the Company entered into a
modification and extension agreement with the bank that extended the maturity
date to April 30, 2009. On June 10, 2009, the Company entered into a
modification and extension agreement with the bank that extended the maturity
date to July 15, 2009.  On August 21, 2009, the Company entered into a
modification and extension agreement with the bank that extended the maturity
date to October 5, 2009. The line of credit has expired and the Company is
currently negotiating with the bank to further extend the maturity
date.  The bank has not requested repayment of the line and the
Company has continued to finance its operations using this revolving line of
credit.
  On
February 13, 2009, in order to facilitate the acquisition of the Wilhelmina
Companies, the Company entered into a certain letter 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 Acquisition Agreement 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 its credit
facility upon the occurrence of specified events including, but not limited to,
written notification to the Company of the termination or acceleration of the
credit facility. Any amount remaining will be released to Esch upon the renewal,
replacement or extension of the Company’s credit facility, subject to certain
requirements set forth in the Letter Agreement. In the event any portion of the
amount held in escrow is used 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.
  12
 INDEX
  The
Company’s credit facility includes a term note (in the aggregate principal
amount of approximately $96,000 at September 30, 2009) which is payable in
monthly installments of $23,784 including principal and interest calculated at a
fixed rate of 6.65% per annum and matures in December 2009. The line of credit
and the term note are collateralized by all of the assets of the Wilhelmina
Companies, cross collateralized by the combined and consolidated Wilhelmina
Companies and is guaranteed by a stockholder of the Company.
  Note
6.  Restricted Cash
  At
September 30, 2009, the Company had $175,000 of restricted cash that serves as
collateral for an irrevocable standby letter of credit. The letter of credit
serves as additional security under the lease extension relating to the
Company’s office space in New York that expires in December 2010.
  Note
7.  Operating Leases
 
 The
Company is obligated under non-cancelable lease agreements for the rental of
office space and various other lease agreements for the leasing of office
equipment. These operating leases expire at various dates through 2011. In
addition to the minimum base rent, the office space lease agreements provide
that the Company shall pay its pro-rata share of real estate taxes and operating
costs as defined in the lease agreement.
  The
Company also leases pursuant to a services agreement (see Note 13) certain
corporate office space.
  Rent
expense totaled approximately $217,000 and $548,000 for the three and nine
months ended September 30, 2009, respectively, compared to approximately $8,000
and $24,000 for the three and nine months ended September 30, 2008,
respectively.
  Note
8.  Licensing Agreements and Deferred Revenue
  The
Company is a party to various contracts by virtue of its relationship with
certain talent.  The various contracts contain terms and conditions
which require the revenue and the associated talent cost to be recognized
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 nine months ended September 30, 2009, the
Company recognized approximately $89,000 and $225,000, respectively, of revenue
from product licensing agreements.
  
 Note
9.  Revenue Interest
  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.
  13
 INDEX
  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 $36,800,000 and $35,600,000 as of
September 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 September 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.
  Note
10.  Commitments and Contingencies
  The
Company is engaged in various legal proceedings that are routine in nature and
incidental to its business.  None of these proceedings, either
individually or in the aggregate, is believed, in the Company’s opinion, to have
a material adverse effect on either its consolidated financial position or its
consolidated results of operations.
  As
of September 30, 2009, a 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
$3,003,000.  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 September 30, 2009, total compensation payable
under the non-compete provisions approximated $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 $354,000 at September 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.
  14
 INDEX
  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.”
  15
 INDEX
  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 nine
months ended September 30, 2009 (in thousands, except share data):
  Additional
      Paid-in Capital
              
              
              Common
      Stock
                  Shares
              
              
              Common
      Stock AmountBalance
      December 31, 2008
              
              $
              75,357
              
              
              
              53,883,872
              
              
              $
              539Common
      Stock issued in the Wilhelmina Transaction to Patterson, Control Sellers
      and their advisors
              
              
              6,975
              
              
              
              63,411,131
              
              
              
              634Newcastle
      equity issuance cost
              
              
              (139
              )
              
              
              -
              
              
              
              -Common
      Stock issued to Newcastle under Equity Financing Agreement
              
              
              2,879
              
              
              
              12,145,749
              
              
              
              121Balance
      September 30, 2009
              
              $
              85,072
              
              
              
