United States
Securities and Exchange Commission
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 March 31, 2003
or
| ( ) | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| EXCHANGE ACT OF 1934 |
Commission File Number: 23346
EQUITY MARKETING, INC.
| Delaware (State or other jurisdiction of incorporation or organization) |
13-3534145 (I.R.S. Employer Identification No.) |
|
| 6330 San Vicente Blvd. Los Angeles, CA (Address of principal executive offices) |
90048 (Zip Code) |
(323) 932-4300
(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, 5,700,453 shares as of May 12, 2003.
EQUITY MARKETING, INC.
Index To Quarterly Report on Form
10-Q
Filed with the Securities and
Exchange Commission
March 31, 2003
Page
| Part I. Financial Information | |||||||||||||
| Item 1. | Financial Statements | 3 | |||||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | |||||||||||
| Item 4. | Controls and Procedures | 24 | |||||||||||
| Part II. Other Information | |||||||||||||
| Item 6. | Exhibits and Reports on Form 8-K | 25 | |||||||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
| December 31, | March 31, | |||||||||
| 2002 | 2003 | |||||||||
| (Unaudited) | ||||||||||
CURRENT ASSETS: |
||||||||||
Cash and cash equivalents |
$ | 25,833 | $ | 13,940 | ||||||
Marketable securities |
1,000 | 4,500 | ||||||||
Accounts receivable (net of allowances of $2,033 and
$1,703 as of December 31, 2002 and March 31, 2003, respectively) |
43,817 | 25,167 | ||||||||
Inventories, net (Note 2) |
16,363 | 13,517 | ||||||||
Prepaid expenses and other current assets |
4,807 | 5,076 | ||||||||
Total current assets |
91,820 | 62,200 | ||||||||
Fixed assets, net |
4,185 | 3,941 | ||||||||
Goodwill (Notes 2 and 6) |
33,730 | 33,420 | ||||||||
Other intangibles, net (Notes 2 and 6) |
769 | 694 | ||||||||
Other assets |
2,750 | 3,622 | ||||||||
Total assets |
$ | 133,254 | $ | 103,877 | ||||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| December 31, | March 31, | |||||||||
| 2002 | 2003 | |||||||||
| (Unaudited) | ||||||||||
CURRENT LIABILITIES: |
||||||||||
Accounts payable |
$ | 38,334 | $ | 17,495 | ||||||
Accrued liabilities |
24,329 | 15,562 | ||||||||
Total current liabilities |
62,663 | 33,057 | ||||||||
LONG-TERM LIABILITIES |
1,596 | 1,636 | ||||||||
Total liabilities |
64,259 | 34,693 | ||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||
Mandatory redeemable preferred stock, Series A senior cumulative participating
convertible, $.001 par value per share, 25,000 issued and outstanding, stated at liquidation
preference of $1,000 per share ($25,000), net of issuance costs |
23,049 | 23,049 | ||||||||
STOCKHOLDERS’ EQUITY: |
||||||||||
Preferred stock, $.001 par value per share, 1,000,000
shares authorized, 25,000 Series A issued and outstanding |
— | — | ||||||||
Common stock, $.001 par value per share, 50,000,000
shares authorized, 5,716,503 and 5,705,028 shares outstanding
as of December 31, 2002 and March 31, 2003, respectively |
— | — | ||||||||
Additional paid-in capital |
21,641 | 21,806 | ||||||||
Retained earnings |
38,689 | 39,292 | ||||||||
Accumulated other comprehensive income |
1,710 | 1,423 | ||||||||
| 62,040 | 62,521 | |||||||||
Less— |
||||||||||
Treasury stock, 3,007,108 and 3,033,008 shares, at cost, as of
December 31, 2002 and March 31, 2003, respectively (Note 4) |
(15,506 | ) | (15,839 | ) | ||||||
Unearned compensation |
(588 | ) | (547 | ) | ||||||
Total stockholders’ equity |
45,946 | 46,135 | ||||||||
Total liabilities and stockholders’ equity |
$ | 133,254 | $ | 103,877 | ||||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
| Three Months Ended | ||||||||||
| March 31, | ||||||||||
| 2002 | 2003 | |||||||||
REVENUES |
$ | 36,115 | $ | 47,567 | ||||||
COST OF SALES |
26,904 | 35,287 | ||||||||
Gross profit |
9,211 | 12,280 | ||||||||
OPERATING EXPENSES: |
||||||||||
Salaries, wages and benefits |
4,277 | 5,861 | ||||||||
Selling, general and administrative |
4,077 | 5,025 | ||||||||
Total operating expenses |
8,354 | 10,886 | ||||||||
Income from operations |
857 | 1,394 | ||||||||
OTHER INCOME, net |
48 | 102 | ||||||||
Income before provision for income taxes and cumulative
effect of change in accounting principles |
905 | 1,496 | ||||||||
PROVISION FOR INCOME TAXES |
235 | 518 | ||||||||
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES |
670 | 978 | ||||||||
Cumulative effect of change in accounting principles, net of tax (Note 2) |
(2,496 | ) | — | |||||||
Net income (loss) |
(1,826 | ) | 978 | |||||||
PREFERRED STOCK DIVIDENDS |
375 | 375 | ||||||||
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS |
$ | (2,201 | ) | $ | 603 | |||||
BASIC INCOME (LOSS) PER SHARE: |
||||||||||
Income per share before cumulative effect of change in
accounting principles |
$ | 0.05 | $ | 0.11 | ||||||
Cumulative effect of change in accounting principles |
(0.44 | ) | — | |||||||
BASIC INCOME (LOSS) PER SHARE |
$ | (0.39 | ) | $ | 0.11 | |||||
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING |
5,708,343 | 5,708,279 | ||||||||
DILUTED INCOME (LOSS) PER SHARE: |
||||||||||
Income per share before cumulative effect of change in
accounting principles |
$ | 0.05 | $ | 0.10 | ||||||
Cumulative effect of change in accounting principles |
(0.42 | ) | — | |||||||
DILUTED INCOME (LOSS) PER SHARE |
$ | (0.37 | ) | $ | 0.10 | |||||
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING |
5,884,044 | 5,882,609 | ||||||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
| Three Months Ended | |||||||||
| March 31, | |||||||||
| 2002 | 2003 | ||||||||
NET INCOME (LOSS) |
$ | (1,826 | ) | $ | 978 | ||||
OTHER COMPREHENSIVE INCOME (LOSS): |
|||||||||
Foreign currency translation adjustments (Note 2) |
(234 | ) | (286 | ) | |||||
Unrealized gain (loss) on foreign currency (Note 2)
forward contracts |
5 | (1 | ) | ||||||
COMPREHENSIVE INCOME (LOSS) |
$ | (2,055 | ) | $ | 691 | ||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
| Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2002 | 2003 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
(1,826 | ) | $ | 978 | ||||||||
Adjustments
to reconcile net income (loss) to net cash
used in operating activities: |
||||||||||||
Cumulative effect of change in accounting principles, net of tax |
2,496 | — | ||||||||||
Depreciation and amortization |
397 | 472 | ||||||||||
Provision for doubtful accounts |
65 | 89 | ||||||||||
Loss on disposal of fixed assets |
— | 3 | ||||||||||
Tax benefit from exercise of stock options |
8 | 11 | ||||||||||
Amortization of restricted stock |
— | 41 | ||||||||||
Other |
(6 | ) | (1 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Increase (decrease) in cash and cash equivalents: |
||||||||||||
Accounts receivable |
(500 | ) | 18,472 | |||||||||
Note receivable |
498 | — | ||||||||||
Inventories |
(969 | ) | 2,822 | |||||||||
Prepaid expenses and other current assets |
366 | (370 | ) | |||||||||
Other assets |
(9 | ) | (869 | ) | ||||||||
Accounts payable |
(2,741 | ) | (20,765 | ) | ||||||||
Accrued liabilities |
1,242 | (8,725 | ) | |||||||||
Long-term liabilities |
(58 | ) | 40 | |||||||||
Net cash used in operating activities |
(1,037 | ) | (7,802 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchases of fixed assets |
(329 | ) | (117 | ) | ||||||||
Proceeds from sale of fixed assets |
20 | 16 | ||||||||||
Purchase of marketable securities |
— | (3,500 | ) | |||||||||
Net cash used in investing activities |
(309 | ) | (3,601 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Payment of preferred stock dividends |
(375 | ) | (375 | ) | ||||||||
Purchase of treasury stock |
(267 | ) | (333 | ) | ||||||||
Proceeds from exercise of stock options |
58 | 154 | ||||||||||
Net cash used in financing activities |
(584 | ) | (554 | ) | ||||||||
Net decrease in cash and cash equivalents |
(1,930 | ) | (11,957 | ) | ||||||||
Effects of exchange rate changes on cash and cash equivalents |
(31 | ) | 64 | |||||||||
CASH AND CASH EQUIVALENTS, beginning of period |
21,935 | 25,833 | ||||||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 19,974 | $ | 13,940 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||||||
CASH PAID FOR: |
||||||||||||
Interest |
$ | 82 | $ | 57 | ||||||||
Income taxes |
$ | — | $ | 1,286 | ||||||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
EQUITY MARKETING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1 – ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation and subsidiaries (the “Company”), is a leading global marketing services company based in Los Angeles, with offices in Chicago, New York, London, Paris and Hong Kong. The Company focuses on the design and execution of strategy-based marketing programs, with 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, CVS/pharmacy, Diageo, Kellogg’s, Discover Financial Services, and Procter & Gamble, among others. The Company complements its core marketing services and promotions business by developing and marketing distinctive consumer products, based primarily on classic licensed properties, which are sold through specialty and mass-market retailers. The Company primarily sells to customers in the United States and Europe. The Company’s functional currency is United States dollars.
