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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 22308
EQUITY MARKETING, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 13-3534145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
131 SOUTH RODEO DRIVE
BEVERLY HILLS, CA 90212
(Address of principal executive offices) (Zip Code)
(310) 887-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.001 Par Value, 5,588,512 shares as of August 12, 1996
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EQUITY MARKETING, INC.
Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
Three Months Ended June 30, 1996
Page
Part I. Financial Information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II.
Item 6. Exhibits and Reports on Form 8-K 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 444 $ 3,940
Marketable securities .......................................... -- 11,935
Accounts receivable, net of allowances of $352 and
$200 as of June 30, 1996 and December 31, 1995,
respectively ................................................... 36,752 1,749
Production-in-process and inventory ............................ 3,317 3,296
Prepaid expenses and other current assets ...................... 1,333 2,119
--------- --------
Total current assets ................................... 41,846 23,039
FIXED ASSETS, net ................................................ 2,094 1,980
INTANGIBLE ASSETS, net ........................................... 274 391
OTHER ASSETS ..................................................... 708 852
--------- --------
Total assets ........................................... $ 44,922 $ 26,262
========= ========
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
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EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(UNAUDITED)
CURRENT LIABILITIES:
Short term bank borrowings................................. $ 8,550 $ --
Accounts payable........................................... 10,372 5,726
Accrued liabilities........................................ 5,514 3,896
Deferred revenue........................................... 369 971
-------- --------
Total current liabilities 24,805 10,593
LONG TERM LIABILITIES 1,012 787
-------- --------
Total Liabilities.................................... 25,817 11,380
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value per share; 1,000,000
shares authorized, none issued or outstanding.............. -- --
Common stock, par value $.001 per share, 20,000,000
shares authorized, 5,588,512 and 5,509,682 shares
outstanding as of June 30, 1996 and December 31, 1995,
respectively............................................... -- --
Additional paid-in capital................................. 8,604 8,241
Retained earnings.......................................... 11,847 7,990
-------- --------
20,451 16,231
Less--
Treasury stock, 1,897,670 and 1,907,100 shares, at cost,
as of June 30, 1996 and December 31, 1995, respectively.... (1,282) (1,285)
Stock subscription receivable.............................. (64) (64)
-------- --------
Total stockholders' equity......................... 19,105 14,882
-------- --------
Total liabilities and stockholders' equity......... $ 44,922 $ 26,262
======== ========
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
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EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
REVENUES............................................. $ 38,443 $ 9,767 $ 56,615 $ 27,496
COST OF SALES........................................ 28,934 6,631 42,647 20,236
--------- --------- --------- ---------
Gross Profit.................................... 9,509 3,136 13,968 7,260
--------- --------- --------- ---------
OPERATING EXPENSES:
Salaries, wages and benefits.................... 3,514 1,295 5,195 2,861
Selling, general and administrative............. 1,625 1,105 2,904 2,376
--------- --------- --------- ---------
Total operating expenses................... 5,139 2,400 8,099 5,237
--------- --------- --------- ---------
Income from operations..................... 4,370 736 5,869 2,023
INTEREST INCOME, net 34 110 157 149
--------- --------- --------- ---------
Income before provision for income taxes... 4,404 846 6,026 2,172
PROVISION FOR INCOME TAXES........................... 1,586 332 2,169 862
--------- --------- --------- ---------
Net income................................. $ 2,818 $ 514 $ 3,857 $ 1,310
========= ========= ========= =========
NET INCOME PER SHARE................................. $ .48 $ .09 $ .66 $ .23
========= ========= ========= =========
WEIGHTED AVERAGE
SHARES OUTSTANDING......................... 5,918,346 5,680,769 5,887,598 5,685,079
========= ========= ========= =========
The accompanying notes are an integral part of these
condensed consolidated statements.
