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WHLM > SEC Filings for WHLM > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for WILHELMINA INTERNATIONAL, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WILHELMINA INTERNATIONAL, INC.


14-Nov-2011

Quarterly Report


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, 2011 and September 30, 2010. It should be read in conjunction with the financial statements of the Company, the notes thereto and other financial information included elsewhere in this report, and the Company's Annual Report on Form 10-K for the year ended December 31, 2010, as amended.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain "forward-looking" statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management as well as information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, the interest rate environment, governmental regulation and supervision, seasonality, changes in industry practices, one-time events and other factors described herein and in other filings made by the Company with the SEC. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not undertake any obligation to publicly update these forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements.


Overview

Wilhelmina's primary business is fashion model management, which is headquartered in New York City. The Company's predecessor was founded in 1967 by Wilhelmina Cooper, a renowned fashion model, and is one of the oldest and largest fashion model management companies in the world. Since its founding, Wilhelmina has grown to include operations located in Los Angeles and Miami, as well as a growing network of licensees comprising leading modeling agencies in various local markets across the U.S. as well as in Panama. Wilhelmina provides traditional, full-service fashion model and talent management services, specializing in the representation and management of models, entertainers, artists, athletes and other talent to various customers and clients, including retailers, designers, advertising agencies and catalog companies.

Wilhelmina has strong brand recognition that enables it to attract and retain top talent to service a broad universe of quality media and retail clients.

Industry and Outlook

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, Internet and TV advertising campaigns.

During the three and nine months ended September 30, 2011, Wilhelmina has continued to see improvement in its clients' willingness to spend on the services it provides as evidenced by an increase in demand for models. During these periods, the Wilhelmina Companies continued to experience revenue growth in its core modeling business. 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.

Trends and Opportunities

The Company expects that the combination of the location of Wilhelmina's main operating base in New York City, the industry's capital, the depth and breadth of its talent pool and client roster, its diversification across various talent management segments, and its geographical reach should make Wilhelmina's operations more resilient to industry changes and economic swings than those of many of the smaller firms operating in the industry. Similarly, in the segments where Wilhelmina competes with other leading full service agencies, Wilhelmina continues to compete successfully. Accordingly, the Company believes that the current economic climate will create new growth opportunities for strong industry leaders such as Wilhelmina.

Since 2007, Wilhelmina has seen an increasingly strong influx of talent, at both the new and seasoned talent levels, and it believes it is increasingly attractive as an employer for successful agents across the industry as evidenced by the quality of agents expressing an interest in joining Wilhelmina. The Company continues to seek new business and branding opportunities directly or indirectly relating to the fashion industry. In order to take advantage of these opportunities and support its continued growth, Wilhelmina will need to continue to successfully allocate resources and staffing in a way that enhances its ability to respond to these new opportunities.


With total advertising expenditures on major media (newspapers, magazines, television, cinema, outdoor and Internet) amounting to approximately $156 billion in 2010, North America is by far the world's largest advertising market. For the fashion talent management industry, including Wilhelmina, advertising expenditures on magazines, television and outdoor are of particular relevance, with Internet advertising becoming increasingly important.

Due to the increasing ubiquity of the Internet as a standard business tool, the Wilhelmina Companies have increasingly sought to harness the opportunities of the Internet and other digital media to improve their communications with clients and to facilitate the effective exchange of fashion model and talent information. The Wilhelmina Companies have also continued their efforts to expand the geographical reach of the Wilhelmina Companies through this medium in order to both support revenue growth and to reduce operating expenses. At the same time, the Internet presents challenges for the Wilhelmina Companies, including (i) the cannibalization of traditional print advertising business and
(ii) pricing pressures with respect to photo shoots and client engagements.

Strategy

Management's strategy is to increase value to shareholders through the following initiatives:

expanding the women's high end fashion board;

continuing to invest in the WAM business;

strategic acquisitions;

licensing the "Wilhelmina" name to leading, local model management agencies;

exploring the use of the "Wilhelmina" brand in connection with consumer products, cosmetics and other beauty products; and

partnering on television shows and promoting model search contests.

Wilhelmina Acquisition

On February 13, 2009, the Company closed the Wilhelmina Transaction and acquired the Wilhelmina Companies. As of the closing of the Wilhelmina Transaction, the business of the Wilhelmina Companies represents the Company's primary operating business. Prior to closing of the Wilhelmina Transaction, the Company's interest in Ascendant, acquired on October 5, 2005, represented the Company's sole operating business.