              129,440,752
              
              
              $
              1,294
  16
 INDEX
  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 $48,000 for
the three and nine months ended September 30, 2009, respectively, and $8,000 and
$24,000 for the three and nine months ended September 30, 2008,
respectively.
  The
Company owed NCM approximately $78,000 and $69,000 as of September 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 September 30, 2009.  As of September 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.
  17
 INDEX
  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 nine months ended September 30, 2009 and
September 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 nine months
ended September 30, 2009, compared to the three and nine months ended September
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 September 30, 2009.
  The
second section is a discussion of pro forma unaudited financial information of
the Wilhelmina Companies for the three and nine months ended September 30, 2009
and September 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.
  18
 INDEX
  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 , 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 nine months ended September 30, 2009, the Wilhelmina Companies experienced a
decline in the rate of revenue growth compared to the comparable period of the
previous 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.
  19
 INDEX
  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 $36,800,000 and $35,600,000 as of
September 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 September 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 Nine Months Ended September 30,
2009 Compared to the Three and Nine Months Ended September 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; 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. Gross
billings are 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 continued 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 do not include costs of $1,725,000 due to the
elimination of these agreements and the repayment of the promissory note.
  Beginning
April 2009, the Company began incurring compensation expense of approximately
$450,000 annually, related to the positions of chief executive officer, chief
financial officer and general counsel. Also, post transaction, the Company
continued the employment of Esch to facilitate the transition of the Wilhelmina
Companies’ 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 above
mentioned agreements.
  20
 INDEX
  Gross
Billings
  During
the three and nine months ended September 30, 2009, gross billings of the
Company were approximately $10,011,000 and $25,023,000, respectively, compared
to $0 during the three and  nine months ended September 30,
2008.  The Company completed the Wilhelmina Transaction on February
13, 2009.
  Revenues
  During
the three and nine months ended September 30, 2009, revenues of the Company were
approximately $9,108,000 and $22,211,000, respectively, compared to $0 during
the three and nine months ended September 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 September 30, 2009, in its statements of operations for the three
and nine months ended September 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 September 30, 2009, in its
statements of operations for the three and nine months ended September 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 nine months ended September 30, 2009,  management fee income
from the unconsolidated affiliate amounted to approximately $31,000 and $72,000,
respectively, and $0 for the three and nine 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 nine months
ended September 30, 2009, license fees totaled approximately $62,000 and
$138,000, respectively, and $0 for the three and nine months ended September 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 nine-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 nine months
ended September 30, 2009, the Company recognized approximately $52,000 and
$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 nine months ended September 30,
2009, the Company recognized approximately $37,000 and $124,000, respectively,
of revenues from this agreement.
  21
 INDEX
  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. 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 nine months ended September 30,
2009, model costs were approximately $6,527,000 and $15,695,000, respectively,
compared to $0 during the three and nine months ended September 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 September 30, 2009, in its statements of operations
for the three and nine months ended September 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 September 30, 2009, in its statements of
operations for the three and nine months ended September 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 nine months ended September 30, 2009, operating expenses increased
approximately $3,083,000 and $8,633,000, to approximately $3,164,000 and
$8,904,000, respectively, compared to approximately $81,000 and $271,000 during
the three and nine months ended September 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 nine months ended September 30, 2009, salaries and service costs
were approximately $1,756,000 and $4,580,000, respectively, compared to $0
during the three and nine months ended September 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 September 30, 2009, in its statements of operations
for the three and nine months ended September 30, 2009.
  22
 INDEX
  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 nine months ended September 30, 2009, office and general expenses were
approximately $629,000 and $1,541,000, respectively, compared to $0 during the
three and nine months ended September 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 September 30, 2009, in its statements of operations for the three
and nine months ended September 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 nine months ended September 30,
2009, depreciation and amortization expense totaled $490,000 (of which $463,000
relates to amortization of intangibles acquired in connection with the
Wilhelmina Transaction) and $1,225,000 (of which $1,159,000 relates to
amortization of intangibles acquired in connection with the Wilhelmina
Transaction), respectively, compared to $0 during the three and nine months
ended September 30, 2008.  The Company made approximately $16,000 and
$0 of fixed asset purchases during the nine months ended September 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 nine months ended September 30, 2009, corporate overhead
approximated $276,000 and $885,000, respectively, compared to $81,000 and
$271,000 for the three and nine months ended September 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 a
business combination, acquisition transaction costs, such as certain investment
banking fees, due diligence costs and attorney fees are to be recorded as a
reduction of earnings in the period they are incurred.  Prior to
January 1, 2009, acquisition transaction costs were included in the cost of the
acquired business. On February 13, 2009, the Company closed the Wilhelmina
Transaction, and therefore, recorded all previously capitalized acquisition
transaction costs of approximately $849,000 as a reduction of earnings for the
year ended December 31, 2008.
  23
 INDEX
  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 nine months ended September
30, 2009, the Company recorded acquisition transaction costs of approximately
$13,000 and $673,000, respectively.
  Interest
Income
  Interest
income totaled approximately $0 and $4,000 during the three and nine months
ended September 30, 2009, respectively, compared to approximately $60,000 and
$223,000 during the three and nine months ended September 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
September 30, 2009 Compared to the Quarter Ended September 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.
  24
 INDEX
  Pro Forma
Operating Income of the Wilhelmina Companies compared to the historical
information for the quarter ended September 30, 2008 for the Wilhelmina
Companies acquired on February 13, 2009:
  
