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 September 30, 2003
or
( ) TRANSITION 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
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, 5,699,453 shares as of November 12, 2003.
EQUITY MARKETING, INC.
Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
September 30, 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 |
19 | |||||||
Item 4. Controls and Procedures |
26 | |||||||
| Part II. | Other Information |
|||||||
Item 6. Exhibits and Reports on Form 8-K |
27 | |||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
| December 31, | September 30, | |||||||||
| 2002 | 2003 | |||||||||
| (Unaudited) | ||||||||||
CURRENT ASSETS: |
||||||||||
Cash and cash equivalents |
$ | 25,833 | $ | 13,806 | ||||||
Marketable securities |
1,000 | 2,500 | ||||||||
Accounts receivable (net of allowances of $2,033 and
$2,482 as of December 31, 2002 and September 30, 2003, respectively) |
43,817 | 31,103 | ||||||||
Inventories, net (Note 2) |
16,363 | 17,669 | ||||||||
Prepaid expenses and other current assets |
4,807 | 5,704 | ||||||||
Total current assets |
91,820 | 70,782 | ||||||||
Fixed assets, net |
4,185 | 3,560 | ||||||||
Goodwill (Notes 2 and 6) |
33,730 | 40,778 | ||||||||
Other intangibles, net (Notes 2 and 6) |
769 | 1,226 | ||||||||
Other assets |
2,750 | 5,448 | ||||||||
Total assets |
$ | 133,254 | $ | 121,794 | ||||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS’ EQUITY
| December 31, | September 30, | |||||||||
| 2002 | 2003 | |||||||||
| (Unaudited) | ||||||||||
CURRENT LIABILITIES: |
||||||||||
Accounts payable |
$ | 38,334 | $ | 27,332 | ||||||
Accrued liabilities |
24,329 | 14,990 | ||||||||
Total current liabilities |
62,663 | 42,322 | ||||||||
LONG-TERM LIABILITIES |
1,596 | 6,431 | ||||||||
Total liabilities |
64,259 | 48,753 | ||||||||
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 5,758,653 shares outstanding
as of December 31, 2002 and September 30, 2003, respectively |
— | — | ||||||||
Additional paid-in capital |
21,641 | 23,686 | ||||||||
Retained earnings |
38,689 | 42,009 | ||||||||
Accumulated other comprehensive income |
1,710 | 2,141 | ||||||||
| 62,040 | 67,836 | |||||||||
Less— |
||||||||||
Treasury stock, 3,007,108 and 3,077,008 shares, at cost, as of
December 31, 2002 and September 30, 2003, respectively (Note 4) |
(15,506 | ) | (16,480 | ) | ||||||
Unearned compensation |
(588 | ) | (1,364 | ) | ||||||
Total stockholders’ equity |
45,946 | 49,992 | ||||||||
Total liabilities and stockholders’ equity |
$ | 133,254 | $ | 121,794 | ||||||
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 | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | |||||||||||||||
REVENUES |
$ | 53,119 | $ | 48,948 | $ | 136,385 | $ | 153,468 | ||||||||||
COST OF SALES |
38,084 | 35,513 | 99,865 | 112,566 | ||||||||||||||
FORGIVENESS OF NOTE RECEIVABLE |
— | — | 1,685 | — | ||||||||||||||
Gross profit |
15,035 | 13,435 | 34,835 | 40,902 | ||||||||||||||
OPERATING EXPENSES: |
||||||||||||||||||
Salaries, wages and benefits |
6,054 | 6,141 | 14,979 | 17,539 | ||||||||||||||
Selling, general and administrative |
5,490 | 5,546 | 14,552 | 17,056 | ||||||||||||||
Integration costs |
161 | — | 219 | — | ||||||||||||||
Restructuring charge |
178 | — | 178 | — | ||||||||||||||
Total operating expenses |
11,883 | 11,687 | 29,928 | 34,595 | ||||||||||||||
Income from operations |
3,152 | 1,748 | 4,907 | 6,307 | ||||||||||||||
OTHER INCOME, net |
121 | 188 | 191 | 495 | ||||||||||||||
Income before provision for income taxes and cumulative
effect of change in accounting principles |
3,273 | 1,936 | 5,098 | 6,802 | ||||||||||||||
PROVISION FOR INCOME TAXES |
1,142 | 609 | 1,752 | 2,357 | ||||||||||||||
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES |
2,131 | 1,327 | 3,346 | 4,445 | ||||||||||||||
Cumulative effect of change in accounting principles,
net of tax (Note 2) |
— | — | 2,496 | — | ||||||||||||||
NET INCOME |
2,131 | 1,327 | 850 | 4,445 | ||||||||||||||
PREFERRED STOCK DIVIDENDS |
375 | 375 | 1,125 | 1,125 | ||||||||||||||
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS |
$ | 1,756 | $ | 952 | $ | (275 | ) | $ | 3,320 | |||||||||
BASIC INCOME (LOSS) PER SHARE: |
||||||||||||||||||
Income per share before cumulative effect of change in
accounting principles |
$ | 0.31 | $ | 0.17 | $ | 0.39 | $ | 0.58 | ||||||||||
