1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------------------------
FORM 8-K/A
-------------------------------------------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JULY 23, 1998
EQUITY MARKETING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMISSION FILE NUMBER 23346
DELAWARE 13-3534145
(STATE OF OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
131 S. RODEO DRIVE
BEVERLY HILLS, CALIFORNIA 90212
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(310) 887-4300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 23, 1998, Equity Marketing, Inc. (the "Company") acquired substantially
all of the assets of Contract Marketing, Inc., a Massachusetts corporation, and
U.S. Import & Promotions Co., a Florida corporation (collectively referred to
herein as the "Acquired Businesses"), in exchange for $15,000,000 in cash plus
potential additional cash consideration based upon the results of operations of
the Acquired Businesses during each calendar year through December 31, 2002 as
set forth in the respective Asset Purchase Agreements, dated as of July 23,
1998, by and among the Company and each of Contract Marketing, Inc. and U.S.
Import & Promotions Co. The source of funds used for the acquisitions was bank
borrowings from the Company's existing credit facility with Sanwa Bank
California and Imperial Bank.
The Acquired Businesses focus primarily on promotions for oil and gas and other
retailers. The Company intends to continue to use the acquired assets for this
purpose. The primary operations of the Acquired Businesses are located in West
Boylston, Massachusetts, and St.
Augustine, Florida.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
a. Financial Statements of Businesses Acquired.
1. Combined Financial Statements of Contract Marketing, Inc.
and U.S. Import & Promotions Co. as of and for the year
ended December 31, 1997
Page
-----
Report of Independent Public Accountants 4
Combined Balance Sheet as of December 31, 1997 5
Combined Statement of Income and Retained Earnings
for the year ended December 31, 1997 6
Combined Statement of Cash Flows for the year
ended December 31, 1997 7
Notes to Combined Financial Statements 8-11
2. Condensed Combined Financial Statements of Contract Marketing,
Inc. and U.S. Import & Promotions Co. as of June 30, 1998 and
for the six months ended June 30, 1998 and 1997 (Unaudited)
Page
-----
Condensed Combined Balance Sheets as of December 31, 1997 and
June 30, 1998 (Unaudited) 12
Condensed Combined Statements of Income and Retained
Earnings for the six months ended June 30, 1997 and 1998
(Unaudited) 13
Condensed Combined Statements of Cash Flows for the six
months ended June 30, 1997 and 1998 (Unaudited) 14
Notes to Condensed Combined Financial Statements (Unaudited) 15
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b. Pro Forma Financial Information.
Pro Forma Condensed Combining Financial Statements as of June 30, 1998
and for the six months ended June 30, 1998 and for the year ended
December 31,1997
Page
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Pro Forma Condensed Combining Balance Sheet
as of June 30, 1998 (Unaudited) 17
Pro Forma Condensed Combining Statement of Income for the
six months ended June 30, 1998 (Unaudited) 18
Pro Forma Condensed Combining Statement of Income
for the year ended December 31, 1997 (Unaudited) 19
Notes to Pro Forma Condensed Combining Financial
Statements (Unaudited) 20
c. Exhibits.
10.1. Asset Purchase Agreement, dated July 23, 1998, by and among Equity
Marketing, Inc., Contract Marketing, Inc., John C. McDaniel and Philip
A. McDaniel. Previously filed as an exhibit to Equity Marketing, Inc.'s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 7, 1998 incorporated herein by reference.
10.2. Asset Purchase Agreement, dated July 23, 1998, by and among Equity
Marketing, Inc., U.S. Import & Promotions Co., Philip A. McDaniel and
John C. McDaniel. Previously filed as an exhibit to Equity Marketing,
Inc.'s Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 7, 1998 incorporated herein by reference.
23.1 Consent of Independent Public Accountants.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF CONTRACT MARKETING, INC.
