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| WHLM > SEC Filings for WHLM > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
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 six months ended June 30, 2012 and June 30, 2011. It should be read in conjunction with the financial statements of the Company, the notes thereto and other financial information included elsewhere in this report, and the Company's Annual Report on Form 10-K for the year ended December 31, 2011, 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
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. Beginning in November 2011, revenues from the core modeling business have been down slightly on a year over year basis. To drive new revenue growth, the Company continues to focus on recruiting top agents when available and scouting and developing new talent. Based on current trends in the business, combined with the termination of Patterson, the former President of Wilhelmina International in February 2012 and the resulting transition required, the Company expects revenues from the core modeling business to remain flat to down slightly for the foreseeable future.
Although Wilhelmina has a large and diverse client base, as discussed below, it is not immune to global economic conditions. Wilhelmina closely monitors economic conditions, client spending and other factors and continually looks for ways to reduce costs, manage working capital and conserve cash. There can be no assurance as to the effects on Wilhelmina of future economic circumstances, client spending patterns, client credit worthiness and other developments and whether, or to what extent, Wilhelmina's efforts to respond to them will be effective.
Trends and Opportunities
The Company expects that its geographical reach, along with the depth and breadth of its talent pool, and client roster should make Wilhelmina's operations more resilient to industry changes and economic swings than many of its competitors. Accordingly, the Company believes that its market position as a strong industry leader should create new growth opportunities.
Wilhelmina has seen an increasingly strong influx of talent, at both the new and seasoned talent levels, and believes it is increasingly attractive as an employer for successful agents across the industry as evidenced by the quality of agents expressing an interest in joining Wilhelmina. Similarly, new business and branding opportunities directly or indirectly relating to the fashion industry are being brought to Wilhelmina's attention. In order to take advantage of these opportunities and support its continued growth, Wilhelmina will need to continue to successfully allocate resources and staffing in a way that enhances its ability to respond to these new opportunities.
With total advertising expenditures on major media (newspapers, magazines, television, cinema, outdoor and Internet) amounting to approximately $161 billion in 2010 and $165 billion in 2011, North America is by far the world's largest advertising market. For the fashion talent management industry, including Wilhelmina, advertising expenditures on magazines, television, Internet and outdoor are of particular relevance.
Due to the increasing ubiquity of the Internet as a standard business tool, the Company has increasingly sought to harness the opportunities of the Internet and other digital media to improve its communications with clients and to facilitate the effective exchange of fashion model and talent information. The Company continues to make significant investments in technology in pursuit of gains in efficiency and better communications with customers. At the same time, the Internet presents challenges for the Company, including (i) the decline in traditional print advertising which is potentially being caused by the Internet and (ii) pricing pressures with respect to online/Internet photo shoots and client engagements.
Strategy
Management's strategy is to increase value to shareholders through the following initiatives:
· expanding the women's high end fashion board;
· continuing to invest in the Wilhelmina Artist Management LLC ("WAM") business;
· strategic acquisitions;
· licensing the "Wilhelmina" name to leading, local model management agencies;
· exploring the use of the "Wilhelmina" brand in connection with consumer products, cosmetics and other beauty products;
· partnering on television shows and promoting model search contests.
Wilhelmina Acquisition
On February 13, 2009, the Company closed the Wilhelmina Acquisition and acquired Wilhelmina International, Wilhelmina Miami, WAM, Wilhelmina Licensing LLC and Wilhelmina Film & TV Productions LLC (together, the "Wilhelmina Companies"). As of the closing of the Wilhelmina Acquisition, the business of Wilhelmina represents the Company's primary operating business. Prior to closing of the Wilhelmina Acquisition, the Company's interest in ACP Investments, L.P. (d/b/a Ascendant Capital Partners) ("Ascendant"), acquired on October 5, 2005, represented the Company's sole operating business.
Ascendant
On October 5, 2005, the Company acquired an interest in the revenues generated by Ascendant, a Berwyn, Pennsylvania based alternative asset management company whose funds have investments in long/short equity funds and which distributes its registered funds primarily through various financial intermediaries and related channels. Ascendant had assets under management of approximately $80,800,000 and $72,600,000 as of June 30, 2012 and June 30, 2011, respectively.
