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WHLM > SEC Filings for WHLM > Form 10-K on 1-Apr-2013All Recent SEC Filings

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

Form 10-K for WILHELMINA INTERNATIONAL, INC.


1-Apr-2013

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, 2012 and 2011. 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, Thailand and Dubai. The Company provides traditional, full-service fashion model and talent management services, specializing in the representation and management of models, entertainers, artists, athletes and other talent to various customers and clients, including retailers, designers, advertising agencies and catalog companies.

The business of talent management firms, such as Wilhelmina, depends heavily on the state of the advertising industry, as demand for talent is driven by Internet, print and TV advertising campaigns for consumer goods and retail clients.

Wilhelmina believes it has strong brand recognition which enables it to attract and retain top agents and talent to service a broad universe of clients. In order to take advantage of these opportunities and support its continued growth, the Company will need to continue to successfully allocate resources and staffing in a way that enhances its ability to respond to these new opportunities. The Company continues to focus on cutting costs, recruiting top agents when available and scouting and developing new talent.

Although Wilhelmina has a large and diverse client base, 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 2012.

With total advertising expenditures on major media (newspapers, magazines, television, cinema, outdoor and Internet) amounting to approximately $165 billion in 2011 and $172 billion 2012, North America is by far the world's largest advertising market. For the fashion talent management industry, including Wilhelmina, advertising expenditures on magazines, television, Internet and outdoor are of particular relevance.


Due to the increasing ubiquity of the Internet as a standard business tool, the Company has increasingly sought to harness the opportunities of the Internet and other digital media to improve 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 (including developing in-house art and social media departments) 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 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:

develop Wilhelmina into a global brand;
expand the women's high end fashion board;
expand the WAM (artist management) business;
strategic acquisitions;
licensing the "Wilhelmina" name to leading model management agencies;
licensing the "Wilhelmina" brand in connection with consumer products, cosmetics and other beauty products;
promoting model search contests, and events and partnering on media projects (television, film, books, etc.).

RESULTS OF OPERATIONS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 2012 COMPARED TO THE YEAR ENDED DECEMBER 31, 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, Select, Media, Runway, Curve, Lifestyle, Kids, etc.)) of the business, revenues by geographic locations and revenues from significant clients. Wilhelmina has three primary sources of revenue: revenues from principal relationships whereby the gross amount billed to the client is recorded as revenue, when the revenues are earned and collectability is reasonably assured; revenues from agent relationships whereby the commissions paid by models as a percentage of their gross earnings are recorded as revenue when earned and collectability is reasonably assured; and 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 T&E (travel, meals and entertainment) to deliver the Company's services and to enable new business development activities.


Analysis of Consolidated Statements of Operations and Gross Billings

                                                                                              Percent Change
Year ended December 31,                                        2012             2011           2012 vs 2011

GROSS BILLINGS                                               63,657,000       59,005,000                  7.9 %

Revenues                                                     54,511,000       54,119,000                  0.7 %
License fees and other income                                 1,864,000        1,347,000                 38.4 %
TOTAL REVENUES                                               56,375,000       55,466,000                  1.6 %
Model costs                                                  38,395,000       37,552,000                  2.2 %
REVENUES NET OF MODEL COSTS                                  17,980,000       17,914,000                  0.4 %
GROSS PROFIT MARGIN                                                31.9 %           32.3 %
Salaries and service costs                                   10,151,000        9,502,000                  6.8 %
Office and general expenses                                   3,376,000        2,912,000                 15.9 %
Amortization and depreciation                                 1,564,000        1,642,000                 (4.8 %)
Corporate overhead                                            1,428,000        1,406,000                  1.6 %
OPERATING INCOME                                              1,461,000        2,452,000                (40.4 %)
OPERATING MARGIN                                                    2.6 %            4.4 %
Miami earn-out fair value adjustment                                  -         (111,000 )
Interest income                                                   8,000            6,000                 33.3 %
Interest expense                                                (44,000 )        (28,000 )               57.1 %
Equity Earnings in affiliate                                     56,000           25,000                124.0 %
INCOME BEFORE INCOME TAXES                                    1,481,000        2,344,000                (36.8 %)
Income taxes                                                    419,000          775,000                (45.9 %)
Effective tax rate                                                 28.3 %           33.1 %
NET INCOME                                                    1,062,000        1,569,000                (32.3 %)

