<PAGE> 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) September 18, 1996
---------------------
Commission File Number 23346
EQUITY MARKETING, INC.
(Exact name of registrant as specified in its charter)
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)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 18, 1996, Equity Marketing, Inc. (the "Company") acquired
EPI Group Limited, a Delaware company ("EPI"), through the purchase of all of
the issued and outstanding common stock of EPI from the individual stockholders
of EPI in exchange for $2,891,000 in cash plus potential additional cash
consideration based upon the results of operations of the EPI business during
the three-year period ending December 31, 1999 as set forth in the Stock
Purchase Agreement, dated as of September 18, 1996, by and among Equity
Marketing, Inc. and the stockholders of EPI. The funds used for the
acquisition were provided by the Company's cash reserves on hand.
EPI is a designer, developer, producer and marketer of promotional and
retail toys and other products. Its operations are located in Southport,
Connecticut. The press release issued by Equity Marketing, Inc. dated
September 18, 1996 is attached hereto as Exhibit 99 and incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
a. Financial Statements of Business Acquired.
1. Financial Statements of EPI Group Limited as of December 31,
1995 and for the nine months ended December 31, 1995.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report. 4
Balance Sheet as of December 31, 1995. 5
Statement of Income and Retained Earnings
for the nine months ended December 31, 1995. 6
Statement of Cash Flows for the nine months
ended December 31, 1995. 7
Notes to Financial Statements. 9
</TABLE>
2. Condensed Financial Statements of EPI Group Limited as of
September 30, 1996 and for the nine months ended September 30,
1996 and 1995.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheet as of September 30, 1996. 17
Condensed Statements of Operations and Retained
Earnings (Deficit) for the nine months ended
September 30, 1996 and 1995. 18
Condensed Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995. 19
Notes to Condensed Financial Statements. 20
</TABLE>
2
<PAGE> 3
b. Pro Forma Financial Information.
Pro Forma Condensed Combining Financial Statements as of September 30,
1996 and for the nine months ended September 30, 1996 and the year ended
December 31,1995.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Pro Forma Condensed Combining Balance Sheet
as of September 30, 1996. 22
Pro Forma Condensed Combining Statement of Income for the
nine months ended September 30, 1996. 23
Pro Forma Condensed Combining Statement of Income
for the year ended December 31,1995. 24
Notes to Pro Forma Condensed Combining Financial Statements. 25
</TABLE>
c. Exhibits.
<TABLE>
<S> <C> <C>
10. Stock Purchase Agreement by and among Equity Marketing, Inc.
and the stockholders of EPI Group Limited.*
23.1 Consent of Arthur Andersen LLP 28
23.2 Consent of Shubert and Rosen, LLP 29
99. Press Release issued by Equity Marketing, Inc. dated
September 18, 1996.*
</TABLE>
* Previously filed as an exhibit to Equity Marketing, Inc.'s Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 2, 1996
incorporated herein by reference.
3
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
EPI GROUP LIMITED
SOUTHPORT, CT
We have audited the accompanying balance sheet of EPI Group Limited (A Delaware
Corporation) as of December 31, 1995, and the related statements of income and
retained earnings and cash flows for the nine months 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 financial statements referred to above present fairly, in
all material respects, the financial position of EPI Group Limited as of
December 31, 1995 and the results of its operations and cash flows for the nine
months then ended, in conformity with generally accepted accounting principles.
/s/ SHUBERT & ROSEN
- -------------------
New York, N.Y.
May 30, 1996 except with respect to Note 13 for which the date is October 30,
1996.
