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WHLM > SEC Filings for WHLM > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for WILHELMINA INTERNATIONAL, INC.

Form 10-K for WILHELMINA INTERNATIONAL, INC.


31-Mar-2014

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, 2013 and 2012. 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, Dubai, Vancouver and Tokyo. 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 2013.

With total advertising expenditures on major media (newspapers, magazines, television, cinema, outdoor and Internet) exceeding approximately $160 billion in recent years, 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.

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 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; and

promoting model search contests, and events and partnering on media projects (television, film, books, etc.).

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.


RESULTS OF OPERATIONS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012

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, Direct, Direct 2, 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

                                                     Year Ended
                                 December 31,       December 31,      Percent Change
(in thousands)                       2013               2012           2013 vs 2012

GROSS BILLINGS                          68,546             63,657                 7.7 %

Revenues                                65,360             54,511                19.9 %
License fees and other income              584              1,864               (68.7 %)
TOTAL REVENUES                          65,944             56,375                17.0 %
Model costs                             46,242             38,395                20.4 %
REVENUES NET OF MODEL COSTS             19,702             17,980                 9.6 %
GROSS PROFIT MARGIN                       29.9 %             31.9 %
Salaries and service costs              11,460             10,151                12.9 %
Office and general expenses              3,658              3,376                 8.4 %
Amortization and depreciation            1,572              1,564                   1 %
Corporate overhead                       1,198              1,428               (16.1 %)
OPERATING INCOME                         1,814              1,461                24.2 %
OPERATING MARGIN                           2.8 %              2.6 %
Interest income                              8                  8                 0.0 %
Interest expense                           (61 )              (44 )              38.6 %
Equity Earnings in affiliate                (7 )               56              (112.5 %)
INCOME BEFORE INCOME TAXES               1,754              1,481                18.4 %
Current income tax (expense)              (532 )             (419 )
Deferred tax benefit                     2,170                  -
Effective tax rate                       -93.4 %             28.3 %
NET INCOME                               3,392              1,062               221.7 %

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.

The Company experienced a 21% increase in gross billings across the core modeling business during the year ended December 31, 2013, which were partially offset by a significant decrease in the gross billings of the WAM business, when compared to the gross billings across the core modeling and WAM businesses for the year ended December 31, 2012. Gross billings of the WAM business decreased due to reduced fixed payments earned under a product licensing agreement (per the terms of the contract) and due to the expiration of another product licensing agreement (per the terms of the contract), which the Company was a party to, with a former talent. Management expects gross billings and operating results from the WAM business to continue to decline in 2014 as compared to 2013, as a result of expiring product licensing agreements. Gross billings of the WAM division represented approximately 5% of total gross billings for the year ended December 31, 2013, compared to approximately 16% for the year end December 31, 2012.

Revenues

The increase in revenues for the year ended December 31, 2013, is attributable to the increases in gross billings of the core modeling business, partially offset by a decline in revenues from the WAM business (as discussed above).

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, 2013, royalties from these licensing agreements totaled approximately $180,000, compared to $1,252,000 for the year ended December 31, 2012. As previously mentioned, fixed royalty payments earned have declined under a product licensing agreement (per the terms of the contract) and due to the expiration of another product licensing agreement (per the terms of the contract), which the Company was a party to, with a former talent. Management expects royalty payments earned to continue to decline in 2014, as a result of expiring product licensing agreements.


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, 2013 and December 31, 2012, 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, 2013, franchise fees totaled approximately $298,000, compared to approximately $274,000 for the year ended December 31, 2012.

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, are 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.

Gross profit margins were lower during the year ended December 31, 2013, when compared to the year ended December 31, 2012, as a result of the following:

Royalties earned in the WAM business are reported on a net basis and have decreased significantly, as previously discussed.

The rate of recovery of certain costs advanced to models (which causes margins to increase) declined slightly during the year ended December 31, 2013 when compared to the year ended December 31, 2012, as a result of the Company's continued efforts to develop new talent. In addition, mother agency fees measured as a percentage of core gross billings increased slightly, as a result of increased scouting efforts.

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 increases in salaries and service costs when comparing the year ended December 31, 2013 to the year ended December 31, 2012:

The Company hired additional key personnel to execute the Company's strategy to increase value to shareholders through the initiatives discussed in the "Strategy" section above.

During the year ended December 31, 2013, the Company experienced an increase in T&E costs in connection with delivering services to its customers and models.

The increases in salaries and service costs for the year ended December 31, 2013 compared to the year ended December 31, 2012 were partially offset by the fact that 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.

The amount of salaries and service costs as a percentage of revenue for the year ended December 31, 2013 declined to 17.4% from 18.0% for the year ended December 31, 2012.