AND U.S. IMPORT & PROMOTIONS CO.:
We have audited the accompanying combined balance sheet of Contract Marketing,
Inc. (a Massachusetts Corporation) and U.S. Import & Promotions Co. (a Florida
Corporation) as of December 31, 1997, and the related combined statements of
income and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Contract
Marketing, Inc. and U.S. Import & Promotions Co. as of December 31, 1997 and the
results of their combined operations and their combined cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
September 30, 1998
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CONTRACT MARKETING, INC. AND U.S. IMPORT & PROMOTIONS CO.
COMBINED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,390,542
Accounts receivable, net of allowance for doubtful accounts of $6,000 254,813
Inventory 923,968
Prepaid expenses and other current assets 7,601
-----------
TOTAL CURRENT ASSETS 3,576,924
PROPERTY AND EQUIPMENT, net 45,948
OTHER ASSETS 2,000
-----------
TOTAL ASSETS $3,624,872
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $968,010
Accrued royalties 88,161
Accrued expenses 70,443
Deferred revenue 41,416
-----------
TOTAL CURRENT LIABILITIES 1,168,030
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 600
Additional paid-in capital 63,551
Retained earnings 2,920,454
-----------
2,984,605
Less - Notes receivable from stockholder (527,763)
-----------
TOTAL STOCKHOLDERS' EQUITY 2,456,842
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,624,872
===========
The accompanying notes are an integral part of this combined balance sheet.
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CONTRACT MARKETING, INC. AND U.S. IMPORT & PROMOTIONS CO.
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES $17,238,847
COST OF SALES 11,883,024
------------
Gross profit 5,355,823
------------
OPERATING EXPENSES:
Salaries, wages and benefits 911,002
General and administrative expenses 2,098,381
------------
Total operating expenses 3,009,383
------------
Income from operations 2,346,440
OTHER INCOME:
Interest income 88,376
------------
Income before provision for income taxes 2,434,816
PROVISION FOR INCOME TAXES --
------------
Net income 2,434,816
RETAINED EARNINGS, beginning of the year 2,086,668
Less: dividends (1,601,030)
------------
RETAINED EARNINGS, end of the year $2,920,454
============
The accompanying notes are an integral part of this combined financial statement.
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CONTRACT MARKETING, INC. AND U.S. IMPORT & PROMOTIONS CO.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,434,816
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 32,723
Provision for bad debts 6,000
Changes in assets and liabilities:
Decrease (increase) in cash and cash equivalents:
Accounts receivable (106,955)
Inventory 496,660
Prepaid expenses and other current assets (7,601)
Other assets (1,000)
Accounts payable 485,623
Accrued liabilities (246,131)
Deferred revenue (23,682)
-----------
Net cash provided by operating activities 3,070,453
-----------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchases of property and equipment (34,090)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (1,601,030)
Advances to stockholder (527,763)
------------
Net cash used in investing activities (2,128,793)
------------
Net increase in cash and cash equivalents 907,570
CASH AND CASH EQUIVALENTS, beginning of year 1,482,972
-----------
CASH AND CASH EQUIVALENTS, end of year $ 2,390,542
===========
The accompanying notes are an integral part of this combined financial statement.
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CONTRACT MARKETING, INC. AND U.S. IMPORT & PROMOTIONS CO.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - NATURE OF THE BUSINESS
Contract Marketing, Inc. ("CMI") and U.S. Import & Promotions Co. ("USI") were
incorporated in Massachusetts and Florida, respectively. CMI and USI are related
companies with a primary focus on collectible toy truck promotions for oil and
gas retailers. CMI and USI combined, are collectively referred to herein as the
"Company."