4
<PAGE> 5
EPI GROUP LIMITED
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 150,219
Accounts receivable, less allowance for doubtful accounts of $36,300 872,050
Inventory (Note 1b) 892,294
Prepaid expenses 29,483
Deferred tax asset (Notes 1e and 11) 70,888
Due from stockholders, current portion (Note 3) 54,343
-----------
TOTAL CURRENT ASSETS 2,069,277
PROPERTY AND EQUIPMENT (Notes 1c and 4) 310,090
INVESTMENT IN AFFILIATE (Notes 1h and 2) 40,000
DUE FROM STOCKHOLDERS (Note 3) 25,000
OTHER ASSETS (Notes 1d and 5) 141,945
-----------
TOTAL ASSETS $ 2,586,312
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loan payable, bank (Note 6) $ 471,652
Accounts payable 717,104
Accrued expenses 76,182
Royalties payable, conservation partners (Note 7) 119,899
Sponsorship fulfillment payable (Note 7) 141,115
Income taxes payable (Notes 1e and 11) 117,886
Due to stockholder, current portion (Note 9) 164,349
Commissions payable & other current liabilities (Note 8) 39,313
-----------
TOTAL CURRENT LIABILITIES 1,847,500
DEFERRED TAX LIABILITY (Notes 1e and 11) 24,925
DEFERRED RENT EXPENSE (Notes 1f and 12) 67,326
DUE TO STOCKHOLDER (Note 9) 12,500
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 1,000 shares authorized, issued
and outstanding 10
Capital in excess of par 120,115
Retained earnings 513,936
-----------
TOTAL STOCKHOLDERS' EQUITY 634,061
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,586,312
============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
EPI GROUP LIMITED
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
REVENUES (Note 1a) $ 4,355,457
COST OF GOODS SOLD (Note 1b) 1,460,215
-----------
GROSS PROFIT 2,895,242
-----------
EXPENSES
Salaries, payroll taxes and benefits 743,972
Royalties, commissions and other selling expenses (Notes 7 and 8) 1,198,518
General and administrative expenses 545,840
-----------
2,488,330
-----------
406,912
Interest expense (including $65,322 applicable to short-term product
financing arrangements) net of interest income of $5,412 (78,013)
OTHER INCOME (Note 10) 107,694
-----------
INCOME BEFORE INCOME TAXES 436,593
PROVISION FOR INCOME TAXES (Notes 1e and 11) 178,772
-----------
NET INCOME (Per share : $257.82 - Note 1i) 257,821
RETAINED EARNINGS, BEGINNING - RESTATED (Note 13) 256,115
-----------
RETAINED EARNINGS, ENDING $ 513,936
============
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
EPI GROUP LIMITED
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 257,821
Adjustments to reconcile net income to net cash used in operating activities
Depreciation 36,206
Amortization of trademarks and license 5,490
Deferred income tax benefit (2,853)
Deferred rent expense 42,197
Net interest accrued on stockholder loans (1,901)
Gain on sale of investment (2,845)
Bad debt provision 29,243
Changes in current assets and current liabilities:
Decrease (increase) in:
Accounts receivable (220,149)
Inventory (349,476)
Prepaid expenses (24,487)
Increase (decrease) in:
Accounts payable and accrued expenses 24,261
Royalties payable, conservation partners (49,499)
Commissions payable and other current liabilities (67,099)
Sponsorship fulfillment payable 121,115
Income taxes payable 8,318
----------
(451,479)
----------
NET CASH USED IN OPERATING ACTIVITIES (193,658)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (141,153)
Purchase of investments (77,526)
Sales of investments 107,784
Loan receivable, former investee (53,600)
Loan to stockholder (25,362)
Investment in affiliated company (40,000)
Advance to affiliated company (12,975)
Other (26,721)
----------
NET CASH USED IN INVESTING ACTIVITIES $(269,553)
----------
</TABLE>
(continued)
7
<PAGE> 8
EPI GROUP LIMITED
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
(continued)
<TABLE>
<S> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short term bank borrowing, net of repayments $ 411,694
Proceeds of stockholder loans 175,000
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 586,694
----------
NET INCREASE IN CASH 123,483
CASH AT BEGINNING OF YEAR 26,736
-----------
CASH AT END OF YEAR $ 150,219
==========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 76,872
==========
Income taxes paid $ 173,307
=========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
EPI GROUP LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. The Company
EPI Group Limited was incorporated in Delaware in October, 1991. The Company
is engaged in marketing and distribution of gift items for retail outlets and
direct mail consumer programs. The Company specializes in the marketing of
environmental cause related products and publishes related books, consumer
newsletters and activity kits. The Company also provides extensive promotional
marketing for Fortune 500 and other companies. The Company grants credit to
customers in these industries. Consequently, the Company's ability to collect
the amounts due from customers is affected by economic fluctuations in such
industries.