 
  Quarter
      ended September 30,
                  (in
      thousands)2009
                
                
                2008$
                
                
                %
      of
                    Revenues
                    net
      of
                    model
      costs
                
                
                %
      of
                    Operating
                    Expenses
                
                
                $
                
                
                %
      of Revenues net of model costs
                
                
                %
      of Operating
                    ExpensesTotal
      revenues
                
                $
                9,385
                
                
                
                
                
                
                
                
                $
                10,119Model
      costs
                
                
                6,527
                
                
                
                
                
                
                
                
                
                7,152Revenues
      net of model costs
                
                
                2,858
                
                
                
                
                
                
                
                
                
                2,967Operating
      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 September 30, 2009, gross billings of the Wilhelmina Companies
decreased approximately $1,882,000, or 15.8%, to approximately $10,011,000,
compared to approximately $11,893,000 during the quarter ended September 30,
2008.  The Wilhelmina Companies experienced decreases in gross
billings across all lines of the business as a result of a decrease in spending
by its clients due to the global economic recession.
  Revenues
net of model costs
  During
the quarter ended September 30, 2009, revenues net of model costs of the
Wilhelmina Companies decreased approximately $109,000, or 3.6%, to approximately
$2,858,000, compared to approximately $2,967,000 during the quarter ended
September 30, 2008. The year-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 for the quarter
ended September 30, 2009, since $1,200,000 of gross billings for the quarter
ended September 30, 2008 resulted in 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 September 30, 2009, operating expenses
decreased approximately $126,000, or 5.0%, to approximately $2,385,000, compared
to approximately $2,511,000 during the quarter ended September 30, 2008. The
decrease in operating expense was primarily attributable to a decline in
salaries and service costs as described below.
  25
 INDEX
  Salaries
and Service Costs
  During
the quarter ended September 30, 2009, salaries and service costs decreased
approximately $214,000, or 10.9%, to approximately $1,756,000, compared to
approximately $1,970,000 during the quarter ended September 30, 2008. The
decrease in salaries and service costs was mostly attributable to a decrease in
travel costs incurred by employees when delivering the Company’s services to
customers and models. Salaries and service costs as a percentage of total
operating expenses were 73.7% and 78.5% for the quarters ended September 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 September 30, 2009, office and
general expenses increased approximately $88,000, or 16.2%, to approximately
$629,000, compared to approximately $541,000 during the quarter ended September
30, 2008.  Office and general expenses, as a percentage of total
operating expenses, were 26.3% for the quarter ended September 30, 2009 and
21.5% for the quarter ended September 30, 2008.
  Pro
Forma Operating Income
  During
the quarter ended September 30, 2009, pro forma operating income was
approximately $473,000 compared to operating income of approximately $456,000
during the quarter ended September 30, 2008, an increase of $17,000, or
3.7%.  The increase in pro forma operating income was mostly
attributable to the recognition of certain revenues deferred in prior periods
and a decrease in travel related cost incurred by employees during the quarter
ended September 30, 2009 as compared to the quarter ended September 30,
2008.
  Pro
Forma Results of Operations of the Wilhelmina Companies for the Nine Months
Ended September 30, 2009 Compared to the Nine Months Ended September 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.
  26
 INDEX
  Pro Forma
Operating Income of the Wilhelmina Companies compared to the historical
information for the nine months ended September 30, 2008 for the Wilhelmina
Companies acquired on February 13, 2009:
  Nine
      months ended September 30,
                  (in
      thousands)2009
                
                
                2008$
                
                
                
                %
      of
                    Revenues
                    net
      of
                    model
      costs
                
                
                %
      of
                    Operating
                    Expenses
                
                
                $
                
                
                
                %
      of
                    Revenues
                    net
      of
                    model
      costs
                
                
                %
      of
                    Operating
                    ExpensesTotal
      revenues
                
                $
                27,244
                
                
                
                
                
                
                
