AT EQUITY MARKETING, INC.:
Lisa Mueller
Investor Relations
(323) 932-4034
FOR IMMEDIATE RELEASE
EQUITY MARKETING REPORTS RESULTS
FOR SECOND QUARTER OF 2004
LOS ANGELES, JULY 29, 2004 - Equity Marketing, Inc. (Nasdaq: EMAK), a
leading marketing services firm, today announced its financial results for the
second quarter ended June 30, 2004.
Revenues were $51.8 million in the second quarter of 2004, compared with
revenues of $57.0 million in the same period of the previous year.
Net loss in the second quarter of 2004 was $530,000, or $0.16 per diluted
share, compared with net income of $2.1 million, or $0.22 per diluted share, in
the same period of the previous year. Earnings per share for the second quarter
of 2003 include a restatement pursuant to Emerging Issues Task Force Issue No.
03-6 ("EITF 03-6") "Participating Securities and the Two-Class Method under SFAS
No. 128, Earnings Per Share." EITF 03-6 requires that companies with
participating securities calculate earnings per share using a two-class method.
The Company's cumulative participating mandatorily redeemable preferred stock
qualifies as "participating securities;" therefore, EITF 03-6 requires the
allocation of a portion of undistributed earnings to preferred stock. As a
result, earnings per diluted common share were reduced by $0.06 for the second
quarter of 2003, to $0.22 from $0.28 as reported in the prior year. This change
reflects no economic or operating impact on the business.
Impacting the second quarter 2004 results were charges of $93,000, or
$0.01 per diluted share, related to integration costs for the acquisitions of
Johnson Grossfield ("JGI") and SCI Promotion ("SCI"), and $105,000, or $0.01 per
diluted share, for a restructuring charge related to
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the realignment of centralized resources in the Marketing Services business. The
Company also recorded a charge of $311,000, or $0.03 per diluted share, due to
lower than estimated sublease income for vacated office space in the Upshot
business. The office space has been subleased at rates modestly below the
Company's initial estimates, due to softness in the current Chicago real estate
market. Excluding these charges, the Company's second quarter 2004 net loss was
$221,000 or $0.10 per diluted share, within the range of its revised quarterly
guidance issued on July 8, 2004. The revised guidance was for revenues to range
from $50 million to $51 million, and a net loss per share before charges of
$0.10 to $0.12. The following table reconciles diluted earnings per share and
charges:
Diluted earnings per share:
Reconciliation of GAAP to non-GAAP measures Three Months Ended
- ------------------------------------------- ------------------
June 30, June 30,
2004 2003
------ -----
Diluted earnings (loss) per share - as reported $(0.16) $0.22
Integration costs 0.01 --
Restructuring charge 0.01 --
Loss on Chicago lease 0.03 --
------ -----
Diluted earnings (loss) per share - excluding charges $(0.10)(a) $0.22
====== =====
Adjustment due to adoption of EITF 03-6 -- 0.06
Diluted earnings per share as reported in 2003
prior to EITF 03-6 adoption -- $0.28
====== =====
(a) does not add due to rounding
"As noted in our July 8 press release, our second quarter performance was
hurt by revenue and margin shortfalls primarily in our consumer products
division," said Equity Marketing Chairman and Chief Executive Officer Don Kurz.
"However, some of the shortfall came in the form of postponed marketing services
programs that are now scheduled for the second half of the year, and we expect
to ultimately recapture that revenue and profit."
QUARTER ENDED JUNE 30, 2004 FINANCIAL HIGHLIGHTS
- - Revenues were $51.8 million, compared with revenues of $57.0 million in
the same period of the previous year.
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- - Net foreign currency translation impact contributed approximately $734,000
to revenues versus the prior year period average exchange rates.
- - Domestic revenues for the quarter were $39.3 million, or 75.8% of
revenues, and international revenues for the quarter were $12.5 million,
or 24.2% of revenues. In the prior year period, domestic revenues were
$45.4 million, or 79.8% of revenues, and international revenues were $11.5
million, or 20.2% of revenues.
- - The SCI and JGI businesses generated a combined $5.9 million in revenues
in the second quarter of 2004. Results for the second quarter of 2003 do
not include SCI (acquired September 3, 2003) or JGI (acquired effective
January 31, 2004).