CMI and USI work together extensively. USI, based in St. Augustine, Florida, is
a sales promotions agency that was founded in 1984. In addition to sales and
account management, USI provides creative and design services, as well as
management of overseas production of promotional products on behalf of both
companies. CMI is a marketing and customer service agency which was established
in 1979, in West Boylston, Massachusetts. Besides promotional programs, CMI
offers warehousing and fulfillment services, including management of "store
direct" customer service functions for the co-op, dealer and distributor
networks of both companies' clients.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Combination
All significant intercompany accounts and transactions have been eliminated in
combination.
b. Inventory
Inventory consists primarily of purchased finished goods and are stated at the
lower of cost or market value, on a first-in, first-out basis.
c. Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method of accounting at rates
based on the following estimated useful lives:
Years
-----
Warehouse equipment & machinery 5
Furniture, fixtures and office equipment 3 - 5
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Property and equipment, net is summarized as follows:
Warehouse equipment & machinery $ 82,644
Furniture, fixtures and office equipment 107,289
---------
Fixed assets, at cost 189,933
Accumulated depreciation (143,985)
---------
Property and equipment, net $ 45,948
=========
For the year ended December 31, 1997, depreciation expense related to property
and equipment was $32,723.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Income Taxes
CMI and USI have elected to be taxed for federal and state purposes as "S"
Corporations, whereby income is passed through to the stockholders and is taxed
at the individual level. Accordingly, no income taxes are provided in these
combined statements.
e. Cash and cash equivalents
Cash and cash equivalents include cash and overnight highly liquid investments
with original maturities of three months or less.
f. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
g. Revenue Recognition
Sales are recorded upon transfer of title and risk of loss to the customer, and
generally upon shipment of goods. Deferred revenue represents funds paid by
customers in advance of shipment of goods.
NOTE 3 - CONCENTRATION OF RISK
Accounts receivable potentially subject the Company to credit risk. The Company
extends credit to its customers based upon an evaluation of the customer's
financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal losses.
The Company's customers include large multi-outlet oil and gas retailers, three
of which account for a significant percentage of sales volume. These three
customers represent 41 percent, 28 percent, and 12 percent, respectively, of
total sales for the year ended December 31, 1997.
The Company purchases a substantial portion of its manufactured products from
suppliers located outside the United States including China. Foreign
manufacturing is subject to a number of risks, including transportation delays
and interruptions, political and economic disruptions, the imposition of
tariffs, quotas and other import or export controls and changes in governmental
policies. China currently enjoys Most Favored Nation trading status with the
United States. No assurance can be given that China will continue to enjoy Most
Favored Nation status in the future. The Company believes that if these Chinese
suppliers were no longer available, it would be able to obtain its manufactured
products from existing suppliers located within the United States and suppliers
in foreign countries other than China and other foreign countries. However,
there can be no assurance that the Company would be able to obtain manufactured
products under acceptable terms.
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NOTE 4 - PENSION PLAN
CMI has a Simplified Employee Pension Plan (the "SEP") covering substantially
all of its full-time employees. The SEP is an employer-sponsored retirement plan
where the employer makes contributions to an employee-established IRA, subject
to certain Internal Revenue Code limits. Employer contributions to the Plan were
$28,660 in 1997.
NOTE 5 - STOCKHOLDERS EQUITY
The Stockholders Equity accounts, by company, are summarized as follows:
Common stock:
Contract Marketing, Inc., no par value,
15,000 shares authorized, 201 shares issued and outstanding $ 500
U.S. Import & Promotions Co., $1 par value,
7,500 shares authorized, 100 shares issued and
outstanding 100
-----------
Total common stock 600
-----------
Additional paid-in capital:
Contract Marketing, Inc. --
U.S. Import & Promotions Co. 63,551
-----------
Total additional paid-in capital 63,551
-----------
Retained earnings:
Contract Marketing, Inc. 816,569
U.S. Import & Promotions Co. 2,103,885
-----------
Total retained earnings 2,920,454
-----------
Less: Notes receivable from stockholder (527,763)
-----------
Total stockholders' equity $2,456,842
===========
In 1997, the Company funded the construction of an office and warehouse facility
through an affiliated realty trust, owned by a stockholder. This facility was
completed in 1998 and became the headquarters for CMI. The total advanced by the
Company of $527,763 is reflected as notes receivable from stockholder in the
combined balance sheet as of December 31, 1997. These advances were repaid in
February 1998.