During 2009, the Company determined that the present value of expected cash flows from the Ascendant revenue interest was nominal and therefore the revenue interest is carried at $0 in the accompanying balance sheets.
RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
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, 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. Not all gross billings recorded by the Company are collected and therefore remitted to the talent. Some contracts are structured whereby payments are paid directly to the Company, and therefore, the Company remits the appropriate amount to the talent. Other contracts are structured whereby amounts are paid by the customer directly to the talent and Wilhelmina for their respective proceeds of the contract.
Because Wilhelmina provides professional services, salary and service costs represent the largest part of the Company's operating expenses. Salary and service costs are comprised of payroll and related costs and travel costs required to deliver the Company's services and to enable new business development activities.
Gross Billings
Gross billings for the three months ended June 30, 2012 increased approximately $663,000, or 4.3%, to approximately $15,965,000, compared to approximately $15,302,000 for the three months ended June 30, 2011. Generally, trends in gross billings follow the Company's clients spending on advertising and the ability of the Company to have the desired talent available to its clients. During the three months ended June 30, 2012, the Company experienced a slight decrease in gross billings across the core modeling business of approximately 1% and an increase in gross billings in the WAM business of approximately 70% compared to gross billings generated by the respective divisions during the three months ended June 30, 2011. Gross billings of the WAM division represented approximately 12% of total gross billings for the three months ended June 30, 2012, compared to approximately 7% for the three months ended June 30, 2011. During the three months ended June 30, 2012, gross billings of the various boards of the core modeling business experienced positive growth ranging from 9% to 68%, and certain boards experienced negative growth ranging from -16% to -38%, compared to the three months ended June 30, 2011.
Gross billings for the six months ended June 30, 2012 increased approximately $2,232,000, or 7.5%, to approximately $31,773,000, compared to approximately $29,541,000 for the six months ended June 30, 2011. During the six months ended June 30, 2012, the Company experienced a slight decrease in gross billings across the core modeling business of approximately 1% and an increase in gross billings in the WAM business of approximately 122% compared to gross billings generated by the respective divisions during the six months ended June 30, 2011. Gross billings of the WAM division represented approximately 15% of total gross billings for the six months ended June 30, 2012, compared to approximately 7% for the six months ended June 30, 2011. During the six months ended June 30, 2012, gross billings of the various boards of the core modeling business experienced positive growth ranging from 6% to 70% and certain boards experienced negative growth ranging from -4% to -27%, compared to the six months ended June 30, 2011.
Revenues
During the three months ended June 30, 2012, revenues increased approximately $527,000, or 3.6%, to approximately $14,867,000, compared to approximately $14,340,000 during the three months ended June 30, 2011. During the six months ended June 30, 2012, revenues increased approximately $179,000, or 0.6%, to approximately $27,959,000, compared to approximately $27,780,000 during the six months ended June 30, 2011.
During the three and six months ended June 30, 2012, the Company experienced an increase in revenues as a result of recognizing revenues which were previously deferred of approximately $716,000, of which approximately $128,000 were scheduled to be recognized, in the absence of agreement (See Note 5 to the unaudited Consolidated Financial Statements). The Company recognized the revenues as the result of an agreement with a former talent with respect to the modification of payment direction terms under various contracts negotiated by the Company between such talent, certain customers and, in some cases, the Company. Without the recognition of the previously deferred revenues, revenues were down slightly due to the 1% decrease in gross billings in the core modeling business.
In addition gross billings increased at a rate greater than the rate of increase in revenues during the six months ended June 30, 2012, as a result of a larger percentage of total revenues being derived from relationships which required the reporting of revenues net (as an agent) versus gross (as a principal).
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 six months ended June 30, 2012 and June 30, 2011, management fee income from the unconsolidated affiliate amounted to approximately $27,000 and $54,000, 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 Company. During the three and six months ended June 30, 2012 license fees totaled approximately $58,000 and $124,000, respectively, compared to $32,000 and $64,000 for the three and six months ended June 30, 2011, 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 six months ended June 30, 2012 revenues from these licensing agreements totaled approximately $208,000 and $448,000, respectively, compared to $156,000 and $425,000 for the three and six months ended June 30, 2011, respectively.