A unique aspect of the Company's operations are numerous licensing/royalty
agreements entered into with certain non-profit groups (Conservation Partners)
wherein the Company promotes the Conservation Partners' activities and programs
through the creation, production and distribution of "Sponsorship Activity
Kits", newsletters and other promotional products (See Note 7).
b. Inventories
Inventories consist primarily of finished goods and are stated at the lower of
cost or market value, on a first-in, first-out basis. (See Notes 11 and 13)
c. Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method for financial reporting
purposes at rates based on the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Office equipment 7
Furniture, fixtures and equipment 10
Leasehold improvements 7 - 10
</TABLE>
For federal income tax purposes, depreciation is computed using accelerated
methods. 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.
d. Trademarks and Licenses
Trademarks and licenses are carried at cost and amortized over 15 and 2 years
respectively, on a straight-line basis.
9
<PAGE> 10
EPI GROUP LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
f. Rent Expense
Rent expense is recognized on a straight-line basis over the term of the lease.
(See Note 12)
g. 401k Plan
The Company has a 401K plan covering all employees. Company contributions
under this plan are discretionary. No contributions were made for the nine
months ended December 31, 1995.
h. Equity Method of Accounting
The Company accounts for its 49% investment in an affiliate by use of the
equity method. (See Note 2)
i. Earnings Per Share
Earnings per share are computed by dividing the net income for the period by
1,000, the number of common shares outstanding throughout the period.
j. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
k. Change of Fiscal Year
During 1995, the Company changed its fiscal year end from March 31 to December
31. Accordingly, the 1995 fiscal period encompasses nine months.
10
<PAGE> 11
EPI GROUP LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
l. Fair Value of Financial Investments
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value because of the short maturity of these financial
instruments. The carrying amounts of loan payable, bank approximates fair
value because the interest rate fluctuates based on market rates.
NOTE 2 - INVESTMENT IN AFFILIATE
On December 11, 1995, the Company acquired for $40,000, 49% of Synergy
Corporate Technologies Ltd., a newly formed corporation whose operations
commenced in January 1996.
Pursuant to the terms of this acquisition, the Company is to fund all operating
requirements for a period of one year. The method of such funding is a loan,
which is to be repaid, with interest at 10% per annum, beginning in 1997. At
December 31, 1995, the Company has advanced $12,975. (See Notes 5 and 14C).
NOTE 3 - DUE FROM STOCKHOLDERS
Due from stockholders' is comprised of the following:
<TABLE>
<S> <C>
Amount due from stockholder, revolving in nature and non-interest bearing $ 25,593
Loan due from stockholder, dated April 4, 1995, with principal plus accrued
interest at 10% per year repayable in two annual installments. Interest accrued
and added to the loan balance is $3,750 at December 31, 1995. 53,750
--------
Total Due From Stockholders 79,343
Less current portion 54,343
--------
$ 25,000
========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment are summarized by major classifications as follows:
<TABLE>
<S> <C>
Office equipment $150,739
Furniture, fixtures and equipment 81,621
Leasehold improvements 166,803
--------
399,163
Accumulated depreciation 89,073
--------
$310,090
========
</TABLE>
11
<PAGE> 12
EPI GROUP LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 5 - OTHER ASSETS
Other assets includes the following:
<TABLE>
<S> <C>
Loan receivable, former investee* $ 53,600
Due from affiliated company (Note 2) 12,975
Loan receivable, other 3,000
Security deposits 42,964
Trademarks, net of $6,916 of accumulated amortization 27,743
Licenses, net of $9,587 of accumulated amortization 1,663
--------
$141,945
========
</TABLE>
*In November 1995, The Company acquired, for $53,600, 51% of the shares of
Ballantine and Reynolds Inc. (B&R), a newly formed joint venture with Richard
Ballantine. On April 23, 1996, the Company sold its investment in B&R to its
partner for $53,600. As of December 31, 1995, the Company has recharacterized
this investment as a non-current loan receivable of $53,600 which bears
interest at 8% per annum on amounts in excess of $5,100. As part of this
agreement, the Company has agreed to buy 5,000 copies of the "Wolf Book" from
B&R for $50,300. The purchase price of $50,300 will be offset against the
recorded loan receivable, when and if the books are received.