Gross Billings

Generally, the Company's gross billings fluctuate in response to its clients' willingness to spend on advertising and the Company's ability to have the desired talent available. During the year ended December 31, 2012, the Company experienced relatively flat gross billings across the core modeling business, which was offset by a significant year over year increase in the gross billings of the WAM business. Gross billings of the WAM division represented approximately 16% of total gross billings for the year ended December 31, 2012, compared to approximately 10% for the year ended December 31, 2011. During the year ended December 31, 2012, gross billings of the various boards of the core modeling business experienced positive growth ranging from 4% to 44%, and three boards experienced negative growth ranging from 6% to 31%, compared to the year ended December 31, 2011.

Revenues

The increase in revenues for the year ended December 31, 2012 is attributable to the recognition of revenues previously deferred. During April 2012, the Company reached 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. In connection with such modifications (which did not change amounts to which the Company is entitled in respect of such agreements), the Company and the former talent also executed mutual obligation releases relating to the parties' former representation arrangements. In connection with the foregoing contracts, the Company was carrying deferred revenues of approximately $716,000 (of which approximately $458,000 were scheduled to be recognized during the year ended December 31, 2012 in the absence of agreement), all of which were recognized during April 2012.

In addition, revenues during the year ended December 31, 2012 increased at a rate less than the rate of the increase in gross billings over the year ended December 31, 2011 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 principle).

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

License fees and other income include the following:

Product licensing agreements between the Company, its clients and talent, whereby the Company participates in the sharing of royalties. During the year ended December 31, 2012, royalties from these licensing agreements totaled approximately $1,252,000, compared to $880,000 for the year ended December 31, 2011.

An agreement between the Company and an unconsolidated affiliate to provide management and administrative services, as well as sharing of space. For each of the years ended December 31, 2012 and December 31, 2011, management fee and rental income from the unconsolidated affiliate amounted to approximately $110,000.

Franchise revenues from independently owned model agencies that use the Wilhelmina trademark name and various services provided by the Company. During the year ended December 31, 2012, franchise fees totaled approximately $274,000, compared to $171,000 for the year ended December 31, 2011.

Fees derived from participants in the Company's model search contests, events and television syndication royalties.

Gross Profit Margin

Fluctuations in gross profit margin, between periods, is predominantly due to the following:

The mix of revenues being derived from talent relationships, which require the reporting of revenues gross (as a principal) versus net (as an agent). Model costs consist of costs associated with relationships with models where the key indicators suggest that the Company acts as a principal.

An increase or decrease in mother agency fees, relative to model costs.

An increase or decrease in the rate of recovery of advances to models (for the cost of producing initial portfolios and other out-of-pocket costs). These costs are expensed as incurred and repayments of such costs are credited to model costs in the period received.

During the year ended December 31, 2012, mother agency fees increased relative to model costs, when compared to the year ended December 31, 2011. Also the rate of recovery of certain costs advanced to models declined slightly for the year ended December 31, 2012 when compared to the year ended December 31, 2011.

Salaries and Service Costs

Salaries and service costs consist of payroll and related costs and T&E (travel, meals and entertainment) costs required to deliver the Company's services to its customers and talent. The following factors contributed to the changes in salaries and services costs when comparing the year ended December 31, 2012 to the year ended December 31, 2011:

During the year ended December 31, 2012, the Company paid compensation costs of approximately $540,000, in connection with certain non-compete and contractual arrangements of former employees.

During the year ended December 31, 2012, the Company experienced decreased T&E costs in connection with delivering services to its customers and models.

The Company also incurred less incentive compensation for the year ended December 31, 2012, as compared to the year ended December 31, 2011, due to a decline in the achievement of performance targets by certain employees.


During the year ended December 31, 2012, salaries and service costs as a percentage of revenues were approximately 18.0% (17.1% after deducting compensation costs in connection with employment contracts for certain former employees), compared to approximately 17.1% during the year ended December 31, 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 year ended December 31, 2012, office and general expenses increased, when compared to the year ended December 31, 2011, due to costs associated with legal and professional fees, technology, and leases associated with equipment and property. The Company continues to invest in technology, equipment and property to improve delivery of model management services to its talent.

The amount of office and general expenses represented 6.0% of revenues for the year ended December 31, 2012, compared to 5.3% for the year ended December 31, 2011.

Operating Margin

Operating margins declined for the year ended December 31, 2012, when compared to the year ended December 31, 2011, mostly as a result of increases in salaries and service costs and office and general expenses.

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, 2012, depreciation and amortization expense totaled $1,564,000 (of which $ 1,437,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Acquisition), compared to $1,642,000 during the year ended December 31, 2011 (of which $1,540,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Acquisition). Fixed asset purchases totaled approximately $102,000 and $354,000 during the year ended December 31, 2012 and December 31, 2011, respectively. The majority of fixed asset purchases during 2011 related to leasehold improvements and the purchase of furniture for the Los Angeles office.

Corporate Overhead

Corporate overhead expenses include public company costs, director and executive officer compensation, directors' and officers' insurance, legal, audit and professional fees, corporate office rent and travel. Corporate overhead remained relatively unchanged for the year ended December 31, 2012, when compared to the year 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, 2012 and December 31, 2011.

Interest Expense

The increase in interest expense for the year ended December 31, 2012, when compared to the year ended December 31, 2011, is the result of an increase in average borrowings, somewhat offset by lower borrowing costs.


Income Tax Expense

During the year ended December 31, 2012, the Company's combined federal and state effective tax rate was approximately 28.3%. Generally, the Company's combined effective tax rate is high relative to reported net income as a result of certain amounts of amortization expense and corporate overhead not being deductible or attributable to states in which it operates. The Company operates in three states which have relatively high tax rates, California, New York and Florida.

In addition, the Company's effective tax rate would be higher if it were not for federal net operating loss carryforwards available to offset current federal taxable income. As of December 31, 2012, the Company had federal income tax loss carryforwards of approximately $5,000,000, which begin expiring in 2019. Realization of the Company's carryforwards is dependent on future taxable income. A portion of the Company's net operating loss carryforwards were utilized to offset taxable income generated during the year ended December 31, 2012 and December 31, 2011. A valuation allowance has been recorded to reflect the tax effect of the net loss carryforwards not used to offset a portion of the deferred tax liability resulting from the Wilhelmina Acquisition. Ownership changes, as defined in the Internal Revenue Code, may have limited the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.

Liquidity and Capital Resources

The Company's cash balance decreased to $1,145,000 at December 31, 2012, from $3,128,000 at December 31, 2011. For the year ended December 31, 2012, cash flow from operations of approximately $331,000 (before payment of the Company's earn-out obligations relating to operating results of Wilhelmina Miami, Inc., a subsidiary of the Company ("Wilhelmina Miami"), in connection with the Wilhelmina Acquisition (the "Miami Earnout")) was more than offset by an amount of approximately $1,735,000 paid towards the Miami Earnout obligation. Also during the year ended December 31, 2012, cash balances were impacted by net borrowings of $750,000 under the Credit Agreement, the proceeds of which, plus cash balances, were used to repurchase 9,770,991 shares of Common Stock, at an average price of $0.126 per share, for a total of approximately $1,227,000.

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

Amegy Credit Agreement

On April 29, 2011, the Company closed the Credit Agreement for a new $500,000 revolving credit facility with Amegy. Borrowings under the facility are to be used for working capital and other general business purposes of the Company.

The Credit Agreement contains certain representations and warranties and affirmative and negative covenants. Amounts outstanding under the Credit Agreement may be accelerated and become immediately due and payable upon the occurrence of an event of default. All indebtedness and other obligations of the Company under the Credit Agreement are secured by all of the assets of the Company and its subsidiaries, provided, however, that the collateral does not include the intellectual property of the Company or the stock or equity interests in the Company's subsidiaries.

On January 12, 2012, the Company executed and closed an amendment (the "Credit Agreement Amendment") to its revolving Credit Agreement with Amegy. Under the terms of the Credit Agreement Amendment, which was 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. The parties also executed an amendment to their pledge and security agreement ("Security Agreement Amendment") to reflect the execution of the Credit Agreement Amendment. The Company's obligation to repay advances under the amended facility is evidenced by an amended and restated promissory note.


On October 24, 2012, the Company executed and closed the second amendment (the "Second Credit Agreement Amendment") to its revolving Credit Agreement with Amegy, which, amended and replaced the terms amended by the Credit Agreement Amendment. Under the terms of the Second Credit Agreement Amendment, (1) total availability under the revolving credit facility was increased to $5,000,000 (from $1,500,000), (2) the borrowing base was modified to 75% (from 65%) of eligible accounts receivable (as defined in the Credit Agreement) and (3) the Company's minimum net worth covenant was increased to $22,000,000 (from $21,250,000). In addition, the maturity date of the facility was extended to October 15, 2015 (from December 31, 2012). The Company's obligation to repay advances under the amended facility is evidenced by a second amended and restated promissory note (the "Second Amended and Restated Promissory Note"). Under the terms of the Second Amended and Restated Promissory Note, the interest rate on borrowings was reduced to the prime rate plus 1% (from prime plus 2%) and a minimum interest rate (formerly 5%) was eliminated.

As of March 29, 2013, the Company had outstanding borrowings of $1,500,000 under the Credit Agreement.

Earn Out

The Miami Earnout, payable in connection with the Wilhelmina Acquisition, had a final value of $2,244,000. As of December 31, 2012, the Company had paid approximately $1,735,000 of the Miami Earnout liability, with the remaining amount of approximately $509,000, net of indemnity claims for which certain of the selling parties in the Wilhelmina Acquisition retain responsibility. During March 2013, the Company offset approximately $446,000 of the Company's remaining approximately $509,000 earn-out obligation (as of December 31, 2012) for losses incurred in the settlement of foreign withholding claims for tax years 2006 and 2008, leaving a balance of approximately $63,000 which is owed to the shareholders of Wilhelmina Miami. See Note 7 to the Consolidated Financial Statements.

Employee Termination

On February 24, 2012, the employment of Patterson as President of Wilhelmina International was terminated for cause. Over the course of several weeks following the departure of Patterson, five agents resigned from the Company to pursue other interests. The Company has hired several agents and an executive vice president to replace all of these positions. During the year ended December 31, 2012, the Company paid compensation costs of approximately $540,000, in connection with certain non-compete and contractual arrangements of former employees.

Patterson has made certain claims in connection with his termination of employment. The Company believes these claims are without merit and intends to vigorously defend itself.

During the year ended December 31, 2012, an option grant for 2,000,000 shares previously awarded to Patterson terminated, as provided for in the option agreement, as a result of the termination of employment of Patterson.


Off-Balance Sheet Arrangements

As of December 31, 2012 and 2011, the Company had $222,000 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 City that expires February 2021.

Effect of Inflation

Inflation has not been a material factor affecting the Company's business. General operating expenses, such as salaries, employee benefits, insurance and occupancy costs, are subject to normal inflationary pressures.

Critical Accounting Policies

Revenue Recognition

In compliance with generally accepted accounting principles ("GAAP") when reporting revenue gross as a principal versus net as an agent, the Company assesses whether it, the model or the talent is the primary obligor. The Company evaluates the terms of its model, talent and client agreements as part of this assessment. In addition, the Company gives appropriate consideration to other key indicators such as latitude in establishing price, discretion in model or talent selection and credit risk the Company undertakes. The Company operates broadly as a modeling agency and in those relationships with models and talent where the key indicators suggest the Company acts as a principal, the Company records the gross amount billed to the client as revenue when earned and collectability is reasonably assured and the related costs incurred to the model or talent as model or talent cost. In other model and talent relationships, where the Company believes the key indicators suggest it acts as an agent on . . .

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