Ascendant

On October 5, 2005, the Company acquired an interest in the revenues generated by ACP Investments, L.P. (d/b/a Ascendant Capital Partners) ("Ascendant"), a Berwyn, Pennsylvania based alternative asset management company whose funds have investments in long/short equity funds and which distributes its registered funds primarily through various financial intermediaries and related channels. Ascendant had assets under management of approximately $73,400,000 and $52,700,000 as of September 30, 2011 and September 30, 2010, respectively.


During 2009, the Company determined that the present value of expected cash flows from the Ascendant revenue interest was nominal and therefore the revenue interest is carried at $0 in the accompanying balance sheet.

RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010

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, Curve, Lifestyle, Kids, etc.)) of the business, revenues by geographic locations and revenues from significant clients. Wilhelmina has three primary sources of revenue: revenues from principal relationships whereby the gross amount billed to the client is recorded as revenue, when the revenues are earned and collectability is reasonably assured; revenues from agent relationships whereby the commissions paid by models as a percentage of their gross earnings are recorded as revenue when earned and collectability is reasonably assured; and a separate service charge, paid by clients in addition to the booking fees, which is calculated as a percentage of the models' booking fees and is recorded as revenues when earned and collectability is reasonably assured. See Critical Accounting Policies - Revenue Recognition, below. 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.

Gross Billings

Gross billings for the three months ended September 30, 2011 increased approximately $505,000, or 3.7%, to approximately $14,305,000, compared to approximately $13,800,000 for the three months ended September 30, 2010. During the three months ended September 30, 2011, the Wilhelmina Companies experienced an increase in gross billings across the core modeling business of approximately 13%, which was somewhat offset by a decrease in gross billings in the WAM business of approximately 45% compared to gross billings generated by the respective divisions during the three months ended September 30, 2010. Gross billings of the WAM division represented approximately 9% of total gross billings for the three months ended September 30, 2011, compared to approximately 17% for the three months ended September 30, 2010. During the three months ended September 30, 2011, gross billings of the various boards of the core modeling business experienced positive growth ranging from 1% to 48%, and two boards experienced negative growth of 15%, compared to the three months ended September 30, 2010.

Gross billings for the nine months ended September 30, 2011 increased approximately $4,162,000, or 10.5%, to approximately $43,846,000, compared to approximately $39,684,000 for the nine months ended September 30, 2010. Generally, gross billings increased due to the Company's clients spending more on advertising and the Company having the desired talent available to its clients in the core modeling business. During the nine months ended September 30, 2011, the Wilhelmina Companies experienced an increase in gross billings across the core modeling business of approximately 19% and a decrease in gross billings in the WAM business of approximately 39% compared to gross billings generated by the respective divisions during the nine months ended September 30, 2010. Gross billings of the WAM division represented approximately 8% of total gross billings for the nine months ended September 30, 2011, compared to approximately 15% for the nine months ended September 30, 2010. During the nine months ended September 30, 2011, gross billings of the various boards of the core modeling business experienced positive growth ranging from 2% to 65% and one board experienced negative growth of 12%, compared to the nine months ended September 30, 2010.


Historically, gross billings in the WAM division have been erratic based on the specific artist agreements with customers. For this reason, gross billings in the WAM division may vary significantly during individual reporting periods.

Revenues

During the three months ended September 30, 2011, revenues increased approximately $1,437,000, or 12.2%, to approximately $13,258,000 compared to approximately $11,821,000 during the three months ended September 30, 2010. During the three months ended September 30, 2011, the Company experienced increases in revenues as a result of increases in gross billings for the core modeling business. In addition, revenues increased at a rate greater than the rate of increase in gross billings over the three months ended September 30, 2010 as a result of a larger percentage of total revenues being derived from relationships which required the reporting of revenues gross (as a principal) versus net (as an agent).

Typically, relationships in the core modeling business are determined to be principal relationships and therefore require the reporting of revenues on a gross basis. Relationships in the WAM business are usually determined to be agent relationships, which require the reporting of revenues on a net basis.

During the nine months ended September 30, 2011, revenues increased approximately $6,363,000, or 18.4%, to approximately $41,038,000, compared to approximately $34,675,000 during the nine months ended September 30, 2010. During the nine months ended September 30, 2011, the Company experienced increases in revenues as a result of increases in gross billings for the core modeling business. In addition, revenues increased at a rate greater than the rate of increase in gross billings over the nine months ended September 30, 2010 as a result of a larger percentage of total revenues being derived from relationships, which required the reporting of revenues gross (as a principal) versus net (as an agent).