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NOTE 6 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company rents its office and warehouse space under month to month operating
lease agreements. Rent expense was $127,900 for 1997. In July 1998, the Company
entered into a three year operating lease with the affiliated realty trust to
lease the warehouse and office facility. Rent under this lease agreement totals
$162,000 per annum.
Legal Proceedings
The Company is involved in legal proceedings generally incidental to it
business. While the result of any litigation contains an element of uncertainty,
management presently believes that the outcome of any known, pending or
threatened legal proceeding or claim, individually or combined, will not have a
material effect on the Company's financial position or results of operations.
Commission Agreements
The Company has entered into sales representation contracts with various
individuals, wherein each sales representative receives a negotiated commission
on all orders that they generate.
Royalties
The Company enters into agreements to license certain trademarks. Royalties are
paid at negotiated rates based on sales for the licensed products, with no
minimum guarantees.
NOTE 7 - SUBSEQUENT EVENTS
On July 23, 1998, Equity Marketing, Inc. acquired substantially all of the
assets of CMI and USI in exchange for $15,000,000 in cash plus potential
additional cash consideration based upon the results of operations of the
Company during each calendar year through December 31, 2002.
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CONTRACT MARKETING, INC. AND U.S. IMPORT & PROMOTIONS CO.
CONDENSED COMBINED BALANCE SHEETS
ASSETS
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $2,390,542 $1,227,415
Accounts receivable, net of allowances for doubtful accounts of
$6,000 and 18,035 as of December 31, 1997 and June 30, 1998,
respectively 254,813 1,091,830
Inventory 923,968 1,310,981
Prepaid expenses and other current assets 7,601 --
----------- -----------
TOTAL CURRENT ASSETS 3,576,924 3,630,226
PROPERTY AND EQUIPMENT, net 45,948 184,139
OTHER ASSETS 2,000 20,000
----------- -----------
TOTAL ASSETS $3,624,872 $3,834,365
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $968,010 $1,967,057
Accrued royalties 88,161 72,000
Accrued expenses 70,443 80,269
Deferred revenue 41,416 167,610
----------- -----------
TOTAL CURRENT LIABILITIES 1,168,030 2,286,936
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 600 600
Additional paid-in capital 63,551 63,551
Retained earnings 2,920,454 1,483,278
----------- -----------
2,984,605 1,547,429
Less - Notes receivable from stockholder (527,763) --
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,456,842 1,547,429
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,624,872 $3,834,365
=========== ===========
The accompanying notes are an integral part of these condensed combined balance sheets.
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CONTRACT MARKETING, INC. AND U.S. IMPORT & PROMOTIONS CO.
CONDENSED COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
FOR THE SIX MONTH PERIOD ENDED
JUNE 30,
-------------------------------
1997 1998
----------- -----------
REVENUES $6,711,857 $5,919,846
COST OF SALES 5,022,717 4,123,795
----------- -----------
Gross profit 1,689,140 1,796,051
----------- -----------
OPERATING EXPENSES:
Salaries, wages and benefits 455,501 585,707
General and administrative expenses 1,049,190 971,851
----------- -----------
Total operating expenses 1,504,691 1,557,558
----------- -----------
Income from operations 184,449 238,493
OTHER INCOME
Interest income 44,188 74,979
----------- -----------
Income before provision for income taxes 228,637 313,472
PROVISION FOR INCOME TAXES -- --
----------- -----------
Net income 228,637 313,472
RETAINED EARNINGS, beginning of the period 2,086,668 2,920,454
Less: dividends (1,018,204) (1,750,648)
----------- -----------
RETAINED EARNINGS, end of the period $1,297,101 $1,483,278
=========== ===========
The accompanying notes are an integral part of these condensed combined financial statements.
