DESCRIPTION OF THE WILHELMINA BUSINESS
Overview
The primary business of Wilhelmina is fashion
model management. These business operations are headquartered in New York City. The Company’s predecessor was founded
in 1967 by Wilhelmina Cooper, a renowned fashion model, and became one of the oldest, best known and largest fashion model
management companies in the world. Since its founding, Wilhelmina has grown to include operations located in Los Angeles,
Miami, Chicago, and London, as well as a network of licensees in various local markets in the U.S. and several international markets. Wilhelmina
provides traditional, full-service fashion model and talent management services, specializing in the representation and management
of models, entertainers, artists, athletes and other talent to various clients, including retailers, designers, advertising agencies,
print and electronic media and catalog companies. The Company was incorporated in the State of Delaware in 1996.
Organization and Operating Divisions
The Company acquired the predecessor companies
constituting its current primary business in 2008. The Company conducts its business through operating divisions and subsidiaries
engaged in fashion model management and other complementary businesses. These business activities are focused on the following
key areas:
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Fashion model management
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Hair & make-up artist representation
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Licensing and branding associations (including contests, consumer products, events and television)
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Fashion Model Management
Wilhelmina is focused on providing fashion modeling
and talent product-endorsement services to clients such as advertising agencies, branded consumer goods companies, fashion designers,
magazine publications, retailers, department stores, product catalogs and Internet sites.
The fashion model/talent management industry
can be divided into many subcategories, including advertising campaigns as well as catalog/e-commerce, runway, showroom and editorial
work. Advertising work involves modeling for advertisements featuring consumer products such as cosmetics, clothing and other
items to be placed in magazines and newspapers, on billboards and with other types of media. Catalog and e-commerce work involves
modeling of products to be sold through promotional catalogs and Internet commerce sites. Runway work involves modeling at
fashion shows, which primarily take place in Paris, Milan, London and New York City. Showroom work involves on-site modeling
of products at client showrooms and other events and production “fit” work whereby a model serves as the sizing model
for apparel items. Editorial work involves modeling for the cover and editorial sections of magazines.
Clients pay for talent to appear in photo shoots
for magazine features, print advertising, direct mail marketing, product catalogs and Internet sites, as well as to appear in runway
shows to present new designer collections, fit modeling, and on-location presentations and events. In addition, talent
may also appear in film and television commercials. Wilhelmina develops and diversifies its talent portfolio through a combination
of ongoing local, regional and international scouting and talent-search efforts to source new talent, as well as cooperating with
other agencies that represent talent.
Within its fashion model management business,
Wilhelmina has two primary sources of service revenue: (i) commissions paid by models as a percentage of their gross
earnings; and (ii) service charges paid by clients in addition to booking fees, calculated as a percentage of the models’
booking fees. Wilhelmina believes that its commission rates and service charges are comparable to those of its principal
competitors.
Wilhelmina’s fashion model management
operations are organized into divisions called “boards,” each of which specializes by the type of models it represents. Wilhelmina’s
boards are generally described in the table below.
Board Name
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Location
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Target Market
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Women
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NYC, LA, Miami, Chicago, London
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High-end female fashion models
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Men
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NYC, LA, Miami, Chicago, London
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High-end male fashion models
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Direct
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NYC, LA, Miami
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Established/commercial male/female fashion models
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Curve
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NYC
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Full-figured female fashion models
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Showroom
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NYC
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Live modeling and designer fit clothing modeling
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Fitness
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NYC, LA
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Athletic models
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Each
major board is headed by a director who manages the agents assigned to the board. The agents of each board act both as bookers
(including promoting models, negotiating fees and contracting work) and as talent scouts/managers (including providing models with
career and development guidance and helping them better market themselves). Although agents individually develop professional
relationships with models, models are represented by a board collectively and not by a specific agent. Wilhelmina’s
organization into boards enables Wilhelmina to provide clients with services tailored to their particular needs, to allow models
to benefit from agents’ specialized experience in their particular markets, and to limit Wilhelmina’s dependency on
any specialty market or agent.
Most senior agents are employed pursuant to
employment agreements that include noncompetition provisions such as a prohibition from working with Wilhelmina’s models
and clients for a certain period of time after the end of the agent’s employment with Wilhelmina. Wilhelmina typically signs
its models to three-year exclusive contracts, which it actively enforces.
The LW1 division, re-branded in January 2017
as Aperture, operates in New York and Los Angeles, and offers models and actors representation for commercials, film, & television.
Wilhelmina also owns a non-consolidated 50%
interest in Wilhelmina Kids & Creative Management LLC (“Kids”), a New York City-based modeling agency that specialized
in representing child models/talents, from newborns to children 14 years of age. On December 9, 2016, the owners of Kids agreed
to dissolve Kids and ceased related business operations of Kids. As a result, Wilhelmina no longer maintains a board for child
models.
Wilhelmina London Limited (“London”),
a wholly owned subsidiary of Wilhelmina International, Inc., was acquired in January 2015. The London subsidiary establishes a
footprint for the Company in Western Europe, provides a base of operations to service the Company’s European clients, and
serves as a new talent development office for European models and artists. In November 2015, the Company added a London Men’s
board to increase the presence of the Wilhelmina brand in Europe.
In September 2016, Wilhelmina opened a Chicago
office to expand the Company’s presence in the midwest region of the United States.
Hair & Make-up Artist Representation
The Company represents artists in the hair, makeup,
photography, and stylist arenas. These artists work on projects across the globe for well-known companies in the media, advertising,
retail, pharmaceutical and music industries. In addition, their work appears in top magazines and on the runways of major fashion
houses.
Celebrity Management
Wilhelmina Artist Management, LLC (“WAM”)
is a wholly-owned talent management company that seeks to secure endorsement and spokesperson work for celebrities from the worlds
of sports, music and entertainment. WAM has two primary sources of revenue: (i) commissions paid by talent as a percentage
of their gross earnings; and (ii) royalties or a service charge paid by clients. Wilhelmina celebrity management works with emerging
artists and established celebrity names to match them with leading fashion brands and companies.
Licensing & Branding Associations
Wilhelmina Licensing, LLC is a wholly-owned
subsidiary that collects third-party licensing fees in connection with the licensing of the “Wilhelmina” name. Third-party
licensees include several leading fashion model agencies in local markets Denver, Dubai, and Tokyo. A consumer products license
for fragrance and cosmetics is also in effect. The film and television business consists of occasional television syndication royalties
and production series contracts. Also, from time to time, the Company conducts model search contests and other events in an effort
to expand the Wilhelmina brand and recruit talent.
Competition
The fashion model/talent management business
is highly competitive. New York City, Los Angeles and Miami, as well as London, Paris, Milan and Sao Paulo, are considered
the most important markets for the fashion talent management industry. Most of the leading international firms are headquartered
in New York City. Wilhelmina’s principal competitors include other large fashion model management businesses in the
U.S., including IMG Models, Elite Model Management, Ford Models, Inc., DNA Model Management, NEXT Model Management and Marilyn
Model Agency. However, Wilhelmina is the only publicly-owned fashion talent management company in the world.
Competition also includes foreign agencies and
smaller U.S. agencies in local markets that recruit local talent and cater to local market needs. Several of the larger
fashion talent firms operate offices in multiple cities and countries or have chosen to partner with local or foreign agencies.
The Company believes that its sources of revenue
(mainly generated from commissions and service charges) are comparable to those of its principal competitors. Therefore,
for the Company to obtain a competitive advantage, it must develop and maintain a deep pool of talent and deliver high quality
service to its clients. The Company believes that through its scouting efforts, search contests, licensing network,
advertising and television shows it is able to recruit a deeper pool of talent relative to its competitors. These recruitment
tools, coupled with the broad range of fashion boards available to the Company’s talent, enable the Company to develop talent
and generate a broader range of revenues relative to its principal competitors. While a broad range of talent and boards provides
a level of stability to the business, certain talent may be more inclined to work with a boutique agency that may appear to tailor
more specifically to their needs.