Cumulative effect of change in accounting principles |
— | — | (0.44 | ) | — | |||||||||||||
BASIC INCOME (LOSS) PER SHARE |
$ | 0.31 | $ | 0.17 | $ | (0.05 | ) | $ | 0.58 | |||||||||
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING |
5,740,001 | 5,750,736 | 5,714,546 | 5,719,677 | ||||||||||||||
DILUTED INCOME (LOSS) PER SHARE: |
||||||||||||||||||
Income per share before cumulative effect of change in
accounting principles |
$ | 0.28 | $ | 0.15 | $ | 0.38 | $ | 0.55 | ||||||||||
Cumulative effect of change in accounting principles |
— | — | (0.42 | ) | — | |||||||||||||
DILUTED INCOME (LOSS) PER SHARE |
$ | 0.28 | $ | 0.15 | $ | (0.05 | ) | $ | 0.55 | |||||||||
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING |
7,582,285 | 6,160,484 | 5,908,233 | 6,029,523 | ||||||||||||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||||||
NET INCOME |
$ | 2,131 | $ | 1,327 | $ | 850 | $ | 4,445 | |||||||||
OTHER COMPREHENSIVE INCOME: |
|||||||||||||||||
Foreign currency translation adjustments (Note 2) |
222 | 34 | 1,164 | 540 | |||||||||||||
Unrealized gain (loss) on foreign currency
forward contracts (Note 2) |
130 | 67 | (40 | ) | (109 | ) | |||||||||||
COMPREHENSIVE INCOME |
$ | 2,483 | $ | 1,428 | $ | 1,974 | $ | 4,876 | |||||||||
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)
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2002 | 2003 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 850 | $ | 4,445 | ||||||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||||||
Cumulative effect of change in accounting principles, net of tax |
2,496 | — | ||||||||||
Depreciation and amortization |
1,311 | 1,434 | ||||||||||
Provision for doubtful accounts |
334 | 232 | ||||||||||
Gain on disposal of fixed assets |
(12 | ) | (19 | ) | ||||||||
Tax benefit from exercise of stock options |
16 | 75 | ||||||||||
Forgiveness of note receivable |
1,685 | — | ||||||||||
Amortization of restricted stock |
33 | 259 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Increase (decrease) in cash and cash equivalents: |
||||||||||||
Accounts receivable |
(4,250 | ) | 17,664 | |||||||||
Note receivable |
498 | — | ||||||||||
Inventories |
(2,430 | ) | (381 | ) | ||||||||
Prepaid expenses and other current assets |
2,552 | 738 | ||||||||||
Other assets |
75 | (837 | ) | |||||||||
Accounts payable |
(1,234 | ) | (15,160 | ) | ||||||||
Accrued liabilities |
4,120 | (11,369 | ) | |||||||||
Long-term liabilities |
(92 | ) | 85 | |||||||||
Net cash provided by (used in) operating activities |
5,952 | (2,834 | ) | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchases of fixed assets |
(624 | ) | (527 | ) | ||||||||
Proceeds from sale of fixed assets |
133 | 74 | ||||||||||
Proceeds from sale of marketable securities |
6,700 | — | ||||||||||
Payment for purchase of UPSHOT |
(9,997 | ) | — | |||||||||
Payment for purchase of SCI, net of cash acquired of $162 |
— | (6,075 | ) | |||||||||
Purchase of marketable securities |
— | (1,500 | ) | |||||||||
Net cash used in investing activities |
(3,788 | ) | (8,028 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Payment of preferred stock dividends |
(1,125 | ) | (1,125 | ) | ||||||||
Purchase of treasury stock |
(391 | ) | (974 | ) | ||||||||
Proceeds from exercise of stock options |
130 | 935 | ||||||||||
Net cash used in financing activities |
(1,386 | ) | (1,164 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
778 | (12,026 | ) | |||||||||
Effects of exchange rate changes on cash and cash equivalents |
134 | (1 | ) | |||||||||
CASH AND CASH EQUIVALENTS, beginning of period |
21,935 | 25,833 | ||||||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 22,847 | $ | 13,806 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||||||
CASH PAID FOR: |
||||||||||||
Interest |
$ | 184 | $ | 164 | ||||||||
Income taxes |
$ | 255 | $ | 3,275 | ||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
EQUITY MARKETING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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, Ontario (CA), London, Paris and Hong Kong. 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’s, and Procter & Gamble, among others. The Company complements its core marketing services business by developing and marketing distinctive consumer products, based primarily on 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 age