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WHLM > SEC Filings for WHLM > Form 10-K on 29-Mar-2012All Recent SEC Filings

Show all filings for WILHELMINA INTERNATIONAL, INC.

Form 10-K for WILHELMINA INTERNATIONAL, INC.


29-Mar-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following is a discussion of the Company's financial condition and results of operations comparing the calendar years ended December 31, 2011 and 2010. You should read this section in conjunction with the Company's Consolidated Financial Statements and the Notes thereto that are incorporated herein by reference and the other financial information included herein and the notes thereto.

OVERVIEW

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

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

The business of talent management firms, such as Wilhelmina, depends heavily on the state of the advertising industry, as demand for talent is driven by Internet, print and TV advertising campaigns for consumer goods and retail clients. The Company continues to focus on cutting costs and recruiting top agents when available and scouting and developing new talent. As a result, during 2011, Wilhelmina


realized growth in its gross billings partly due to its deeper bench of agents and new talent and also partly due to improvement in its clients' willingness to spend on the related services it provides.

Although Wilhelmina has a large and diverse client base, as discussed below, it is not immune to global economic conditions. Wilhelmina closely monitors economic conditions, client spending and other factors and continually looks for ways to reduce costs, manage working capital and conserve cash. There can be no assurance as to the effects on Wilhelmina of future economic circumstances, client spending patterns, client credit worthiness and other developments and whether, or to what extent, Wilhelmina's efforts to respond to them will be effective.

Trends and Opportunities

The Company expects that the combination of Wilhelmina's main operating base in New York City, the industry's capital, with the depth and breadth of its talent pool and client roster and its diversification across various talent management segments, together with its geographical reach should make Wilhelmina's operations more resilient to industry changes and economic swings than those of many of the smaller firms operating in the industry. Similarly, in the segments where Wilhelmina competes with other leading full service agencies, Wilhelmina competed successfully in 2011. Accordingly, the Company believes that the current economic climate will create new growth opportunities for strong industry leaders such as Wilhelmina.

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

With total advertising expenditures on major media (newspapers, magazines, television, cinema, outdoor and Internet) amounting to approximately $161 billion in 2010 and $165 billion 2011, North America is by far the world's largest advertising market. For the fashion talent management industry, including Wilhelmina, advertising expenditures on magazines, television, Internet and outdoor are of particular relevance.

Due to the increasing ubiquity of the Internet as a standard business tool, the 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 Company continues to make significant investments in technology in pursuit of gains in efficiency and better communications with customers. At the same time, the Internet presents challenges for the 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;

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 discussed in further detail in Item 1 of this Form 10-K. As of the closing of the Wilhelmina Transaction, the business of Wilhelmina represents the Company's primary operating business. Prior to closing of the Wilhelmina Transaction, the Company's interest in Ascendant, acquired on October 5, 2005, represented the Company's sole operating business.

Ascendant

On October 5, 2005, the Company acquired an interest in the revenues generated by ACP 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 $74,900,000 and $59,100,000 as of December 31, 2011 and December 31, 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 at December 31, 2011 and 2010.

RESULTS OF OPERATIONS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 2011 COMPARED TO THE YEAR ENDED DECEMBER 31, 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, Select, S2, Runway, Curve, Lifestyle, Kids, etc.)) of the business, revenues by geographic locations and revenues from significant clients. Wilhelmina has three primary sources of revenue: revenues from principal relationships whereby the gross amount billed to the client is recorded as revenue, when the revenues are earned and collectability is reasonably assured; revenues from agent relationships whereby the commissions paid by models as a percentage of their gross earnings are recorded as revenue when earned and collectability is reasonably assured; and separate service charges, paid by clients in addition to the booking fees, which are calculated as a percentage of the models' booking fees and are recorded as revenues when earned and collectability is reasonably assured. See Critical Accounting Policies - Revenue Recognition. Gross billings are an important business metric that ultimately drive 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 year ended December 31, 2011 increased approximately $6,521,000, or 12.4%, to approximately $59,005,000, compared to approximately $52,484,000 for the year ended December 31, 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. During the year ended December 31, 2011, the Wilhelmina Companies experienced a significant increase in gross billings across the core modeling business, which was partially offset by a year over year decrease in gross billings in the WAM business. Gross billings of the WAM division represented approximately 10% of total gross billings for the year ended December 31, 2011, compared to approximately 12% for the year ended December 31, 2010. During the year ended December 31, 2011, gross billings of the various boards of the core modeling business experienced positive growth ranging from 3% to 92%, and two boards experienced negative growth of 2%, compared to the year ended December 31, 2010.