Also, over the past 50 years, Wilhelmina and
its predecessors have created long standing client relationships and a number of business activities related to the fashion model
management business that provide exposure to diverse markets and demographics. The Company has also developed a professional
workforce with years of talent management experience.
Clients and Customers
As
of December 31, 2016, Wilhelmina represented a roster of approximately 2,600 active models and talent. Wilhelmina’s
active models include Janis Ancens, Francisco Lachowski, Keilani Asmus, Alex Lundquist, Clarke Bockelman, Cindy Bruna, Armando
Cabral, Elisabeth Erm, Bastian Van Gaalen, Rayla Guimaraes Jacunda, RJ King, Claudio Moreira, Nathan Owens, Ava Smith, Kirsten
Shiells, Marlon Teixiera, Robin Lawley, I-Hua Wu, Sora Choi, and Ally Ertel. Wilhelmina’s celebrity talent includes Nick
Jonas, Karreuche Tran, Machine Gun Kelly, Demi Lovato, Shawn Mendes, RJ Mitte, Ellar Cotrane, Hopper Penn, Clara McGregor, and
Leona Lewis.
Wilhelmina serves approximately 3,900 external
clients. Wilhelmina’s customer base is highly diversified, with no one customer accounting for more than 2% of overall
gross revenues. The top 100 clients of Wilhelmina together accounted for approximately 40% of overall gross revenues during
2016.
Governmental Regulations
Certain jurisdictions in which Wilhelmina operates,
such as California and Florida, require that companies maintain a Talent Agency License in order to engage in the “talent
agency” business. The talent agency business is generally considered the business of procuring engagements or any employment
or placement of a talent, where the talent performs in his or her artistic capacity. Where required, the Wilhelmina
subsidiaries operating in these jurisdictions maintain Talent Agency Licenses issued by those jurisdictions.
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, 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 believes it competed successfully in 2016.
With total advertising expenditures on major
media (newspapers, magazines, television, cinema, outdoor and Internet) exceeding approximately $187 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:
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increase Wilhelmina’s brand awareness and consideration among advertisers and potential talent;
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expand the Wilhelmina network through strategic geographic market development;
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expand the women’s high end fashion board;
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expand the Aperture division’s representation in commercials, film, & television;
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expand celebrity representation; and
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promote model search contests, and events and partnering on media projects (television, film, books, etc.).
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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 (including developing in-house art and social media departments)
in pursuit of gains in efficiency and better communications with clients. At the same time, the Internet presents challenges
for the Company, including (i) the cannibalization of traditional print media businesses, and (ii) pricing pressures
with respect to digital media photo shoots and client engagements.
In January 2015, the Company purchased 100%
of the outstanding shares of Union Models Management Ltd. in London and renamed it Wilhelmina London Limited (“London”).
The strategic acquisition of London establishes a footprint for the Company and the brand in Western Europe. London also serves
as a base of operations to service the Company’s European clients, and as a new talent development office for European models
and artists.
In September 2016, Wilhelmina opened a Chicago
office to better provide models and talent with direct access to clients in the midwest region of the United States.
EMPLOYEES
As of December 31, 2016, the Company had 121
employees, 77 of whom were located in New York City, eight of whom were located at Wilhelmina’s Miami office, five of whom
were located at Wilhelmina’s Chicago office, 17 of whom were located at Wilhelmina’s Los Angeles office, 12 of whom
were located at Wilhelmina’s London office and two of whom were located at the corporate headquarters in Dallas.
TRADEMARKS AND LICENSING
The “Wilhelmina” brand is essential
to the success and competitive position of the Company. Wilhelmina’s trademark is vital to the licensing business because
licensees pay for the right to use the trademark. The Company has invested significant resources in the “Wilhelmina”
brands in order to obtain the public recognition that these brands currently enjoy. Wilhelmina relies upon domestic and
international trademark laws, license agreements and nondisclosure agreements to protect the “Wilhelmina” brand name
used in its business. Trademarks registered in the U.S. have a duration of ten years and are generally subject to an indefinite
number of renewals for a like period on appropriate application.