Other income includes fees derived from participants in the Company's model search contests and sponsors of such contests, television syndication royalties and production series contracts.
Model Costs
Model costs consist of costs associated with relationships with models where the key indicators suggest that the Company acts as a principal. Therefore, the Company records the gross amount billed to the client as revenue when the revenues are earned and collectability is reasonably assured, and the related costs incurred to the model as model cost.
Model costs also include advances to models for the cost of initial portfolios and other out-of-pocket costs, which are reimbursable only from collections from the Company's customers as a result of future work, and are expensed to model costs as incurred. Any repayments of such costs are credited to model costs in the period received. The Company also classifies commissions (in the industry known as "mother agency fees") paid to other agencies as model costs.
During the three months ended June 30, 2012, model costs increased approximately $273,000, or 2.7%, to approximately $10,230,000, compared to approximately $9,957,000 during the three months ended June 30, 2011. Model costs increased slightly compared to the prior year quarter as a result of a decrease in the recovery of certain fixed model costs and an increase in mother agency fees.
During the six months ended June 30, 2012, model costs increased approximately $34,000, or 0.2%, to approximately $19,388,000, compared to approximately $19,354,000 during the six months ended June 30, 2011. During the six months ended June 30, 2012, model costs as a percentage of revenues were approximately 69.4% compared to 69.7% during the three months ended June 30, 2011. Margins were relatively unchanged from the prior year period.
Operating Expenses
Operating expenses consist of costs that support the operations of the Company, including payroll, rent, overhead, insurance, travel, professional fees, amortization and depreciation, asset impairment charges and corporate overhead.
During the three months ended June 30, 2012, operating expenses increased approximately $467,000, or 12.1%, to approximately $4,320,000, compared to approximately $3,853,000 during the three months ended June 30, 2011. The increase in operating expenses is generally attributable to increases in salaries and service costs, office and general expenses and corporate overhead.
During the six months ended June 30, 2012, operating expenses increased approximately $767,000 or 10.2%, to approximately $8,307,000 compared to approximately $7,540,000 during the six months ended June 30, 2011. The increase in operating expenses is attributable to increases in salaries and service costs, office and general expenses and corporate overhead, somewhat offset by decreases in amortization and depreciation.
All operating costs 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 June 30, 2012, salaries and service costs increased approximately $217,000, or 9.0%, to approximately $2,616,000, compared to approximately $2,399,000 during the three months ended June 30, 2011. The Company experienced increased salary costs in connection with the compensation costs associated with employment contracts for certain former employees.
During the six months ended June 30, 2012, salaries and service costs increased approximately $443,000, or 9.7%, to approximately $5,008,000, compared to approximately $4,565,000 during the six months ended June 30, 2011. As previously mentioned, the Company experienced increased salary costs in connection with the compensation costs associated with employment contracts for certain former employees, somewhat offset by a decrease in travel costs. The Company has also experienced a slight increase in overall salary costs, including certain payroll related costs such as healthcare.
During the six months ended June 30, 2012, salaries and service costs as a percentage of revenues were approximately 17.1%, compared to approximately 16.4% during the six months ended June 30, 2011.
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 June 30, 2012, office and general expenses increased approximately $124,000, or 16.4%, to approximately $880,000, compared to approximately $756,000 during the three months ended June 30, 2011. Office and general expenses increased due to costs associated with professional fees, technology and contract employees.
During the six months ended June 30, 2012, office and general expenses increased approximately $113,000, or 7.3%, to approximately $1,671,000, compared to approximately $1,558,000 during the six months ended June 30, 2011. Office and general expenses increased due to costs associated with professional fees, technology and contract employees. During the six months ended June 30, 2012, office and general expenses as a percentage of revenues were approximately 5.8%, compared to approximately 5.6% during the six months ended June 30, 2011. The Company continually works to leverage its resources and reduce costs 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 six months ended June 30, 2012, depreciation and amortization expense totaled $389,000 and $785,000 (of which $357,000 and $725,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Acquisition), respectively, compared to $390,000 and $837,000 (of which $374,000 and $792,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Acquisition) during the three and six months ended June 30, 2011, respectively. Fixed asset purchases totaled approximately $90,000 and $202,000 during the six months ended June 30, 2012 and June 30, 2011, respectively. Fixed assets purchases during the six months ended June30, 2012 mostly relate to technology infrastructure and equipment. The majority of the fixed asset purchases incurred during the six months ended June 30, 2011 relate to leasehold improvements, furniture and equipment for the Company's new office space in Los Angeles. In connection with this new office space the Company entered into a 5 year lease effective July 1, 2011.