Revenues

During the year ended December 31, 2011, revenues increased approximately $6,547,000, or 13.3%, to approximately $55,466,000, compared to approximately $48,919,000 during the year ended December 31, 2010. This increase in revenues is attributable to increases in gross billings for the core modeling business and recognition of revenues previously deferred.

In addition, revenues during the year ended December 31, 2011 increased at a rate greater than the rate of increase in gross billings over the year ended December 31, 2010 as a result of a larger percentage of total revenues being derived from relationships which required the reporting of revenues gross (as a principal) versus net (as an agent).

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.

License Fees and Other Income

The Company has an agreement with an unconsolidated affiliate to provide management and administrative services, as well as sharing of space. For each of the years ended December 31, 2011 and December 31, 2010, management fee and rental income from the unconsolidated affiliate amounted to approximately $110,000.

License fees consist primarily of franchise revenues from independently owned model agencies that use the Wilhelmina trademark name and various services provided to them by the Wilhelmina Companies. During the year ended December 31, 2011, license fees totaled approximately $171,000, compared to $192,000 for the year ended December 31, 2010.


The Company has entered into product licensing agreements with clients. Under these agreements, the Company earns commissions and service charges and participates in sharing of royalties with talent it represents. During the year ended December 31, 2011, revenue from these licensing agreements totaled approximately $880,000, compared to $780,000 for the year ended December 31, 2010.

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

Model Costs

Model costs consist of costs associated with relationships with models where the key indicators suggest that the Company acts as a principal. Therefore, the Company records the gross amount billed to the client as revenue when the revenues are earned and collectability is reasonably assured, and the related costs incurred to the model as model cost. During the year ended December 31, 2011, model costs increased approximately $4,714,000, or 14.4%, to approximately $37,552,000, compared to approximately $32,838,000 during the year ended December 31, 2010. Increases in model costs are a direct result of an increase in the utilization of models by the customers of the Company and an increase in average billing rates for models. During the year ended December 31, 2011, model costs as a percentage of revenues were approximately 67.7%, compared to 67.1% during the year ended December 31, 2010. Margins declined slightly from the prior year period mostly as a result of a larger percentage of total revenues being derived from relationships, which required the reporting of revenues gross (as a principal) versus net (as an agent).

Operating Expenses

Operating expenses consist of costs that support the operations of the Company, including payroll, rent, overhead, insurance, travel, professional fees, amortization and depreciation, asset impairment charges and corporate overhead. During the year ended December 31, 2011, operating expenses increased approximately $866,000, or 5.9%, to approximately $15,400,000, compared to approximately $14,596,000 during the year ended December 31, 2010. The increase in operating expenses is attributable to increases in salaries and service costs partially offset by a decrease in office and general expenses and amortization.

Salaries and Service Costs

Salaries and service costs consist of payroll and related costs and travel costs required to deliver the Company's services to its customers and models. During the year ended December 31, 2011, salaries and service costs increased approximately $1,190,000, or 14.3%, to approximately $9,502,000, compared to approximately $8,312,000 during the year ended December 31, 2010. Salaries and service costs were 17.1% of revenues for the year ended December 31, 2011, compared to 17.0% for the year ended December 31, 2010. The Company has consistently leveraged its employees to meet the increased demands from customers for Wilhelmina talent in 2011.


The Company experienced increased travel costs in connection with delivering services to its customers and models due to increased gross billings and also in pursuit of generating new revenues. The Company also incurred additional incentive compensation for the year ended December 31, 2011, as compared to the year ended December 31, 2010, due to the achievement of performance targets by certain employees.

Office and General Expenses

Office and general expenses consist of office and equipment rents, advertising and promotion, insurance expenses, administration and technology cost. These costs are less directly linked to changes in the Company's revenues than are salaries and service costs. During the year ended December 31, 2011, office and general expenses decreased approximately $63,000, or 2.1%, to approximately $2,912,000, compared to approximately $2,975,000 during the year ended December 31, 2010. Office and general expenses decreased due to a decrease in costs associated with advertising, promotion and contest related activities.