NOTE 6 - LOAN PAYABLE, BANK
The Company has a line of credit at National Westminster Bank Plc. This credit
line can be utilized in U.S. dollars or U.K. Sterling to a maximum of $500,000.
It is repayable on demand and bears interest at the "Bank's base rate" plus 3%
per annum (subject to a minimum rate of 7% per annum). The interest rate at
December 31, 1995 was 8.75% per annum. Interest expense was $16,462 for the
nine months ended December 31, 1995.
The credit line is guaranteed by the Company's stockholders and directors. (See
Note 14A)
NOTE 7 - ROYALTIES PAYABLE, CONSERVATION PARTNERS
The Company has entered into agreements with certain non-profit groups
(Conservation Partners) wherein the Company is to promote the Conservation
Partners' activities and programs through the creation, production and
distribution of Sponsorship Kits and other promotional products. These
agreements stipulate that the Conservation Partners will receive royalties of
$1 to $2 per Sponsorship Kit sold. The Conservation Partners will also receive
$9 to $10 for each renewal Sponsorship Kit sold to existing holders of these
kits. Royalties to conservation partners were $359,743 for the nine months
ended December 31, 1995.
These agreements also require the Company to mail four quarterly newsletters
relating to each Conservation Partners' activities and programs, for each
Sponsorship Kit sold, upon the return of a registration card by the purchaser.
These registration cards do not have an expiration date.
12
<PAGE> 13
EPI GROUP LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 7 - ROYALTIES PAYABLE, CONSERVATION PARTNERS (continued)
Accordingly, an accrual for sponsorship fulfillment of the future cost of these
newsletters has been provided at $141,115 at December 31, 1995.
NOTE 8 - COMMISSIONS PAYABLE
The Company has entered into sales representation contracts with various
companies, wherein each sales representative receives a negotiated commission
on all orders that they generate. Additionally, certain employees receive
varying commissions on sales generated. Commissions payable at December 31,
1995 were $26,795.
NOTE 9 - DUE TO STOCKHOLDERS'
Due to stockholders' is comprised of the following:
<TABLE>
<S> <C>
On April 4, 1995 the Company borrowed $25,000 from a stockholder. Principal plus accrued interest
at 10% per annum is repayable in two annual installments. Interest accrued and added to the loan
balance is $1,849 at December 31, 1995. $ 26,849
On December 20, 1995 the Company borrowed $150,000 from a stockholder. The loan is payable on
demand and bears interest at the higher of 10% per annum or 3% over the interbank borrowing rate,
beginning January 1, 1996. 150,000
---------
Total Due to Stockholders' 176,849
Less current portion 164,349
---------
$ 12,500
=========
</TABLE>
NOTE 10 - OTHER INCOME
In October 1995, the Company received a settlement on certain litigation
pertaining to non-performance of an environmentally themed free standing insert
program. The Company realized net proceeds of $104,849 which is included in
other income.
During 1995, the Company sold its equity securities which were classified as
trading securities and recorded at market value. The original cost of the
securities was $31,061. A gain of $2,845 was realized on the sale and is
included in other income.
13
<PAGE> 14
EPI GROUP LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current :
Federal $127,283
State 54,342
--------
Total current 181,625
Deferred benefit (2,853)
--------
$178,772
========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Allowance for doubtful accounts $ 15,246
Inventory (Note 13) 51,610
Compensated absences 4,032
---------
Total Deferred Tax Assets $ 70,888
=========
Deferred Tax Liability:
Property and equipment $(24,925)
=========
</TABLE>
A valuation allowance against deferred tax assets was not required at either
the beginning or end of the reporting period.
The following schedule summarizes income tax expense recorded by the Company at
the applicable statutory rates for the nine months ended December 31, 1995.
<TABLE>
<S> <C>
Federal income tax rate 34%
State income tax, net of Federal tax benefit 7%
---
Effective tax rate 41%
===
</TABLE>
NOTE 12- COMMITMENTS AND CONTINGENCIES
A) The Company conducts its operations from facilities that are leased under
a five-year non- cancelable operating lease expiring on April 30, 1997 with an
additional five year option. Current annual rent is approximately $93,000 and
will increase over the term, including the renewal period, to approximately
$106,000. In July 1995, the Company leased a warehouse under a three-year
non-cancelable lease, expiring in July 1998. Annual rental is $75,000 for the
first two years and $90,000 in year three, plus a portion of real estate
14
<PAGE> 15
EPI GROUP LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 12- COMMITMENTS AND CONTINGENCIES (continued)
taxes and 48% of the lessor's operating expenses each year, estimated in the
lease at $15,421 per year. The lease has two options, the first for a two year
term, the second for a five year term. Total rent expense amounted to
approximately $137,500 for the nine months ended December 31, 1995.