Corporate Overhead
Corporate overhead expenses include public company costs, director and executive officer compensation, directors' and officers' insurance, legal and professional fees, corporate office rent and travel. During the three and six months ended June 30, 2012, corporate overhead approximated $435,000 and $843,000 compared to $308,000 and $580,000 for the three and six months ended June 30, 2011, respectively. The increase in corporate overhead for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011 is primarily attributable to increased director's fees, stock exchange fees, professional fees and legal fees in connection with the filing of a resale registration statement on Form S-1.
Asset Impairment Charge
Each reporting period, the Company assesses whether events or circumstances have occurred which indicate that the carrying amount of an intangible asset exceeds its fair value. If the carrying amount of the intangible asset exceeds its fair value, an asset impairment charge will be recognized in an amount equal to that excess. No asset impairment charges were incurred during the three and six months ended June 30, 2012 and 2011.
Interest Expense
Interest expense totaled approximately $8,000 and $15,000, respectively, for the three and six months ended June 30, 2012 compared to $5,000 and $19,000 for the three and six months ended June 30, 2011, respectively. The increase in interest expense for the three months ended June 30, 2012, compared to the three months ended June 30, 2011, is the result of an increase in average borrowings, somewhat offset by lower borrowing costs.
The decrease in interest expense for the six months ended June 30, 2012, compared to the six months ended June 30, 2011is due to a decrease in average borrowings and a decrease in the interest rates for outstanding debts. See Liquidity and Capital Resources below for further discussion.
Liquidity and Capital Resources
The Company's cash balance decreased to $1,959,000 at June 30, 2012, from $3,128,000 at December 31, 2011. The decrease is primarily attributable to payments in the amount of approximately $1,736,000 paid towards the Miami Earnout obligations.
The Company's primary liquidity needs are for financing working capital associated with the expenses it incurs in performing services under its client contracts. Generally, the Company incurs significant operating expenses with payment terms shorter than its average collections on billings.
Amegy Credit Agreement
On April 29, 2011, the Company closed the Credit Agreement for a new $500,000 revolving credit facility with Amegy. Borrowings under the facility are to be used for working capital and other general business purposes of the Company.
The Credit Agreement contains certain representations and warranties and affirmative and negative covenants. Amounts outstanding under the Credit Agreement may be accelerated and become immediately due and payable upon the occurrence of an event of default. All indebtedness and other obligations of the Company under the Credit Agreement are secured by all of the assets of the Company and its subsidiaries, provided, however, that the collateral does not include the intellectual property of the Company or the stock or equity interests in the Company's subsidiaries.
Generally, amounts outstanding under the 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.
On January 12, 2012, the Company executed and closed the Credit Agreement Amendment to its revolving Credit Agreement with Amegy.
Under the terms of the Credit Agreement Amendment, which is effective as of
January 1, 2012, (1) total availability under the revolving credit facility was
increased to $1,500,000 (from $500,000), (2) the borrowing base was modified to
65% (from 80%) of eligible accounts receivable (as defined in the Credit
Agreement) and (3) the Company's minimum net worth covenant was increased to
$21,250,000 (from $20,000,000). In addition, the maturity date of the facility
was extended to December 31, 2012.
As of June 30, 2012, the Company had outstanding borrowings of $500,000 under
the Credit Agreement.
On August 1, 2012 the Company drew an additional $1,000,000 under the Credit Agreement to fund the repurchase of 8,000,000 shares of its Common Stock at a price of $0.126 per share. The transaction was effected through a broker dealer making a market in the Company's shares on behalf of an affiliate of the Company.
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