The amount of office and general expenses represented 5.3% of revenues for the year ended December 31, 2011, compared to 6.1% for the year ended December 31, 2010. The majority of fixed asset purchases for the year ended December 31, 2011 related to leasehold improvements and furniture for the new Los Angeles office.

Amortization and Depreciation

Depreciation and amortization expense is incurred with respect to certain assets, including computer hardware, software, office equipment, furniture, and other intangibles. During the year ended December 31, 2011, depreciation and amortization expense totaled $1,642,000 (of which $1,540,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Transaction), compared to $1,919,000 during the year ended December 31, 2010 (of which $1,855,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Transaction). Fixed asset purchases totaled approximately $354,000 and $105,000 during the year ended December 31, 2011 and December 31, 2010, respectively. The majority of fixed asset purchaser during 2011 related to leasehold improvements and furniture for the Los Angeles office.

Corporate Overhead

Corporate overhead expenses include public company costs, director and executive officer compensation, compensation and consulting fees to Esch, directors' and officers' insurance, legal, audit and professional fees, corporate office rent and travel. During the year ended December 31, 2011, corporate overhead approximated $1,406,000, compared to $1,390,000 for the year ended December 31, 2010. The increase in corporate overhead for the year ended December 31, 2011 compared to the year ended December 31, 2010 is mostly attributable to increases in directors fees and stock exchange fees partially offset by decreases in accounting and tax fees.

Miami Earn-Out Adjustment and Settlement Expenses

In connection with the Settlement Agreement reached October 18, 2010, (A) approximately 39% (representing the amount that would otherwise be paid to Krassner L.P.) of the first $2 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, was to be calculated based on the three year average of audited Wilhelmina Miami EBITDA beginning January 1, 2009 and ending December 31, 2011, multiplied by 7.5, and payable in cash or stock. As of December 31, 2010, the fair value of the Miami Earnout was approximately $2,063,000, which management determined based on a number of factors. At December 31, 2011, management computed the actual amount to be paid on the Miami Earnout based on the financial results of the Miami division for the three years ended December 31, 2011 to be $2,174,000. As a result, for the year ended December 31, 2011, the Company recorded adjustments to the previously estimated fair value of $111,000, of which $36,000 was recorded in the quarter ended December 31, 2011.

Asset Impairment Charge

Each reporting period, the Company assesses whether events or circumstances have occurred which indicate that the carrying amount of an intangible asset exceeds its fair value. If the carrying amount of the intangible asset exceeds its fair value, an asset impairment charge will be recognized in an amount equal to that excess. No asset impairment charges were incurred during the year ended December 31, 2011 and December 31, 2010.

Interest Income

Interest income totaled approximately $6,000 and $4,000 for the years ended December 31, 2011 and 2010, respectively. The increase in interest income is the result of increased cash balances.

Interest Expense

Interest expense totaled approximately $28,000 for the year ended December 31, 2011, compared to approximately $64,000 for the year ended December 31, 2010. The decrease in interest expense for the year ended December 31, 2011, compared to the year ended December 31, 2010, is attributable to the principal repayment on the Esch Note partially offset by the borrowing of $500,000 under the Amegy Credit Agreement. See Liquidity and Capital Resources below for further discussion Note 4 of the accompanying financial statements for a discussion relating to the repayment of the Esch Note.

Income Tax Expense

During the year ended December 31, 2011, the Company's combined federal and state effective tax rate was approximately 19%. The Company's effective tax rate would be substantially higher if it were not for federal net operating loss carryforwards.

As of December 31, 2011, the Company had a federal income tax loss carryforward of approximately $7,400,000, which begins expiring in 2019. Realization of the Company's carryforwards is dependent on future taxable income and capital gains. A valuation allowance has been recorded to reflect the tax effect of the net loss carryforwards not used to offset a portion of the deferred tax liability resulting from the Wilhelmina Transaction. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.