- - Marketing Services revenues for the quarter represented 91.1% of total
revenues, while Consumer Products revenues represented 8.9% of total
revenues. In the prior year period, Marketing Services revenues
represented 81.1% of total revenues, while Consumer Products revenues
represented 18.9% of total revenues.
- - Gross profit was 26.6% in the second quarter of 2004, as compared to
26.7% in the same period in 2003. Gross profit was 27.1% in the
Marketing Services business and 20.9% in the Consumer Products
business in the second quarter of 2004, as compared to 24.4% and
36.5%, respectively, in the second quarter of 2003. Marketing
Services gross profit was higher due to an increase in the relative
mix of non-Burger King business. Gross profit in the Consumer
Products business decreased from the prior year due to pricing
pressure, a changing product sales mix and a higher mix of
international sales, which tend to carry lower margins.
- - Overall operating expenses were $14.6 million, or 28.1% of revenues,
compared with $12.0 million, or 21.1% of revenues, in the prior year.
Excluding charges, operating expenses were $14.1 million, or 27.2% of
revenues, in the second quarter of 2004. Prior year operating expenses
exclude SCI and JGI.
- - Operating expenses in the second quarter of 2004 include approximately
$194,000 in non-cash expense related to grants of restricted stock units,
compared with approximately $61,000 recognized in the same period in 2003.
- - Earnings before interest, taxes, depreciation, amortization and charges in
2004 ("EBITDA") was $181,000, compared with $3.8 million in the same
period in 2003.
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- - The Company generated $1.5 million in cash flow from operations during the
quarter, compared with $2.8 million in the same period in 2003.
- - Net loss was $530,000, or $0.16 per diluted share, compared with net
income of $2.1 million, or $0.22 per diluted share, in the same period of
the previous year. Excluding charges, the Company's second quarter 2004
net loss was $221,000 or $0.10 per diluted share.
- - Collectively, SCI and JGI were $0.05 dilutive per share in the second
quarter of 2004.
SIX MONTHS ENDED JUNE 30, 2004 FINANCIAL HIGHLIGHTS
- - Revenues were $103.6 million, compared with revenues of $104.5 million in
the same period of the previous year.
- - Net foreign currency translation impact contributed approximately
$2.2 million to revenues versus the prior year period average exchange
rates.
- - Domestic revenues were $74.7 million, or 72.1% of revenues, and
international revenues were $28.9 million, or 27.9% of revenues. In the
prior year period, domestic revenues were $82.0 million, or 78.5% of
revenues, and international revenues were $22.5 million, or 21.5% of
revenues.
- - The SCI and JGI businesses generated a combined $10.7 million in revenues
in the first six months of 2004. Results for the first six months of 2003
do not include SCI or JGI.
- - Marketing Services revenues for the first six months represented 90.4% of
total revenues, while Consumer Products revenues represented 9.6% of total
revenues. In the prior year period, Marketing Services revenues
represented 86.1% of total revenues, while Consumer Products revenues
represented 13.9% of total revenues.
- - Gross profit was 26.1% for the first six months of 2004, as compared to
26.3% in the same period in 2003. Gross profit was 26.0% in the Marketing
Services business and 26.3% in the Consumer Products business in the first
six months of 2004, as compared to 24.6% and 36.5%, respectively, in the
same period of 2003.
- - Overall operating expenses were $27.8 million, or 26.8% of revenues,
compared with $22.9 million, or 21.9% of revenues, in the prior year.
Excluding charges, operating
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expenses were $27.2 million, or 26.3% of revenues, in the first six months
of 2004. Prior year operating expenses exclude SCI and JGI.
- - Operating expenses in the first six months of 2004 include approximately
$257,000 in non-cash expense related to grants of restricted stock units,
compared with approximately $61,000 recognized in the same period in 2003.
No restricted stock units were granted in the first quarter of 2003 as
they were not used as the primary means of stock-based compensation until
the second quarter.
- - Earnings before interest, taxes, depreciation, amortization and charges in
2004 ("EBITDA") was $444,000, compared with $5.8 million in the same
period in 2003.
- - The Company generated $1.3 million in cash flow from operations during the
first six months of 2004, compared with cash used of ($5.0) million in the
same period in 2003.
- - Net loss was $696,000, or $0.25 per diluted share, compared with net
income of $3.1 million, or $0.31 per diluted share, in the same period of
the previous year. Excluding charges, the Company's net loss in the first
six months of 2004 was $360,000 or $0.19 per diluted share.
- - Collectively, SCI and JGI were $0.12 dilutive per share in the first six
months of 2004.
FINANCIAL CONDITION
At June 30, 2004, the Company had $14.2 million in cash, cash equivalents
and marketable securities, $23.7 million in working capital, a current ratio of
1.6 and no debt.
SHARE REPURCHASE PROGRAM
In July 2002, Equity's Board of Directors authorized the implementation of
a new $10 million stock repurchase program. Since then, the Company has spent a
total of $3.5 million from this program to purchase 267,650 shares at an average
price of $13.10 per share, including commissions. Since initiating its original
buyback program on July 21, 2000, the Company has spent a total of approximately
$15.5 million to purchase 1,245,959 shares at an average price of $12.47 per
share, including commissions.
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SHARE COUNT UPDATE
In accordance with GAAP, based on the level of net income for the second
quarter of 2004, the calculation of diluted earnings per share excludes the
impact of the assumed conversion of preferred stock and includes the preferred
stock dividend. Accordingly, the number of diluted weighted average shares
outstanding for purposes of computing earnings per share was 5.8 million shares
in the second quarter of 2004.
For the full year 2004, the Company expects its diluted weighted average
shares outstanding for purposes of computing earnings per share to be 7.9
million shares.
OUTLOOK
The Company confirmed its guidance for the full year. Revenues are
expected to range between $245 million and $260 million, and diluted earnings
per share before charges are expected to range between $1.05 and $1.15. The
Company's diluted earnings per share, required to be reported based on GAAP,
will modestly differ from this guidance because of charges that have been
incurred in the first half of the year and other charges that could occur in the
second half.
The Company believes the following factors will contribute to
significantly improved results in the second half of 2004:
- - Strengthening business trends being reflected in the Company's
promotional programs for Burger King(R)
- - Several new clients at Logistix, SCI and Upshot that have projects
scheduled to be implemented during the remainder of 2004
- - A seasonally stronger second half for SCI due to its retail
department store client base
- - JGI is planning to produce two more promotional programs for
SUBWAY(R) to be in store this year
- - The seasonal impact of holiday shopping in the Consumer Products
business, including the first holiday sales for the Baby Einstein((TM))
product line
Mr. Kurz commented on the outlook for Equity Marketing: "More companies
are shifting resources towards non-traditional, non-advertising marketing
services, and we are seeing an
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increase in quality revenue opportunities. We have an excellent pipeline of work
scheduled for the remainder of 2004, although a greater portion of our revenues
are coming from our new businesses that experience more seasonality and have
different delivery and service patterns and shorter lead times than our core
promotional business, thus giving us less short-term visibility. While it has
been our practice to provide quarterly guidance, the timing uncertainty makes it
difficult to accurately project the distribution of revenue and earnings between
the third and fourth quarters at this point in time.
"However, annual visibility has not changed, and we remain confident in
our full year projections and believe we will have a very strong second half for
both revenue and earnings. Importantly, it will be the most diversified revenue
and earnings mix in the Company's history, as we expect to have meaningful
contributions from six distinct revenue streams. We are also taking appropriate
actions to optimize our profitability and help offset the margin pressure we are
seeing in some areas of the business.
"Despite the disappointing reported results in the first half of 2004, we
have generated positive cash flow and remain in excellent financial position. We
intend to continue using this financial strength to invest in new business
development and branding efforts that will help drive organic growth, as well as
pursue attractive acquisitions that can leverage our existing infrastructure. We
are confident that the performance of our business will markedly improve in the
second half of 2004, and lay a good foundation for continued profitable growth,"
said Mr. Kurz.
SECOND QUARTER CONFERENCE CALL
The Company will host a conference call today at 4:30 p.m. ET/1:30 p.m. PT
to discuss its first quarter financial results and operational highlights. All
interested parties may listen to the live call or access a replay of the call
via the Internet at www.equity-marketing.com. To listen to the live call, visit
the Investor Relations page of the Web site at least 15 minutes prior to
download any necessary software.