The Company leases equipment under non-cancelable leases expiring in December
1997. Rent expense thereunder amounted to $25,100 for the nine months ended
December 31, 1995. The Companys' facilities in Charlotte, North Carolina are
leased on a month-to-month basis.
The future minimum rental payments under the above operating leases through
expiration, of the present terms are as follows:
<TABLE>
<CAPTION>
Years Amount
----- ------
<S> <C>
1996 $ 184,000
1997 115,000
1998 53,000
---------
$ 352,000
=========
</TABLE>
B) Approximately 40% of the Company's revenues are derived from four
customers, each of whom account for approximately 10% of the total.
NOTE 13 - RESTATEMENT
The opening balance of retained earnings at April 1, 1995 has been reduced by
$71,271 to reflect the reversal of certain capitalized inventory costs of
$122,881 less the applicable increase in deferred tax assets at that date of
$51,610. The costs in question had previously been capitalized to allocate
certain warehousing and assembly costs related to certain products. The
Company has determined that such capitalization was inappropriate.
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED)
A) On July 24, 1996, the Company entered into a $2,500,000 commercial
revolving credit line with Peoples Bank and drew down $1,000,000 against this
facility. This banking relationship replaced the line of credit at National
Westminster Bank P.L.C. described in Note 6. The Peoples Bank credit line is
repayable on July 24, 1997 with interest payable monthly at the bank's "Prime
Rate" plus one-half percentage point. The credit line is secured by all
Company assets and it is guaranteed by three of the Company's stockholders.
B) In September 1996, a senior employee of the Company agreed to accept 111
shares of the Company's common stock in consideration of her waiver of certain
rights to receive commissions on sales generated by her for the Company, and
to treat as fully earned, advance commissions of $64,000 previously paid to
her. Accordingly, the authorized and issued $.01 par value common shares of
the company were increased by 111 to 1111. Additionally, the common stock was
reclassified into three classes, A, B and C, each of which have the same rights
and privileges.
15
<PAGE> 16
EPI GROUP LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (continued)
C) By agreement dated September 17, 1996 the Company transferred all of its
stock in Synergy Corporate Technologies Ltd.(Synergy) (Notes 2 and 5) to
Synergy in consideration of the sum of $1 and the termination of any
obligations under the terms of any existing agreements between the Company and
Synergy or between any officer, director or shareholder of the Company and
Synergy.
D) On September 18, 1996, Equity Marketing, Inc., a California-based,
publicly-owned company, purchased all of the issued and outstanding common
stock of the Company from its individual stockholders in exchange for
$2,891,851 in cash plus potential additional cash consideration based upon the
results of the Company's operations during the three-year period ending
December 31, 1999 as described in the related stock purchase agreement dated
September 18, 1996.
E) The Company is subject to various claims and actions, all of which have
arisen in the ordinary course of business. In the opinion of management, none
of these matters are expected to result in any significant liability to the
Company.
16
<PAGE> 17
EPI GROUP LIMITED
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129
Accounts receivable, net of allowance of $136 . . . . . . 1,097
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 2,064
Prepaid expenses and other current assets 920
-------
Total current assets . . . . . . . . . . . . . . . . . . 4,210
FIXED ASSETS, net . . . . . . . . . . . . . . . . . . . . . 652
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 24
-------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 4,886
=======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank borrowings . . . . . . . . . . . . . . . . . . . . . $ 1,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . 1,100
Accrued liabilities . . . . . . . . . . . . . . . . . . . 3,202
-------
Total current liabilities . . . . . . . . . . . . . . . 5,302
LONG TERM LIABILITIES . . . . . . . . . . . . . . . . . . . 105
-------
Total liabilities . . . . . . . . . . . . . . . . . . . 5,407
-------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, par value $.01, 1,111 shares authorized,
issued and outstanding . . . . . . . . . . . . . . . . . ---
Additional paid-in capital . . . . . . . . . . . . . . . . 120
Retained deficit . . . . . . . . . . . . . . . . . . . . . (641)
-------
Total stockholders' deficit . . . . . . . . . . . . . . . (521)
-------
Total liabilities and stockholders' deficit . . . . . . . $ 4,886
=======
</TABLE>
The accompanying notes are an integral part of this condensed balance sheet.