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LEGAL PROCEEDINGS
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On October 24, 2013, a purported class action
lawsuit was brought against the Company by former Wilhelmina model Alex Shanklin and others (the “Shanklin Litigation”),
in New York State Supreme Court (New York County) by the same lead counsel who represented plaintiffs in a prior, now-dismissed
action brought by Louisa Raske (the “Raske Litigation”). The claims in the Shanklin Litigation initially included
breach of contract and unjust enrichment allegations arising out of matters similar to the Raske Litigation, such as the handling
and reporting of funds on behalf of models and the use of model images. Other parties named as defendants in the
Shanklin Litigation include other model management companies, advertising firms, and certain advertisers. On January 6, 2014,
the Company moved to dismiss the Amended Complaint in the Shanklin Litigation for failure to state a claim upon which relief can
be granted and other grounds, and other defendants also filed motions to dismiss. On August 11, 2014, the court denied the
motion to dismiss as to Wilhelmina and other of the model management defendants. Further, on March 3, 2014, the judge assigned
to the Shanklin Litigation wrote the Office of the New York Attorney General bringing the case to its attention, generally
describing the claims asserted therein against the model management defendants, and stating that the case “may involve matters
in the public interest.” The judge’s letter also enclosed a copy of his decision in the Raske Litigation, which
dismissed that case. Plaintiffs have retained substitute counsel, who has filed a Second and now Third Amended Complaint. Plaintiffs’
Third Amended Complaint asserts causes of action for alleged breaches of the plaintiffs' management contracts with the defendants,
conversion, breach of the duty of good faith and fair dealing, and unjust enrichment. The Third Amended Complaint also alleges
that the plaintiff models were at all relevant times employees, and not independent contractors, of the model management defendants,
and that defendants violated the New York Labor Law in several respects, including, among other things, by allegedly failing to
pay the models the minimum wages and overtime pay required thereunder, not maintaining accurate payroll records, and not providing
plaintiffs with full explanations of how their wages and deductions therefrom were computed. The Third Amended Complaint seeks
certification of the action as a class action, damages in an amount to be determined at trial, plus interest, costs, attorneys’
fees, and such other relief as the court deems proper. On October 6, 2015, Wilhelmina filed a motion to dismiss as to most of the
plaintiffs’ claims, and oral argument on the motion was heard by the Court in June 2016. The judge reserved decision
and it is not known when the decision will be issued. The Company believes the claims asserted in the Third Amended Complaint are
without merit, and intends to continue to vigorously defend the action.
On June 6, 2016, another purported class action
lawsuit was brought against the Company by former Wilhelmina model Shawn Pressley and others (the “Pressley Litigation”),
in New York State Supreme Court (New York County) by the same counsel representing the plaintiffs in the Shanklin Litigation, and
asserting identical, although more recent, claims as those in the Shanklin Litigation. On June 14, 2016, the Court stayed
all proceedings in the Pressley Litigation until a decision is issued on the motion to dismiss in the Shanklin Litigation. The
Company believes the claims asserted in the Pressley Litigation are without merit, and intends to vigorously defend the action.
On August 20, 2015, a lawsuit was brought
against the Company and the Company’s former Chief Accounting Officer by a former employee of Wilhelmina model, Angel Betancourt
(the “Plaintiff”). The lawsuit alleged that the Plaintiff was discriminated against during his time of employment and
upon his termination. The lawsuit further alleged that the Plaintiff was not properly compensated due to misclassification by the
Company under the federal Fair Labor Standards Act. During the fourth quarter of 2016, the Company paid $25 thousand in excess
of its insurance coverage to settle the matter.
In addition to the legal proceedings disclosed
herein, the Company is also engaged in various legal proceedings that are routine in nature and incidental to its business. None
of these routine proceedings, either individually or in the aggregate, are believed likely, in the Company's opinion, to have a
material adverse effect on its consolidated financial position or its results of operations.