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CONTRACT MARKETING, INC. AND U.S. IMPORT & PROMOTIONS CO.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTH PERIOD ENDED
JUNE 30,
------------------------------
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $228,637 $313,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 16,361 18,791
Provision for bad debts 3,000 12,035
Changes in assets and liabilities:
Decrease (increase) in
cash and cash equivalents:
Accounts receivable (256,049) (849,052)
Inventory 94,628 (387,013)
Prepaid expenses and other current assets (7,601) 7,601
Other assets (1,000) (18,000)
Accounts payable 1,301,696 999,047
Accrued liabilities 74,089 (6,335)
Deferred revenue (51,786) 126,194
----------- -----------
Net cash provided by operating activities 1,401,975 216,740
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchase of property and equipment (16,536) (156,982)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (1,018,204) (1,750,648)
(Advances to) repayment from stockholder (527,763) 527,763
----------- -----------
Net cash used in investing activities (1,545,967) (1,222,885)
----------- -----------
Net decrease in cash and cash equivalents (160,528) (1,163,127)
CASH AND CASH EQUIVALENTS, beginning of period 1,482,972 2,390,542
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $1,322,444 $1,227,415
=========== ===========
The accompanying notes are an integral part of these condensed combined financial statements.
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CONTRACT MARKETING, INC. AND U.S. IMPORT & PROMOTIONS CO.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management and subject to year-end audit, the accompanying
unaudited condensed combined financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information 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
condensed combined financial statements should be read in conjunction with the
historical combined financial statements of Contract Marketing, Inc. and U.S.
Import & Promotions Co. as of December 31, 1997 and for the year then ended and
pro forma condensed combining financial statements and footnotes thereto
included in this Form 8-K/A.
NOTE 2 - SUBSEQUENT EVENTS
On July 23, 1998, the Equity Marketing, Inc. acquired substantially all of the
assets of CMI and USI in exchange for $15,000,000 in cash plus potential
additional cash consideration based upon the results of operations of the
Company during each calendar year through December 31, 2002.
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EQUITY MARKETING, INC.
PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
The following unaudited pro forma condensed combining balance sheet as of June
30, 1998 and the pro forma condensed combining statements of income for the six
months ended June 30, 1998 and for the year ended December 31, 1997 illustrate
the effect of the acquisition by Equity Marketing, Inc. (the "Company") of
substantially all of the assets of Contract Marketing, Inc. ("CMI") and U.S.
Import and Promotions Co. ("USI") (the "Acquired Businesses") which occurred on
July 23, 1998 in exchange for approximately $15,000,000 in cash plus potential
additional cash consideration not to exceed $8,000,000 based on the results of
operations of the Acquired Businesses' during each calendar year in the period
ending December 31, 2002, as set forth in the respective Asset Purchase
Agreements. The acquisition is being accounted for as a purchase, and as such
the assets acquired and liabilities assumed are being recorded at their
estimated fair market value. The unaudited pro forma condensed combining balance
sheet assumes that the transaction occurred on June 30, 1998 and the unaudited
pro forma condensed combining statements of income assumes that the transaction
occurred at the beginning of the periods presented.
The unaudited pro forma adjustments are based upon currently available
information and upon certain assumptions that the Company believes are
reasonable. The adjustments included in the unaudited pro forma combining
financial statements represents the Company's preliminary determination of these
adjustments based upon available information. There can be no assurance that the
actual adjustments will not differ significantly from the pro forma adjustments
reflected in the pro forma financial information.
The unaudited pro forma condensed combining financial statements are not
necessarily indicative of future results of operations that might have been
achieved if the foregoing transaction had been consummated as of the indicated
dates. The unaudited pro forma condensed combining financial statements should
be read in conjunction with the historical financial statements of the Company
and the Acquired Businesses together with the related notes thereto, included
elsewhere in this Form 8-K/A.