17
<PAGE> 18
EPI GROUP LIMITED
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
1996 1995
---- ----
<S> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . $ 4,047 $ 4,559
COST OF SALES . . . . . . . . . . . . . . . . . . . 1,628 1,903
-------- -------
Gross Profit . . . . . . . . . . . . . . . . . 2,419 2,656
-------- -------
OPERATING EXPENSES:
Salaries, wages and benefits . . . . . . . . . 1,100 700
Selling, general and administrative . . . . . 2,522 1,296
-------- -------
Total operating expenses . . . . . . . . 3,622 1,996
-------- -------
Income (loss) from operations . . . . . . (1,203) 660
INTEREST EXPENSE, net . . . . . . . . . . . . . . . (165) (24)
-------- -------
Income (loss) before income taxes . . . . (1,368) 636
PROVISION (BENEFIT) FOR INCOME TAXES . . . . . . .
(213) 305
-------- -------
Net income (loss) . . . . . . . . . . . . (1,155) 331
RETAINED EARNINGS, beginning of period . . . . . . 514 222
-------- -------
RETAINED EARNINGS (DEFICIT), end of period . . . .
$ (641) $ 553
======== =======
NET INCOME (LOSS) PER SHARE . . . . . . . . . . . . $ (1,155) $ 331
======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING . . . . . . . . 1,000 1,000
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
18
<PAGE> 19
EPI GROUP LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (1,155) $ 331
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 103 25
Provision for doubtful accounts . . . . . . . . . . . . . . 100 9
Loss on investment in affiliate . . . . . . . . . . . . . . 52 ---
Changes in assets and liabilities:
Increase (decrease) in cash and cash equivalents --
Accounts receivable . . . . . . . . . . . . . . . . . . (337) (491)
Production-in-process and inventory . . . . . . . . . . (1,172) (484)
Prepaid expenses and other assets. . . . . . . . . . . . (580) (87)
Accounts payable . . . . . . . . . . . . . . . . . . . 383 385
Accrued liabilities . . . . . . . . . . . . . . . . . . 2,694 92
-------- -------
Net cash (used in) provided by operating activities 88 (220)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets . . . . . . . . . . . . . . . . . (445) (73)
-------- -------
Net cash used in investing activities . . . . . . . (445) (73)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in bank borrowings . . . . . . . . . . . . . . . 528 379
Net change in amounts due to/from stockholders . . . . . . . (192) (76)
-------- -------
Net cash provided by financing activities . . . . . 336 303
-------- -------
Net increase (decrease) in cash . . . . . . . . . . (21) 10
CASH, beginning of period . . . . . . . . . . . . . . . . . . . . 150 120
-------- -------
CASH, end of period . . . . . . . . . . . . . . . . . . . . . . . $ 129 $ 130
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
19
<PAGE> 20
EPI GROUP LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(000'S OMITTED EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management and subject to year-end audit, the accompanying
unaudited condensed 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 financial statements should be read in conjunction with the historical
financial statements of EPI as of December 31, 1995 and for the nine month
period then ended and pro forma condensed combining financial statements and
footnotes thereto included in this Form 8-K/A.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share was computed by dividing net income (loss) by the
weighted average number of common shares outstanding during each period.
20
<PAGE> 21
EQUITY MARKETING, INC.
PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
The following unaudited pro forma condensed combining balance sheet as
of September 30, 1996 and the pro forma condensed combining statements of income
for the nine months ended September 30, 1996 and for the year ended December 31,
1995 illustrate the effect of the acquisition by the Company of 100 percent of
the common stock of EPI Group Limited ("EPI") which occurred on September 18,
1996 in exchange for $2,891,000 in cash plus potential additional cash
consideration based on the results of operations of the EPI business (as defined
in the stock purchase agreement) during the three year period ending December
31, 1999. The EPI 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 September 30, 1996 and
the unaudited pro forma condensed combining statements of income assumes that
the transaction occurred at the beginning of the periods presented. The
unaudited historical results for EPI's operations in 1995 are for the twelve
month period then ended. The impact of the purchase to Equity Marketing, Inc.'s
consolidated balance sheet is fully reflected on the September 30, 1996 balance
sheet previously filed by the Company on Form 10-Q.
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 EPI together with the related notes thereto, included elsewhere in this
Form 8-K.
21
<PAGE> 22
EQUITY MARKETING, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
EQUITY EPI GROUP PRO FORMA
MARKETING, INC. LIMITED ADJUSTMENTS PRO FORMA
--------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . $ 8,232 $ 129 $ (2,891)(1) $ 4,470
(1,000)(2)
Accounts receivable, net . . . . . . . 15,498 1,097 --- 16,595
Production in process and inventory . . 9,199 2,064 (240)(3) 11,023
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . . 1,277 920 --- 2,197
------- -------- -------- -------
Total current assets . . . . . . . 34,206 4,210 (4,131) 34,285
FIXED ASSETS, net . . . . . . . . . . . . 2,054 652 (523)(4) 2,183
GOODWILL AND OTHER INTANGIBLE ASSETS, net
214 --- 5,445 (5) 5,659
OTHER ASSETS . . . . . . . . . . . . . . 705 24 --- 729
------- -------- -------- -------
Total assets . . . . . . . . . . . . $37,179 $ 4,886 $ 791 $42,856
======= ======== ======== =======
CURRENT LIABILITIES:
Bank borrowings . . . . . . . . . . . . $ --- $ 1,000 $ (1,000)(2) $ ---
Accounts payable . . . . . . . . . . . 11,641 1,100 --- 12,741
Accrued liabilities . . . . . . . . . . 4,146 3,202 1,270 (6) 8,618
Deferred revenue . . . . . . . . . . . 228 --- --- 228
------- -------- -------- -------
Total current liabilities . . . . . 16,015 5,302 270 21,587
------- -------- -------- -------
LONG TERM LIABILITIES . . . . . . . . . . 901 105 --- 1,006
------- -------- -------- -------
STOCKHOLDERS' EQUITY . . . . . . . . . . 20,263 (521) 521 (7) 20,263
------- -------- -------- -------
Total Liabilities and Stockholders'
equity . . . . . . . . . . . . . . . $37,179 $ 4,886 $ 791 $42,856
======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
combining balance sheet.
22
<PAGE> 23
EQUITY MARKETING, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
EQUITY EPI GROUP PRO FORMA
MARKETING, INC. LIMITED ADJUSTMENTS PRO FORMA
--------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . $76,714 $ 4,047 $ --- $80,761
COST OF SALES . . . . . . . . . . . . . . 56,926 1,628 --- 58,554
------- ------- ----- -------
Gross Profit . . . . . . . . . . . . 19,788 2,419 --- 22,207
------- ------- ----- -------
OPERATING EXPENSES:
Salaries, wages and benefits . . . . 7,523 1,100 (524)(8) 8,099
Selling, general and administrative 4,638 2,522 (459)(9) 6,701
Amortization of goodwill . . . . . . --- --- 204 (10) 204
------- ------- ----- -------
Total operating expenses . . . 12,161 3,622 (779) 15,004
------- ------- ----- -------
Income (Loss) from operations . 7,627 (1,203) 779 7,203
INTEREST INCOME (EXPENSE), net 224 (165) 57 (11) 116
------- ------- ----- -------
Income (Loss) before provision
for income taxes . . . . 7,851 (1,368) 836 7,319
PROVISION (BENEFIT) FOR INCOME TAXES . . 2,836 (213) 39 (12) 2,662
------- ------- ----- -------
Net income (loss) . . . . . . . $ 5,015 $(1,155) $ 797 $ 4,657
======= ======= ===== =======
NET INCOME (LOSS) PER SHARE . . . . . . . $ 0.85 $ 0.79
======= =======
WEIGHTED AVERAGE
SHARES OUTSTANDING . . . . . . 5,903,944 5,903,944
========= =========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
combining financial statement.
23
<PAGE> 24
EQUITY MARKETING, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
EQUITY EPI GROUP PRO FORMA
MARKETING, INC. LIMITED ADJUSTMENTS PRO FORMA
--------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . $84,015 $5,983 $ -- $89,998
COST OF SALES . . . . . . . . . . . . . . 64,032 2,238 -- 66,270
------- ------ ----- -------
Gross Profit . . . . . . . . . . . . 19,983 3,745 -- 23,728
------- ------ ----- -------
OPERATING EXPENSES:
Salaries, wages and benefits . . . . 6,678 1,016 (385) 7,309
Selling, general and administrative 6,353 2,141 (413) 8,081
Amortization of Goodwill . . . . . . --- --- 272 272
------- ------ ----- -------
Total operating expenses . . . 13,031 3,157 (526) 15,662
------- ------ ----- -------
Income from operations . . . . 6,952 588 526 8,066
INTEREST INCOME (EXPENSE), net 449 (93) (24) 332
------- ------ ----- -------
Income before provision for
income taxes . . . . . . 7,401 495 502 8,398
PROVISION FOR INCOME TAXES . . . . . . . 2,812 203 280 3,295
------- ------ ----- -------
Net income . . . . . . . . . . $ 4,589 $ 292 $ 222 $ 5,103
======= ====== ===== =======
NET INCOME PER SHARE . . . . . . . . . . $ 0.80 $ 0.89
======= =======
WEIGHTED AVERAGE
SHARES OUTSTANDING . . . . . . 5,728,549 5,728,549
========= =========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
combining financial statement.
24
<PAGE> 25
EQUITY MARKETING, INC.
NOTES TO PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. To reflect cash consideration for the purchase of 100 percent of EPI's
common stock.
2. To reflect the repayment of EPI's bank borrowings.
3. To write down inventory to reflect post acquisition product line
discontinuance.
4. To reflect the abandonment of leasehold improvements and equipment
associated with EPI's Connecticut operations to be closed by the Company
subsequent to the acquisition.
5. 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 EPI business for the
three year period ending December 31, 1999. To the extent such contingent
consideration is paid, goodwill and the related amortization expense will
increase accordingly.
6. To accrue costs associated with EPI's discontinued Connecticut operations
and transaction costs.
7. To eliminate EPI's stockholders' equity deficit.
8. To reflect the reduction in salaries, wages and benefits due to
discontinuing EPI's Connecticut operations and the related termination of
administrative, accounting and warehousing staff.
9. To reflect elimination of selling, general and administrative expenses
related to discontinuing EPI's Connecticut operations, including operating
leases.
10. To record amortization of goodwill resulting from the acquisition of EPI.
Goodwill is assumed to be amortized on the straight-line basis over 20
years.
11. Represents the elimination of finance charges on EPI's short-term product
financing arrangements, offset by reduction in interest income due to cash
paid for the purchase of the EPI common stock.
12. To adjust provision for income taxes to the Company's historical effective
rate.
25
<PAGE> 26
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: December 2, 1996 By: /s/ KENNETH M. FISHER
-------------------------------------
Kenneth M. Fisher
Senior Vice President and
Chief Financial Officer
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description
--- -----------
<S> <C>
10. Stock Purchase Agreement, dated September 18, 1996, by and among Equity
Marketing, Inc. and the Stockholders of EPI Group Limited.*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Shubert and Rosen, LLP
99. Press Release issued by Equity Marketing, Inc., dated September 18, 1996.*
</TABLE>
- ---------------
* Previously filed as an exhibit to Equity Marketing, Inc.'s Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 2, 1996
incorporated herein by reference.
27
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated February 9, 1996 included in this Form 8-K/A,
into Equity Marketing Inc.'s previously filed Form S-3 registration statement
(Registration No. 333-15479).
/s/ ARTHUR ANDERSEN LLP
-----------------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
December 2, 1996
28
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report for EPI Group Limited dated May 30, 1996 included in
this Form 8-K/A, into Equity Marketing Inc.'s previously filed Form S-3
registration statement (Registration No. 333-15479).
/s/ Shubert and Rosen, LLP
----------------------------------------
Shubert and Rosen, LLP
New York, New York
November 27, 1996
29