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EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
-------- --------
Net income ...................................................................... $ 3,857 $ 1,310
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization ............................................. 394 245
Provision for doubtful accounts ............................................. 160 --
Non-cash rent ............................................................... 225 --
Loss on disposition of fixed assets ......................................... -- 14
Other ..................................................................... 50 --
Changes in assets and liabilities:
Increase (decrease) in cash and cash equivalents --
Accounts receivable ..................................................... (35,163) 8,557
Production-in-process and inventory ............................... (21) (774)
Prepaid expenses and other assets ................................. 786 (313)
Other assets ...................................................... 144 35
Accounts payable .................................................. 4,646 (3,923)
Accrued liabilities ............................................... 1,618 (1,835)
Deferred revenue .................................................. (602) 3,588
-------- --------
Net cash (used in) provided by operating activities.......... (23,906) 6,904
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ........................................... (31,807) (17,883)
Proceeds from sales and maturities of marketable securities .................. 43,742 9,326
Purchases of Fixed Assets .................................................... (391) (375)
-------- --------
Net cash provided by (used in) investing activities ......... 11,544 (8,932)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock .................................................. -- (245)
Proceeds from exercise of stock options ...................................... 76 --
Tax benefit from exercise of stock options ................................... 240 --
Short term borrowings .......................................................... 8,550
-------- --------
Net cash provided by (used in) financing activities ................. 8,866 (245)
Net decrease in cash and cash
equivalents ......................................................... (3,496) (2,273)
CASH AND CASH EQUIVALENTS, beginning of period .................................... 3,940 5,765
-------- --------
CASH AND CASH EQUIVALENTS, end of period .......................................... $ 444 $ 3,492
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest ....................................................................... $ 19 $ 12
======== ========
Income taxes ................................................................... $ 2,101 $ 2,077
======== ========
The accompanying notes are an integral part of these
condensed consolidated statements.
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EQUITY MARKETING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management and subject to year-end audit, the accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included. The
results of operations for the interim periods are not necessarily indicative of
the results for a full year. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Certain reclassifications have been made to the accompanying financial
statements to conform them with the current period presentation.
NET INCOME PER SHARE
Net income per share was computed by dividing net income by the weighted average
number of common shares and common share equivalents outstanding during each
period. Common share equivalents represent stock options and warrants and are
included in the weighted average shares pursuant to the treasury stock method.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations include forward looking statements. Actual results
could vary from those expected due to a variety of risks including, for example,
the potential cancellation of promotions due to delays in the timing of
theatrical motion picture releases, the ability to renew licenses under
favorable terms, the Company's dependence on a single customer, quarterly
fluctuations in financial results, changes in international tariff rates and
other risks detailed from time to time in the Company's SEC reports. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
operating results as a percentage of total revenues:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
----- ----- ----- -----
Revenues........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 75.3% 67.9% 75.3% 73.6%
----- ----- ----- -----
Gross Profit.............................. 24.7% 32.1% 24.7% 26.4%
Operating Expenses:
Salaries, wages and benefits................ 9.1% 13.3% 9.2% 10.4%
Selling, general and administrative......... 4.2% 11.3% 5.1% 8.6%
----- ----- ----- -----
Total operating expenses.................. 13.3% 24.6% 14.3% 19.0%
----- ----- ----- -----
Income from operations.................... 11.4% 7.5% 10.4% 7.4%
Interest Income, net............................ .1% 1.1% .2% .5%
----- ----- ----- -----
Income before provision for income
taxes.................................. 11.5% 8.6% 10.6% 7.9%
Provision for Income Taxes...................... 4.1% 3.4% 3.8% 3.1%
----- ----- ----- -----
Net Income................................ 7.4% 5.2% 6.8% 4.8%
===== ===== ===== =====
Three months ended June 30, 1996 compared to three months ended June 30, 1995
(000's omitted):
Revenue for the three months ended June 30, 1996 increased $28,676 to $38,443
from $9,767 in 1995 primarily as a result of increases in Promotions revenue as
well as increases in Toys revenue. Promotions revenue increased $26,894 to
$33,286 from $6,392 in 1995 due primarily to a high volume promotion associated
with a major motion picture release in June 1996, with no comparable large event
promotion in the second quarter of 1995. Toys revenue increased $1,782 to $5,157
from $3,375 in 1995 primarily due to increases in sales under the Company's
multi-year Warner Bros. International Looney Tunes
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license to various international distributors and sales of toys based on the PBS
television property, Wishbone.
Cost of sales increased $22,303 to $28,934 (75.3% of revenues) for the three
months ended June 30, 1996 from $6,631 (67.9% of revenues) in the comparable
period in 1995 primarily due to higher sales volume in 1996. The decrease in
gross margin percentage for the three month period ended June 30, 1996 is due
primarily to higher margins realized on several European promotions in 1995.
Salaries, wages and benefits increased $2,219 to $3,514 (9.1% of revenues) in
1996 from $1,295 (13.3% of revenues) in 1995 primarily due to the addition of 31
employees, including 12 employees at Equity Marketing Hong Kong, Ltd., and
higher incentive compensation recorded as a result of the increased income in
1996.
Selling, general and administrative expenses increased $520 to $1,625 (4.2% of
revenues) in 1996 from $1,105 (11.3% of revenues) in 1995 primarily due to
higher infrastructure requirements and increased selling costs associated with
the higher sales volume in 1996.
Income from operations increased $3,634 to $4,370 (11.4% of revenues) for the
three month period ended June 30, 1996 from $736 (7.5% of revenues) in the
comparable period in 1995 primarily due to higher sales volume in 1996.
The effective tax rate for the three months ended June 30, 1996 is 36.0%
compared to the effective tax rate of 39.2% in 1995. The effective tax rate is
lower in 1996 as a result of differences in the locations to which products were
shipped in 1996.
Six months ended June 30, 1996 compared to six months ended June 30, 1995(000's
omitted):
Revenue for the six months ended June 30, 1996 increased $29,119 or 105.9% to
$56,615 from $27,496 in the comparable period in the prior year. This increase
is a result of increases in Domestic Promotions and Toys revenue partially
offset by a decrease in International Promotions revenue.
Cost of sales increased $22,411 to $42,647 (75.3% of revenues) for the six month
period ended June 30, 1996, from $20,236 (73.6% of revenues) in the comparable
period in 1995. The decrease in gross margin percentage is due primarily to
higher margins realized on several European promotions in 1995.
Salaries, wages and benefits increased $2,334 to $5,195 (9.2% of revenues) in
1996 from $2,861 (10.4% of revenues) in 1995 due to increases in the number of
employees and higher incentive compensation recorded as a result of the
increased income in 1996.
Selling, general and administrative expenses increased $528 to $2,904 (5.1% of
revenues) in 1996 from $2,376 (8.6% of revenues) in 1995 primarily due to higher
infrastructure requirements and increased selling costs associated with the
higher sales volume in 1996.
Income from operations increased $3,846 to $5,869 (10.4% of revenues) for the
six month period ended June 30, 1996, from $2,023 (7.4% of revenues) in the
comparable period in 1995, primarily due to the higher sales volume in 1996.
The effective tax rate for the six month period ended June 30, 1996 is 36.0%
compared to the effective tax rate of 39.7% for the six month period ended June
30, 1995. The effective tax rate is lower in 1996 as a result of differences in
the locations to which products were shipped in 1996.
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FINANCIAL CONDITION AND LIQUIDITY (000'S OMITTED):
At June 30, 1996 working capital was $17,041 as compared to approximately
$12,446 at December 31, 1995. The increase in working capital is primarily a
result of profits for the six month period ended June 30, 1996.
As of June 30, 1996, the Company's investment in accounts receivable and
production-in-process increased by $35,024 compared to December 31, 1995. This
increase was attributable primarily to an increase in accounts receivable of
$35,003 due to a large promotion associated with a major motion picture release
in June 1996. The cost of manufacturing product for the promotion was funded
primarily through use of the Company's cash and short term borrowings under the
Company's line of credit. As of August 8, 1996, the Company had collected the
majority of its June 30, 1996 accounts receivables and had repaid the borrowings
under the line of credit. In addition, as of August 12, 1996, the Company had
cash and marketable securities totaling approximately $15,000. The Company had
no material commitments for capital expenditures at June 30, 1995.
At June 30, 1996 accounts payable increased $4,646 compared to December 31,
1995. This increase was primarily attributed to the larger number of shipments
in the second quarter of 1996 in contrast to the fourth quarter of 1995.
The Company is exploring the possibility of acquiring other companies to further
diversify its business, although no assurance can be given that the Company will
find suitable acquisition candidates or that it will be successful in
consummating such transactions. If the Company is successful in finding suitable
acquisition candidates, such transactions would be financed, depending on
availability and market conditions, through the use of the Company's existing
funds, bank financing or a combination of these sources.
CREDIT FACILITIES
On January 26, 1996, the Company entered into a credit agreement with Sanwa Bank
California and Imperial Bank which makes available to the Company a line of
credit of up to $25 million. The line of credit is secured by substantially all
of the Company's assets and expires on April 30, 1998. As of June 30, 1996,
$8,550 was outstanding under the line of credit. As of August 8, 1996, all
borrowings outstanding on the line of credit at June 30, 1996 had been repaid.
Subject to the financing requirements of any potential acquisitions, the Company
believes that the line of credit and internally generated funds will provide
adequate financing for its current and expected levels of operations.
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PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the
quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles
and State of California on the 12th day of August, 1996.
EQUITY MARKETING, INC.
By: /s/ DONALD A. KURZ
-------------------------------------------
Donald A. Kurz
President, Co-Chief Executive Officer
By: /s/ KENNETH M. FISHER
-------------------------------------------
Kenneth M. Fisher
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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