ABOUT EQUITY MARKETING
Equity Marketing, Inc. is a leading global marketing services company
based in Los Angeles, with offices in Chicago, Minneapolis, New York, Ontario
(CA), London, Paris, Hong
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Kong and Shanghai. The Company focuses on the design and execution of
strategy-based marketing programs, with particular expertise in the areas of:
strategic planning and research, entertainment marketing, design and
manufacturing of custom promotional products, promotion, event marketing,
collaborative marketing, and environmental branding. The Company's clients
include Burger King Corporation, Diageo, Kellogg's, Kohl's, Macy's, Nordstrom,
Procter & Gamble, and Subway Restaurants, among others. The Company complements
its core marketing services business by developing and marketing distinctive
consumer products, based on emerging and evergreen licensed properties, which
are sold through specialty and mass-market retailers. More information about
Equity Marketing is available on the Company's web site at
www.equity-marketing.com.
NOTE: All trademarks and registered trademarks are property of their respective
owners.
Certain expectations and projections regarding the future performance of Equity
Marketing, Inc. discussed in this news release are forward-looking and are made
under the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. These expectations and projections are based on currently available
competitive, financial and economic data along with the Company's operating
plans and are subject to future events and uncertainties. Management cautions
the reader that the following factors, among others, could cause the Company's
actual consolidated results of operations and financial position in 2004 and
thereafter to differ significantly from those expressed in forward-looking
statements: the Company's dependence on a single customer; the significant
quarter-to-quarter variability in the Company's revenues and net income; the
Company's dependence on the popularity of licensed entertainment properties and
the ability to license, develop and market new products; the Company's
dependence on foreign manufacturers; the Company's need for additional working
capital; the negative results of litigation, governmental proceedings or
environmental matters; and the potential negative impact of past or future
acquisitions. The Company undertakes no obligation to publicly release the
results of any revisions to forward-looking statements, which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. The risks highlighted herein should not be
assumed to be the only items that could affect the future performance of the
Company.
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EQUITY MARKETING, INC.
Condensed Consolidated Statements of Income
(In thousands, except share and per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues $ 51,778 $ 56,953 $ 103,590 $ 104,520
Cost of sales 38,015 41,766 76,587 77,053
----------- ----------- ----------- -----------
Gross profit 13,763 15,187 27,003 27,467
Operating expenses:
Salaries, wages and benefits 7,900 5,537 15,177 11,398
Selling, general and administrative 6,160 6,485 12,056 11,510
Integration costs 93 -- 136 --
Restructuring charge 105 -- 105 --
Loss on Chicago lease 311 -- 311 --
----------- ----------- ----------- -----------
Total operating expenses 14,569 12,022 27,785 22,908
----------- ----------- ----------- -----------
Income (loss) from operations (806) 3,165 (782) 4,559
Other income (expense) (68) 205 (360) 307
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (874) 3,370 (1,142) 4,866
Provision (benefit) for income taxes (344) 1,230 (446) 1,748
----------- ----------- ----------- -----------
Net income (loss) (530) 2,140 (696) 3,118
Preferred stock dividends 375 375 750 750
Undistributed earnings allocated to participating preferred stock -- 405 -- 542
----------- ----------- ----------- -----------
Net income (loss) applicable to common stockholders $ (905) $ 1,360 $ (1,446) $ 1,826
=========== =========== =========== ===========
Basic income (loss) per share*
Income (loss) per share to common stockholders $ (0.16) $ 0.24 $ (0.25) $ 0.32
=========== =========== =========== ===========
Weighted average shares outstanding 5,758,370 5,700,016 5,739,603 5,704,148
=========== =========== =========== ===========
Diluted income (loss) per share*
Income (loss) per share $ (0.16) $ 0.22 $ (0.25) $ 0.31
=========== =========== =========== ===========
Weighted average shares outstanding 5,758,370 6,057,801 5,739,603 5,970,205
=========== =========== =========== ===========
* Per share amounts for 2003 have been restated to reflect the impact of
EITF 03-6 "Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earnings per Share," which reduces basic and diluted
earnings per share $0.07 and $0.06, respectively, for the three months
ended June 30, 2003 and $0.10 and $0.09, respectively, for the six months
ended June 30, 2003. EITF 03-6 had no impact on 2004 per share amounts
because of the net loss. EITF 03-6 requires that rights of securities to
participate in the earnings of an enterprise must be reflected in the
reporting of earnings per share. The Company's cumulative participating
mandatorily redeemable convertible preferred stock qualify as
"participating securities." The proportionate share of 2003 earnings
attributable to these securities is being excluded from the earnings
available to common stockholders.