License Fees and Other Income

The Company has an agreement with an unconsolidated affiliate to provide management and administrative services, as well as sharing of space. For the three and nine months ended September 30, 2011, management fee income from the unconsolidated affiliate amounted to approximately $27,000 and $78,000, respectively, compared to approximately $27,000 and $78,000, for the three and nine months ended September 30, 2010, respectively.

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, 2011, license fees totaled approximately $62,000 and $126,000, respectively, compared to $53,000 and $148,000 for the three and nine months ended September 30, 2010, respectively.

The Company has entered into product licensing agreements with clients. Under these agreements, the Company earns commissions and service charges and participates in sharing of royalties with talent it represents. During the three and nine months ended September 30, 2011, revenue from these licensing agreements totaled approximately $137,000 and $562,000, respectively, compared to $219,000 and $531,000 for the three and nine months ended September 30, 2010, respectively.


Other income includes fees derived from participants in the Company's model search contests; and television syndication royalties and a production series contract. In 2005, the Wilhelmina Companies produced the television show "The Agency" and in 2007 the Wilhelmina Companies entered into an agreement with a television network to develop a television series titled "She's Got the Look", which completed its third season on the network channel TV Land Prime during the nine months ended September 30, 2010. The television series documented 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 agreed to a modeling contract with the winner of the competition, in consideration of a fee per episode produced, plus certain fees, as defined.

Model Costs

Model costs consist of costs associated with relationships with models where the key indicators suggest that the Company acts as a principal. Therefore, the Company records the gross amount billed to the client as revenue when the revenues are earned and collectability is reasonably assured, and the related costs incurred to the model as model cost.

During the three months ended September 30, 2011, model costs increased approximately $1,170,000, or 14.4%, to approximately $9,278,000, compared to approximately $8,108,000 during the three months ended September 30, 2010. Model costs increased 14.4% compared to the prior year quarter as a result of a 12.2% increase in revenues as compared to the prior year quarter. Model costs increased slightly more than expected, given the increase in revenues, due to an increase in certain model related costs.

During the nine months ended September 30, 2011, model costs increased approximately $4,556,000, or 18.9%, to approximately $28,632,000, compared to approximately $24,076,000 during the nine months ended September 30, 2010. During the nine months ended September 30, 2011, model costs as a percentage of revenues were approximately 69.8% compared to 69.4% during the nine months ended September 30, 2010. Margins declined slightly from the prior year period due to increases in certain fixed model costs.

Operating Expenses

Operating expenses consist of costs that support the operations of the Company, including payroll, rent, overhead, insurance, travel, professional fees, amortization and depreciation, asset impairment charges and corporate overhead.

During the three months ended September 30, 2011, operating expenses increased approximately $304,000, or 8.6%, to approximately $3,853,000, compared to approximately $3,549,000 during the three months ended September 30, 2010. The increase in operating expenses is primarily attributable to increases in salaries and service costs offset by decreases in amortization and depreciation and office and general expenses.

During the nine months ended September 30, 2011, operating expenses increased approximately $760,000, or 7.1%, to approximately $11,393,000 compared to approximately $10,633,000 during the nine months ended September 30, 2010. The increase in operating expenses is primarily attributable to increases in salaries and service costs somewhat offset by decreases in amortization and depreciation and corporate overhead. Office and general expenses were relatively flat when comparing the nine months ended September 30, 2011 to the nine months ended September 30, 2010.


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 consist of payroll and related costs and travel costs required to deliver the Company's services to the customers and models. During the three months ended September 30, 2011, salaries and service costs increased approximately $491,000, or 24.4%, to approximately $2,502,000, compared to approximately $2,011,000 during the three months ended September 30, 2010.

During the nine months ended September 30, 2011, salaries and service costs increased approximately $1,072,000, or 17.9%, to approximately $7,067,000, compared to approximately $5,995,000 during the nine months ended September 30, 2010. During the nine months ended September 30, 2011 and September 30, 2010, salaries and service costs as a percentage of revenues remained relatively flat at approximately 17.3%. The Company continues to leverage its employees to meet the increased demands from customers for Wilhelmina talent.

The increase in salaries and service costs when compared to the prior year periods are attributable to increased salary costs in connection with the hiring of employees and increased incentive compensation as a result of employees achieving performance targets. The Company also incurred additional travel related costs in connection with the delivery of its services and in connection with new business development.