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EQUITY MARKETING, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF JUNE 30, 1998
(UNAUDITED)
HISTORICAL
------------------------------
EQUITY CMI/USI PRO FORMA
MARKETING, INC. COMBINED ADJUSTMENTS PRO FORMA
-------------- ---------- ------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,147,000 $ 1,227,415 $ -- $ 2,374,415
Accounts receivable, net 28,435,000 1,091,830 -- 29,526,830
Inventory 9,797,000 1,310,981 -- 11,107,981
Prepaid expenses and other
current assets 7,335,000 -- -- 7,335,000
------------ ------------ ------------ -----------
TOTAL CURRENT ASSETS 46,714,000 3,630,226 -- 50,344,226
FIXED ASSETS, net 2,760,000 184,139 -- 2,944,139
INTANGIBLE ASSETS, net 14,354,000 -- 13,452,571 (2) 27,806,571
OTHER ASSETS 592,000 20,000 -- 612,000
------------ ------------ ------------ -----------
TOTAL ASSETS $64,420,000 $ 3,834,365 $13,452,571 $81,706,936
============ ============ ============ ============
CURRENT LIABILITIES:
Bank borrowings $ -- $ -- $15,000,000 (1) $15,000,000
Accounts payable 15,698,000 1,967,057 -- 17,665,057
Accrued expenses and other
current liabilities 8,707,000 319,879 -- 9,026,879
------------ ------------ ------------ -----------
TOTAL CURRENT LIABILITIES 24,405,000 2,286,936 15,000,000 41,691,936
LONG-TERM LIABILITIES 927,000 -- -- 927,000
------------ ------------ ------------ -----------
TOTAL LIABILITIES 25,332,000 2,286,936 15,000,000 42,618,936
STOCKHOLDERS' EQUITY 39,088,000 1,547,429 (1,547,429) 39,088,000
------------ ------------ ------------ -----------
Total liabilities and
stockholders' equity $64,420,000 $ 3,834,365 $13,452,571 $81,706,936
============ ============ ============ ============
The accompanying notes are an integral part of this pro forma condensed combining balance sheet.
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EQUITY MARKETING, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS
---------------------------- ------------------------------
EQUITY CMI/USI CMI/USI CORINTHIAN (3)
MARKETING, INC. COMBINED COMBINED MARKETING, INC. PRO FORMA
------------- ------------ --------- -------------- -----------
REVENUES $54,389,000 $5,919,846 $ - $1,438,194 $61,747,040
COST OF SALES 39,000,000 4,123,795 - 862,916 43,986,711
----------- ---------- --------- ---------- -----------
Gross Profit 15,389,000 1,796,051 - 575,278 17,760,329
OPERATING EXPENSES:
Salaries, wages and benefits 5,725,000 585,707 - 349,761 6,660,468
Selling, general and administrative 6,346,000 971,851 334,869 (4) 725,772 8,378,492
----------- ---------- --------- ---------- -----------
Total operating expenses 12,071,000 1,557,558 334,869 1,075,533 15,038,960
----------- ---------- --------- ---------- -----------
Income from operations 3,318,000 238,493 (334,869) (500,255) 2,721,369
OTHER INCOME (EXPENSE):
Interest expense (31,000) - (600,000)(5) - (631,000)
Interest income 258,000 74,979 - (200,000) 132,979
----------- ---------- --------- ---------- -----------
Income before provision
for income taxes 3,545,000 313,472 (934,869) (700,255) 2,223,348
PROVISION FOR INCOME TAXES 1,364,000 - (239,238)(6) (208,562) 916,200
----------- ---------- --------- ---------- -----------
Net income $ 2,181,000 $ 313,472 $(695,631) $ (491,693) $ 1,307,148
=========== ========== ========= ========== ===========
BASIC NET INCOME PER SHARE $ 0.36 $ 0.22
=========== ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 6,022,585 6,022,585
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.35 $ 0.21
=========== ===========
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 6,315,159 6,315,159
=========== ===========
The accompanying notes are an integral part of this pro forma condensed combining financial statement.