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EQUITY MARKETING, INC.
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS JUNE 30, DECEMBER 31,
2004 2003
(UNAUDITED)
--------- ---------
Cash and cash equivalents $ 12,948 $ 19,291
Marketable securities 1,300 --
Accounts receivable, net 29,367 36,765
Inventories 14,240 15,099
Prepaid expenses and other current assets 4,384 4,352
--------- ---------
CURRENT ASSETS 62,239 75,507
Fixed assets, net 3,935 3,809
Intangible assets, net 47,683 43,145
Other assets 6,893 5,869
--------- ---------
TOTAL ASSETS $ 120,750 $ 128,330
========= =========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Short-term debt $ -- $ --
Accounts payable 24,917 28,865
Accrued liabilities 13,623 17,195
--------- ---------
CURRENT LIABILITIES 38,540 46,060
Long-term liabilities 5,122 5,555
--------- ---------
TOTAL LIABILITIES 43,662 51,615
Mandatorily redeemable preferred stock 22,518 23,049
Common stock -- --
Additional paid-in capital 27,661 23,886
Retained earnings 43,692 45,138
Accumulated other comprehensive income 3,860 3,334
Less:
Treasury stock (17,669) (17,458)
Unearned compensation (2,974) (1,234)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 54,570 53,666
--------- ---------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 120,750 $ 128,330
========= =========
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EQUITY MARKETING, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED)
----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (696) $ 3,118
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 987 936
Provision for doubtful accounts 110 255
Gain on disposal of fixed assets (8) --
Tax benefit from exercise of stock options 65 60
Amortization of restricted stock 311 156
Other -- 4
Changes in operating assets and liabilities-
Increase (decrease) in cash and cash equivalents:
Accounts receivable 9,487 8,433
Inventories 1,621 1,650
Prepaid expenses and other current assets (829) (199)
Other assets (1,012) (989)
Accounts payable (4,141) (9,680)
Accrued liabilities (4,188) (8,804)
Long-term liabilities (433) 63
-------- --------
Net cash provided by (used in) operating activities 1,274 (4,997)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (936) (373)
Purchase of marketable securities, net (1,300) (1,500)
Proceeds from sale of fixed assets 9 16
Payment for purchase of JGI (4,614) --
-------- --------
Net cash used in investing activities (6,841) (1,857)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of preferred stock dividends (1,125) (750)
Purchase of treasury stock (211) (845)
Proceeds from exercise of stock options 538 389
-------- --------
Net cash used in financing activities (798) (1,206)
-------- --------
Net decrease in cash and cash equivalents (6,365) (8,060)
Effects of exchange rates on cash and cash equivalents 22 165
CASH AND CASH EQUIVALENTS, beginning of period 19,291 25,833
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 12,948 $ 17,938
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EQUITY MARKETING, INC.
EBITDA
(In thousands)
EBITDA, before charges, is calculated as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Net Income (loss) $ (530) $ 2,140 $ (696) $ 3,118
Integration costs 93 -- 136 --
Restructuring charge 105 -- 105 --
Loss on Chicago lease 311 -- 311 --
Interest expense, net 25 12 47 16
Provision (benefit) for income taxes (344) 1,230 (446) 1,748
Depreciation 430 414 825 822
Amortization 91 50 162 114
------- ------- ------- -------
EBITDA, before charges $ 181 $ 3,846 $ 444 $ 5,818
======= ======= ======= =======
EBITDA is reconciled to cash flows provided by (used in) operating activities,
the most comparable measure under generally accepted accounting principles, as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
EBITDA, before charges $ 181 $ 3,846 $ 444 $ 5,818
Integration costs (93) -- (136) --
Restructuring charge (105) -- (105) --
Loss on Chicago lease (311) -- (311) --
Interest expense, net (25) (12) (47) (16)
(Provision) benefit for income taxes 344 (1,230) 446 (1,748)
Changes in operating assets and
liabilities 1,159 (131) 505 (9,526)
Other, net 328 332 478 475
------- ------- ------- -------
Net cash provided by (used in)
operating activities $ 1,478 $ 2,805 $ 1,274 $(4,997)
======= ======= ======= =======
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