                
                $
                30,267Model
      costs
                
                
                19,092
                
                
                
                
                
                
                
                
                
                20,945Revenues
      net of model costs
                
                
                8,152
                
                
                
                
                
                
                
                
                
                9,322Operating
      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 nine months ended September 30, 2009, gross billings of the Wilhelmina
Companies decreased approximately $4,272,000, or 12.6%, to approximately
$29,702,000, compared to approximately $33,974,000 during the nine months ended
September 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.
  Revenues
net of model costs
  During
the nine months ended September 30, 2009, revenues net of model costs of the
Wilhelmina Companies decreased approximately $1,170,000, or 12.5%, to
approximately $8,152,000, compared to approximately $9,322,000 during the nine
months ended September 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.
  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 nine months ended September 30, 2009, operating
expenses decreased approximately $28,000, or 0.4%, to approximately $7,359,000,
compared to approximately $7,387,000 during the nine months ended September 30,
2008.  Operating
expenses have remained relatively unchanged as management has focused on
managing operating costs and maintaining profitable operating
results.
 Salaries
and Service Costs
  During
the nine months ended September 30, 2009, salaries and service costs decreased
approximately $9,000, or 0.2%, to approximately $5,493,000, compared to
approximately $5,502,000 during the nine months ended September 30, 2008. The
Wilhelmina Companies continue to invest in professional personnel and pursue new
business but have been able to reduce travel costs to more than offset the
increases in salaries cost.  Salaries and service costs as a
percentage of total operating expenses were 74.7% and 74.4% for the nine months
ended September 30, 2009 and 2008, respectively.
  27
 INDEX
  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
nine months ended September 30, 2009, office and general expenses decreased
approximately $19,000, or 1.0%, to approximately $1,866,000, compared to
approximately $1,885,000 during the nine months ended September 30, 2008. Office
and general expenses, as a percentage of total operating expenses, were 25.3%
for the nine months ended September 30, 2009 and 25.6% for the nine months ended
September 30, 2008.
  Pro
Forma Operating Income
  During
the nine months ended September 30, 2009, the pro forma operating income was
approximately $793,000 compared to operating income of approximately $1,935,000
during the nine months ended September 30, 2008, representing a decline of
$1,142,000, or 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 $949,000 at September 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 $96,000 as of September 30, 2009, and a revolving line of credit
with a balance of $2,000,000 as of September 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 November 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 September 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.
  28
 INDEX
  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 nine 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 fourth quarter of fiscal 2009.
  29
 INDEX
  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 $354,000 at September 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 GAAP when reporting revenue gross as a principal versus net as
an 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.
  30
 INDEX
  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. Goodwill and intangible assets with
indefinite lives are no longer subject to amortization, but rather to an annual
assessment of impairment by applying a fair-value based test. A significant
amount of judgment is required in estimating fair value and performing goodwill
impairment tests.
  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 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 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.
  At the
date of the Wilhelmina Transaction, GAAP provided that acquisition transaction
costs, such as certain investment banking fees, due diligence costs and attorney
fees were to be recorded as a reduction of earnings in the period they are
incurred.  Prior to January 1, 2009, in accordance with GAAP existing
at that time, the Company included acquisition transaction costs in the cost of
the acquired business. On February 13, 2009, the Company closed the Wilhelmina
Transaction and therefore recorded all previously capitalized acquisition
transaction costs of approximately $849,000 as a reduction of earnings for the
year ended December 31, 2008. The Company incurred acquisition transaction costs
of approximately $673,000 for the nine months ended September 30,
2009.
  31
 INDEX
  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.
  Item 3.  Quantitative and Qualitative Disclosures About
Market Risk.
  Not
applicable.
  Item 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 September 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 (b) accumulated and 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 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.
  32
 INDEX
  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.
  PART II
 OTHER
INFORMATION
  Item 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.
  Item 1.A.  Risk Factors.
  Not
applicable.
  Item 2.  Unregistered Sales of Equity Securities and Use
of Proceeds.
  None.
  Item 3.  Defaults Upon Senior Securities.
  None.
  Item 4.  Submission of Matters to a Vote of Security
Holders.
  None.
  Item 5.  Other Information.
  None.
  Item 6.  Exhibits.
  Exhibit
      No.
              Description31.1
              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
  33
 INDEX
 
 SIGNATURES
  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:  November
      16, 2009
              By:
              /s/
      John P. MurrayName:
              John
      P. MurrayTitle:
              Chief
      Financial Officer
                (Duly
      Authorized and
                Principal
      Financial Officer)
 
  34