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, 2013, office and general expenses increased, when compared to the year ended December 31, 2012, 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 as a percentage of revenue for the year ended December 31, 2013 declined to 5.6% from 6.0% for the year ended December 31, 2012.

Operating Margin

Operating margins increased for the year ended December 31, 2013, when compared to the year ended December 31, 2012, as a result of an increase in revenues from the core modeling business and the results of certain management initiatives to decrease operating expenses as a percentage of revenues.

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, 2013, depreciation and amortization expense totaled $1,572,000 (of which $1,432,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Acquisition), compared to $1,564,000 of depreciation and amortization expense during the year ended December 31, 2012 (of which $1,437,000 relates to amortization of intangibles acquired in connection with the Wilhelmina Acquisition). Fixed asset purchases totaled approximately $421,000 and $102,000 during the year ended December 31, 2013 and December 31, 2012, respectively. Approximately $270,000 of the fixed assets purchases during the year ended December 31, 2013 related to leasehold improvements and new fixtures in the New York office. In accordance with the New York office lease (office located at 300 Park Ave South), the Company is entitled to a reimbursement from the landlord of approximately $190,000 of leasehold improvements. The Company received reimbursement from the Landlord in early 2014.

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 decreased for the year ended December 31, 2013, when compared to the year ended December 31, 2012, due to a decline in stock exchange fees, executive search fees and travel.

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, 2013 and December 31, 2012.

Interest Expense

The increase in interest expense for the year ended December 31, 2013, when compared to the year ended December 31, 2012, is the result of an increase in average borrowings under the Credit Agreement.

Income Taxes

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. Currently, the majority of taxes being paid by the Company are state taxes, not federal taxes. The Company operates in three states which have relatively high tax rates: California, New York and Florida. The Company's combined (federal and state) effective tax rate would be even higher if it were not for federal net operating loss carryforwards available to offset current federal taxable income. After adjusting for taxable income in 2013, the Company had federal income tax loss carryforwards of approximately $3,000,000, which begin expiring in 2019. A portion of the Company's federal net operating loss carryforwards were utilized to offset federal taxable income generated during the year ended December 31, 2013. Realization of the Company's carryforwards is dependent on future taxable income. As of December 31, 2013, management determined that the deferred tax asset ("DTA") valuation allowance of approximately $2,500,000 should be reversed. The decision to reverse the DTA valuation allowance is based on the sustained profitability by the Company in recent years and management's expectation of sufficient profitability in subsequent years which will utlize the net operating losses. As a result of the DTA allowance reversal, net income for the year ended December 31, 2013 increased by approximately $2,170,000.


As defined in the Internal Revenue Code, ownership changes may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income.

Liquidity and Capital Resources

The Company's cash balance increased to $2,776,000 at December 31, 2013, from $1,145,000 at December 31, 2012. For the year ended December 31, 2013, cash balances increased as a result of cash flows from operations of approximately $2,932,000 before the payment of approximately $454,000 in settlement of foreign withholding tax claims for tax years 2006 and 2008. The Company offset approximately $454,000 of its remaining approximately $509,000 Miami earnout obligation (as of December 31, 2012) for losses incurred in the settlement of these foreign withholding claims for tax years 2006 and 2008.

Cash flow from operations were also utilized during the year ended December 31, 2013, to make payments under the Credit Agreement with Amegy of $450,000, to repurchase 2,263,110 shares of the Company's Common Stock, totaling approximately $410,000 and to purchase approximately $421,000 of fixed assets. As previously discussed approximately $270,000 of the fixed asset purchases related to leasehold improvements and fixtures in the New York office, of which $190,000 were reimbursed by the Landlord in early 2014.

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 October 24, 2012, the Company executed and closed a second amendment to its revolving Credit Agreement with Amegy (the "Second Credit Agreement Amendment"), which amended and replaced the terms of the Credit Agreement, as previously amended. Under the terms of the Second Credit Agreement Amendment, (1) total availability under the revolving credit facility is $5,000,000, (2) the borrowing base is 75% of eligible accounts receivable (as defined in the Credit Agreement) and (3) the Company's minimum net worth covenant is $22,000,000. The maturity date of the facility is October 15, 2015. Under the terms of the Second Amended and Restated Promissory Note evidencing the Company's obligation to repay advances under the facility, the interest rate on borrowings is prime rate plus 1%.

As of March 31, 2014, the Company had no outstanding borrowings under the Credit Agreement.

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.

Off-Balance Sheet Arrangements

As of December 31, 2013 and 2012, 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

See Note 2 Summary of Significant Accounting Policies in the audited financials statements included herewith.


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