Office and General Expenses

Office and general expenses consist of office and equipment rents, advertising and promotion, insurance expenses, administration and technology cost. These costs are less directly linked to changes in the Company's revenues than are salaries and service costs. During the three months ended September 30, 2011, office and general expenses decreased approximately $144,000, or 18.8%, to approximately $623,000, compared to approximately $767,000 during the three months ended September 30, 2010. Office and general expenses decreased due to lower costs associated with advertising and promotion, professional fees and facilities related costs.

During the nine months ended September 30, 2011, office and general expenses increased approximately $4,000, or 0.2%, to approximately $2,181,000, compared to approximately $2,177,000 during the nine months ended September 30, 2010. During the nine months ended September 30, 2011, office and general expenses as a percentage of revenues were approximately 5.3%, compared to approximately 6.3% during the nine months ended September 30, 2010. The Company continues to leverage its resources and reduce costs relative to revenues generated when available.

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, 2011, depreciation and amortization expense totaled $401,000 and $1,238,000 (of which $374,000 and $1,166,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Transaction), respectively, compared to $481,000 and $1,447,000 (of which $463,000 and $1,389,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Transaction) during the three and nine months ended September 30, 2010, respectively. Fixed asset purchases totaled approximately $279,000 and $75,000 during the nine months ended September 30, 2011 and September 30, 2010, respectively. The majority of the fixed asset purchases incurred during the nine months ended September 30, 2011 relate to leasehold improvements, furniture and equipment for the Company's new office space in Los Angeles. In connection with the new office space in Los Angeles the Company entered into a 5 year lease effective July 1, 2011.


Corporate Overhead

Corporate overhead expenses include public company costs, stock exchange fees, director and executive officer compensation, directors' and officers' insurance, legal and professional fees, corporate office rent and travel. During the three and nine months ended September 30, 2011, corporate overhead approximated $327,000 and $907,000, respectively, compared to $290,000 and $1,014,000 for the three and nine months ended September 30, 2010, respectively. The decrease in corporate overhead for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 is primarily attributable to a decrease in accounting, tax and legal fees somewhat offset by an increase in directors fees and stock exchange fees.

Miami Earn-Out Adjustment

In connection with the Settlement Agreement reached October 18, 2010, (A) approximately 39% (representing the amount that would otherwise be paid to Krassner L.P.) of the first $2 million of the Miami Earnout was cancelled and (B) approximately 69% (representing the amounts that would otherwise be paid in the aggregate to Krassner L.P. and Lorex) of any such Miami Earnout obligation over $2 million was cancelled.

The Miami Earnout, payable in accordance with the Acquisition Agreement and Settlement Agreement, is calculated based on the three year average of audited Wilhelmina Miami EBITDA beginning January 1, 2009, multiplied by 7.5, payable in cash or stock. As of December 31, 2010 and September 30, 2011, management's estimate of the combined fair value of the Miami Earnout was approximately $2,063,000 and $2,138,000, respectively. During the three months ended September 30, 2011, management determined (based on a number of factors, including the most recent financial results of the Miami division) that the estimate of the fair value of the Miami Earnout required an increase of $75,000.

Asset Impairment Charge

Each reporting period, the Company assesses whether events or circumstances have occurred which indicate that the carrying amount of an intangible asset exceeds its fair value. If the carrying amount of the intangible asset exceeds its fair value, an asset impairment charge will be recognized in an amount equal to that excess. No asset impairment charges were incurred during the nine months ended September 30, 2011 and 2010.

Interest Income

Interest income totaled approximately $4,000 and $0 for the nine months ended September 30, 2011 and September 30, 2010, respectively. The increase in interest income is the result of an increase in cash balances which earn yields.


Interest Expense

Interest expense totaled approximately $2,000 and $21,000 for the three and nine months ended September 30, 2011, respectively, compared to $14,000 and $52,000 for the three and nine months ended September 30, 2010, respectively. The decrease in interest expense for the three and nine months ended September 30, 2011, compared to the three and nine months ended September 30, 2010, is attributable to declines in the balances of the Credit Facility with Signature Bank and the Esch Note due to principal payments somewhat offset by the borrowing under the Amegy Credit Facility during the three months ended September 30, 2011. See Liquidity and Capital Resources below for further discussion.

Income Tax Expense

During the nine months ended September 30, 2011, the Company's combined federal . . .

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