Liquidity and Capital Resources

The Company's cash balance increased to $3,128,000 at December 31, 2011, from $1,732,000 at December 31, 2010. The increase is primarily attributable to cash flow from operations and borrowings under the Amegy credit facility somewhat offset by principal payments under the Esch Note totaling $600,000 and leasehold improvements costs associated with the new lease for office space located in Los Angeles, CA effective July 1, 2011. The Company's accounts receivable and due to models balances as of December 31, 2011 reflect significant increases when compared to the corresponding balances as of December 31, 2010. This increase is attributable to the growth in revenues and model cost during the year ended December 31, 2011 and also reflects accounts receivable and due to models balances of approximately $1,300,000 and $1,000,000, respectively, from two large customer contract payments which were received and paid shortly after December 31, 2011.

Currently, the Company's primary liquidity need is to fund the Miami Earnout payment of approximately $2,174,000, which is payable (subject to the provisions of the Acquisition Agreement) in April 2012. The Company expects to fund the earn-out obligation with cash on hand and borrowings under the Amegy credit facility (see below).

Amegy Credit Agreement

On April 29, 2011, the Company closed the Amegy Credit Agreement for a new $500,000 revolving credit facility with Amegy with a maturity date of February 28, 2012. Borrowings under the facility are to be used for working capital and other general business purposes of the Company. During the three months ended September 30, 2011, the Company drew $500,000 under the Amegy Credit Agreement.

On January 12, 2012, the Company executed and closed an amendment (the "Amegy Credit Agreement Amendment") to its revolving Amegy Credit Agreement.

Under the terms of the Amegy Credit Agreement Amendment, which is effective as of January 1, 2012, total availability under the revolving credit facility was increased to $1,500,000. In addition, the maturity date of the facility was extended to December 31, 2012.

Generally, amounts outstanding under the Amegy Credit Agreement shall bear interest at the greater of (a) 5% per annum or (b) the prime rate (which means, for any day, the rate of interest quoted in The Wall Street Journal as the "Prime Rate") plus 2% per annum. Credit is available under the facility through December 31, 2012 and is limited to a borrowing base equal to 65% of the aggregate value of eligible accounts receivable (as defined in the Amegy Credit Agreement) of the Company.

Earn Out

The Miami Earnout, payable in accordance with the Acquisition Agreement and Settlement Agreement, was to be calculated based on the three year average of audited Wilhelmina Miami EBITDA beginning January 1, 2009 and ending December 31, 2011, multiplied by 7.5, and payable in cash or stock. As of December 31, 2010, the fair value of the Miami Earnout was approximately $2,063,000, which management determined based on a number of factors. At December 31, 2011, management computed the actual amount to be paid on the Miami Earnout based on the financial results of the Miami division for the three years ended December 31, 2011 to be $2,174,000. As a result, for the year ended


December 31, 2011, the Company recorded adjustments to the previously estimated fair value of $111,000, of which $36,000 was recorded in the quarter ended December 31, 2011.

Generally, the Company's needs for liquidity are for financing working capital associated with the expenses it incurs in performing services under its client contracts. The Company incurs significant operating expenses with payment terms shorter than its average collections on billings.

The Company's ability to replace its indebtedness, and to fund working capital and planned capital expenditures, will depend on its ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond its control. The Company 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. The Company believes its operations will provide working capital necessary to meet its needs.

Employee Termination

On February 24, 2012, the employment of Sean Patterson as President of Wilhelmina International was terminated for cause. Wilhelmina International is the principal operating subsidiary of the Company. Over the course of several weeks following the departure of Sean Patterson, five agents resigned from the Company to pursue other interests. As of March 29, 2012, the Company has hired four new agents to replace all of these positions. As of March 29, 2012, the termination of Sean Patterson has not had a material impact on the results of operations or financial position of the Company and, based on current trends in the business, the Company does not expect such termination to have a material impact in the future.

The Company is engaged in search activities for a new president/chief operating officer for Wilhelmina International. In the interim, the roles and responsibilities of Sean Patterson have been assumed by four senior agents along with the chief financial officer, general counsel and chief executive officer of the Company.

Subsequent to December 31, 2011, an option grant for 2,000,000 shares previously awarded to Sean Patterson terminated, as provided for in the option agreement, as a result of the termination of employment of Mr. Patterson.

Off-Balance Sheet Arrangements

. . .

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