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EQUITY MARKETING, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS
--------------------------- ------------------------------
EQUITY CMI/USI CMI/USI CORINTHIAN (3)
MARKETING, INC. COMBINED COMBINED MARKETING, INC. PRO FORMA
-------------- ----------- ----------- --------------- ------------
REVENUES $146,508,000 $17,238,847 $ - $13,436,782 $177,183,629
COST OF SALES 110,508,000 11,883,024 - 9,037,488 131,428,512
------------ ----------- ----------- ---------- ------------
Gross Profit 36,000,000 5,355,823 - 4,399,294 45,755,117
------------ ----------- ----------- ---------- ------------
OPERATING EXPENSES:
Salaries, wages and benefits 11,993,000 911,002 - 1,048,857 13,952,859
Selling, general and administrative 8,882,000 2,098,381 669,738 (4) 3,622,174 15,272,293
------------ ----------- ----------- ---------- ------------
Total operating expenses 20,875,000 3,009,383 669,738 4,671,031 29,225,152
------------ ----------- ----------- ---------- ------------
Income from operations 15,125,000 2,346,440 (669,738) (271,737) 16,529,965
OTHER INCOME (EXPENSE):
Interest expense (89,000) - (1,200,000)(5) - (1,289,000)
interest income 611,000 88,376 - (500,000) 199,376
------------ ----------- ----------- ---------- -----------
Income before provision
for income taxes 15,647,000 2,434,816 (1,869,738) (771,737) 15,440,341
PROVISION FOR INCOME TAXES 6,024,000 - 217,555 (6) (114,012) 6,127,543
------------ ----------- ----------- ---------- -----------
Net income $ 9,623,000 $ 2,434,816 $(2,087,293) $ (657,725) $ 9,312,798
============ =========== =========== ========== ============
BASIC NET INCOME PER SHARE $ 1.63 $ 1.57
============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 5,913,313 5,913,313
============ ============
DILUTED NET INCOME PER SHARE $ 1.55 $ 1.50
============ ============
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 6,216,794 6,216,794
============ ============
The accompanying notes are an integral part of this pro forma condensed combining financial statement.
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EQUITY MARKETING, INC.
NOTES TO PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. To give effect to the assumed incurrence of approximately $15 million of bank
borrowings to finance the purchase of substantially all of the Acquired
Businesses' assets.
2. To record excess of purchase price over fair value of net assets acquired.
The goodwill recorded does not reflect potential contingent cash consideration
related to the operating results of the Acquired Businesses' during each
calendar year through December 31, 2002. To the extent such contingent
consideration is paid, goodwill and the related amortization expense will
increase accordingly.
3. To reflect the pro forma results of operations for Corinthian Marketing,
Inc., which was acquired by the Company on April 24, 1998, as if it had been
acquired at the beginning of the periods presented.
4. To record amortization of goodwill resulting from the acquisition of the
Acquired Businesses' net assets. Goodwill is assumed to be amortized on the
straight-line basis over 20 years.
5. To record additional interest expense, at an assumed interest rate of 8
percent, associated with the incurrence of bank borrowings.
6. To adjust provision for income taxes to the Company's historical effective
rate.
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SIGNATURES
Pursuant to the requirements 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.
EQUITY MARKETING, INC.
Date: October 5, 1998 By: /s/ MICHAEL J. WELCH
--------------- --------------------
Michael J. Welch
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
No. Description
--- -----------
10.1 Asset Purchase Agreement, dated July 23, 1998, by and among
Equity Marketing, Inc., Contract Marketing, Inc., John C.
McDaniel and Philip A. McDaniel. Previously filed as an exhibit
to Equity Marketing, Inc.'s Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 7, 1998
incorporated herein by reference.
10.2 Asset Purchase Agreement, dated July 23, 1998, by and among
Equity Marketing, Inc., U.S. Import & Promotions Co., Philip A.
McDaniel and John C. McDaniel. Previously filed as an exhibit to
Equity Marketing, Inc.'s Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 7, 1998
incorporated herein by reference.
23.1 Consent of Independent Public Accountants.
22