Equity Marketing Hong Kong, Ltd., a Delaware corporation (“EMHK”), is a 100% owned subsidiary of the Company. EMHK manages production of the Company’s products by third parties in the Far East and currently is responsible for performing and/or procuring product sourcing, product engineering, quality control inspections, independent safety testing and export/import documentation.
Logistix Limited, a United Kingdom corporation (“Logistix”), is a 100% owned subsidiary of the Company. Logistix is a marketing services agency which focuses primarily on assisting consumer packaged goods companies in their efforts to market to children between the ages of seven and fourteen by developing and executing premium-based promotions and by providing marketing consulting services. Logistix also derives a portion of its revenues from a consumer products business which holds the license for the Robot Wars® entertainment property, among others.
On July 17, 2002, the Company acquired the principal assets of Promotional Marketing, L.L.C. d/b/a UPSHOT, an Illinois limited liability company (“UPSHOT”). UPSHOT is a marketing agency, specializing in promotion, event marketing, collaborative marketing and environmental branding. UPSHOT has a reputation for creating highly successful integrated marketing programs for world class brands such as Diageo, Discover Financial Services, and Procter & Gamble.
NOTE 2 – 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments 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 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, 2002.
Net Income Per Share
Basic net income per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Net income available to common stockholders represents reported net income (loss) less preferred stock dividend requirements.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS includes in-the-money options and warrants using the treasury stock method and also includes the dilutive effect of the assumed conversion of preferred stock using the if-converted method. Options and warrants to purchase 1,529,166 and 1,694,166 shares of common stock, $.001 par value per share (the “Common Stock”), as of March 31, 2002 and 2003, respectively, were excluded from the computation of diluted EPS as they would have been anti-dilutive. For the three months ended March 31, 2002 and 2003, preferred stock convertible into 1,694,915 shares of common stock was excluded from the computation of diluted EPS as it would have been anti-dilutive.
8
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computation for “income available to common shareholders” and other disclosures required by Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share”:
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2002 | 2003 | ||||||||||||||||||||||||||||
| (Loss) | Shares | Per Share | Income | Shares | Per Share | ||||||||||||||||||||||||
| (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | ||||||||||||||||||||||||
Basic EPS: |
|||||||||||||||||||||||||||||
Income (loss) available to
common stockholders |
$ | (2,201 | ) | 5,708,343 | $ | (0.39 | ) | $ | 603 | 5,708,279 | $ | 0.11 | |||||||||||||||||
Effect of dilutive securities: |
|||||||||||||||||||||||||||||
Options and warrants |
— | 175,701 | — | 174,330 | |||||||||||||||||||||||||
Dilutive EPS: |
|||||||||||||||||||||||||||||
Income (loss) available to common
stockholders and assumed conversion |
$ | (2,201 | ) | 5,884,044 | $ | (0.37 | ) | $ | 603 | 5,882,609 | $ | 0.10 | |||||||||||||||||
Inventories
Inventories consist of (a) production-in-process which primarily represents tooling costs which are deferred and amortized over the life of the products and deferred costs on service contracts and (b) purchased finished goods held for sale to customers and purchased finished goods in transit to customers’ distribution centers. Inventories are stated at the lower of average cost or market. As of December 31, 2002 and March 31, 2003, inventories consisted of the following: