<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 22308
EQUITY MARKETING, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 13-3534145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 SOUTH RODEO DRIVE
BEVERLY HILLS, CA 90212
(Address of principal executive offices) (Zip Code)
(310) 887-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.001 Par Value, 5,538,512 shares as of May 3, 1996
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EQUITY MARKETING, INC.
Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II.
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................... $10,664 $ 3,940
Marketable securities ........................... -- 11,935
Accounts receivable, net of allowance of $239 and
$200 as of March 31, 1996
and December 31, 1995, respectively ............. 4,045 1,749
Production-in-process and inventory ............. 4,366 3,296
Prepaid expenses and other current assets ....... 1,564 2,119
------- -------
Total current assets .................... 20,639 23,039
FIXED ASSETS, net ................................. 2,072 1,980
INTANGIBLE ASSETS, net ............................ 332 391
OTHER ASSETS ...................................... 786 852
------- -------
Total assets ............................ $23,829 $26,262
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
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EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ............................................... $ 2,851 $ 5,726
Accrued liabilities ............................................ 3,086 3,896
Deferred revenue ............................................... 878 971
-------- --------
Total current liabilities .............................. 6,815 10,593
LONG TERM LIABILITIES ............................................ 958 787
-------- --------
Total Liabilities ........................................ 7,773 11,380
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value per share; 1,000,000
shares authorized, none issued or outstanding...................
Common stock, par value $.001 per share, 20,000,000
shares authorized, 5,538,512 and 5,509,682 shares outstanding as
of March 31, 1996 and December 31, 1995, respectively........... -- --
Additional paid-in capital ..................................... 8,374 8,241
Retained earnings .............................................. 9,028 7,990
-------- --------
17,402 16,231
Less--
Treasury stock, 1,897,670 and 1,907,100 shares, at cost, as of
March 31, 1996 and December 31, 1995, respectively ............. (1,282) (1,285)
Stock subscription receivable .................................. (64) (64)
-------- --------
Total stockholders' equity ............................. 16,056 14,882
-------- --------
Total liabilities and stockholders' equity ............. $ 23,829 $ 26,262
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
4
<PAGE> 5
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
REVENUES ...................................... $ 18,173 $ 17,729
COST OF SALES ................................. 13,714 13,565
---------- ----------
Gross Profit ........................... 4,459 4,164
OPERATING EXPENSES:
Salaries, wages and benefits ............. 1,681 1,570
Selling, general and administrative ...... 1,279 1,307
---------- ----------
Total operating expenses ............... 2,960 2,877
---------- ----------
Income from operations ................. 1,499 1,287
INTEREST INCOME, net .......................... 123 39
---------- ----------
Income before provision for income taxes 1,622 1,326
PROVISION FOR INCOME TAXES .................... 584 530
---------- ----------
Net income ............................. $ 1,038 $ 796
========== ==========
NET INCOME PER SHARE .......................... $ .18 $ .14
========== ==========
WEIGHTED AVERAGE
SHARES OUTSTANDING ..................... 5,885,301 5,687,671
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
5
<PAGE> 6
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
---- ----
<S> <C> <C>
Net income ............................................................. $ 1,038 $ 796
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization .................................... 191 128
Provision for doubtful accounts .................................... 39 6
Non-cash rent ...................................................... 171 --
Other .............................................................. 54 --
Changes in assets and liabilities:
Increase (decrease) in cash and cash equivalents --
Accounts receivable ............................................ (2,335) 11,563
Production-in-process and inventory ...................... (1,070) 150
Prepaid expenses and other current assets ................ 555 (178)
Other assets ............................................. 66 66
Accounts payable ......................................... (2,875) (6,547)
Accrued liabilities ...................................... (810) (854)
Deferred revenue ......................................... (93) (811)
-------- --------
Net cash (used in) provided by operating activities (5,069) 4,319
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ................................. (19,372) --
Proceeds from sales and maturities of marketable securities ........ 31,307 --
Purchases of fixed assets .......................................... (224) (169)
-------- --------
Net cash provided by (used in) investing activities ........ 11,711 (169)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock ......................................... -- (41)
Proceeds from exercise of stock options ............................. 60 --
Tax benefit from exercise of stock options .......................... 22 --
-------- --------
Net cash provided by (used in) financing activities ........ 82 (41)
-------- --------
Net increase in cash and cash equivalents .................. 6,724 4,109
CASH AND CASH EQUIVALENTS, beginning of period ........................... 3,940 5,765
-------- --------
CASH AND CASH EQUIVALENTS, end of period ................................. $ 10,664 $ 9,874
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest .............................................................. $ 10 $ 1
======== ========
Income taxes .......................................................... $ 1,021 $ 977
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
6
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EQUITY MARKETING, INC.
THREE MONTHS ENDED MARCH 31, 1996
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management and subject to year-end audit, the accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included. The
results of operations for the interim periods are not necessarily indicative of
the results for a full year. These 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, 1995.
Certain reclassifications have been made to the accompanying financial
statements to conform them with the current period presentation.
NET INCOME PER SHARE
Net income per share was computed by dividing net income by the weighted average
number of common shares and common share equivalents outstanding during each
period. Common share equivalents represent stock options and warrants and are
included in the weighted average shares pursuant to the treasury stock method.
7
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations include forward looking statements. Actual results could vary from
those expected due to a variety of risks including, for example, the potential
cancellation of promotions due to delays in the timing of theatrical motion
picture releases, the ability to renew licenses under favorable terms, changes
in international tariff rates, and other risks detailed from time to time in the
Company's SEC reports. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
required to reflect events or circumstances after the date hereof or to reflect
the occurrence of anticipated events.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
operating expenses as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues .............................. 100.0% 100.0%
Cost of sales ......................... 75.5% 76.5%
------ ------
Gross Profit ................... 24.5% 23.5%
------ ------
Operating Expenses:
Salaries, wages and benefits ...... 9.3% 8.9%
Selling, general and administrative 7.0% 7.3%
------ ------
Total operating expenses ....... 16.3% 16.2%
------ ------
Income from operations ......... 8.2% 7.3%
Interest Income, net .................. 0.7% 0.2%
------ ------
Income before provision for
income taxes ................... 8.9% 7.5%
Provision for Income Taxes ............ 3.2% 3.0%
------ ------
Net Income ..................... 5.7% 4.5%
====== ======
</TABLE>
Three months ended March 31, 1996 compared to three months ended March 31, 1995
(000's omitted):
Revenues for the three months ended March 31, 1996 increased $444 or 2.5% to
$18,173 from $17,729 in the prior year. Promotions revenues increased $705 to
$16,022 due to increases in Burger King revenues and non-Burger King domestic
Promotions revenues, partially offset by lower sales volume in international
promotions. Toys revenues decreased $261 to $2,151 due to no 1996 sales of
Mighty Morphin Power Rangers product partially offset by increased sales under
the Company's Warner Bros. International Looney Tunes license and initial
shipments of Big Feats' Wishbone and products based on the 1996 Olympics mascot,
Izzy.
8
<PAGE> 9
Cost of sales increased $149 to $13,714 (75.5% of revenues) for the three months
ended March 31, 1996 from $13,565 (76.5% of revenues) in the comparable period
in 1995. The gross margin percentage for the period increased due to higher
margins on sales of Toys and domestic Promotions products in the current period.
Operating expenses increased $82 or 2.8% to $2,960 (16.3% of revenues) for the
three months ended March 31, 1996 from $2,878 (16.2% of revenues) in the
comparable period in 1995. The increase in salaries, wages and benefits in 1996
is attributable to the addition of approximately 28 employees, including 15
employees at Equity Marketing Hong Kong, Ltd. The decrease in selling, general
and administrative expenses in 1996 is primarily attributable to lower selling
expenses partially offset by higher occupancy costs due to the Company's
relocation of its corporate offices.
Income from operations increased $212 or 16.5% to $1,499 (8.2% of revenues) from
$1,287 (7.3% of revenues) in 1995. This increase is attributable to higher gross
margin dollars earned during 1996, which were partially offset by increases in
operating expenses.
The effective tax rate for the three months ended March 31, 1996 is 36.0%
compared to the effective tax rate of 40.0% in 1995. The effective tax rate was
lower in 1996 as a result of differences in the locations to which products were
shipped in 1996.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 1996 working capital was approximately $13,824 compared to
approximately $12,446 at December 31, 1995. The increase in working capital is
primarily a result of 1996 profits.
As of March 31, 1996, the Company's investment in accounts receivable and
production-in-process increased by approximately $3,405 compared to December 31,
1995. This increase was attributable to an increase in accounts receivable of
$2,335 due to shipments late in the first quarter of 1996 as well as an increase
in production-in-process of approximately $1,070 due to payments for tooling on
promotions to be shipped later in 1996.
At March 31, 1996, accounts payable decreased $2,875 compared to December 31,
1995. This decrease is primarily due to the smaller number of shipments in the
first quarter of 1996 in contrast to the fourth quarter of 1995.
As of March 31, 1996, the Company had cash and cash equivalents totaling
approximately $10,664. The Company had no material commitments for capital
expenditures at March 31, 1996.
The Company is exploring the possibility of acquiring other companies to further
diversify its business, although no assurance can be given that the Company will
find suitable acquisition candidates or that it will be successful in
consummating such transactions. If the Company is successful in finding suitable
acquisition candidates, such transactions would be financed, depending on
availability and market conditions, through the use of the Company's existing
funds, issuing additional equity or debt, bank financing or a combination of
these sources.
9
<PAGE> 10
CREDIT FACILITIES
On January 26, 1996, the Company entered into a credit agreement with Sanwa Bank
California and Imperial Bank which makes available to the Company a line of
credit of up to $25 million. The line of credit is secured by substantially all
of the Company's assets and expires on April 30, 1998. As of March 31, 1996,
there were no amounts outstanding under this credit agreement.
Subject to the financing requirements of any potential acquisitions, the Company
believes that the line of credit and internally generated funds will provide
adequate financing for its current and expected levels of operations.
10
<PAGE> 11
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the
quarter for which this report is filed.
11
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Beverly
Hills and State of California on the 10th day of May, 1996.
EQUITY MARKETING, INC.
By: /s/ DONALD A. KURZ
------------------
Donald A. Kurz
President, Co-Chief Executive Officer
By: /s/ KENNETH M. FISHER
---------------------
Kenneth M. Fisher
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE> 13
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGES
- - -------------- ----------- -----
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 10,664
<SECURITIES> 0
<RECEIVABLES> 4,284
<ALLOWANCES> 239
<INVENTORY> 4,366
<CURRENT-ASSETS> 20,639
<PP&E> 2,598
<DEPRECIATION> 526
<TOTAL-ASSETS> 23,829
<CURRENT-LIABILITIES> 6,815
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,056
<TOTAL-LIABILITY-AND-EQUITY> 23,829
<SALES> 18,173
<TOTAL-REVENUES> 18,173
<CGS> 13,714
<TOTAL-COSTS> 13,714
<OTHER-EXPENSES> 2,960
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 1,622
<INCOME-TAX> 584
<INCOME-CONTINUING> 1,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,038
<EPS-PRIMARY> .18
<EPS-DILUTED> .18<F1>
<FN>
<F1>THE COMPANY PRESENTS PRIMARY EARNINGS PER SHARE (EPS) ON THE FACE OF ITS INCOME
STATEMENT. FULLY DILUTED EPS IS WITHIN 97% OF PRIMARY EPS. THE FIGURES
PRESENTED ABOVE ARE PRIMARY EPS.
</FN>
</TABLE>
