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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ________________________ to _____________________
Commission File Number 22308
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)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each Class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $0.001 par value
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 period 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 20, 1998 was $50,323,819.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Number of Shares
outstanding on
March 20, 1998
----------------
Common Stock, $0.001 par value................. 6,010,103
Documents Incorporated by Reference: Certain portions of the
Registrant's Proxy Statement relating to Registrant's annual meeting of
stockholders scheduled to be held on May 27, 1998 are incorporated by reference
into Part III of this Form 10-K.
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EQUITY MARKETING, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 1997
ITEMS IN FORM 10-K
<TABLE>
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Page
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<S> <C>
Part I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 13
Part III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
Part IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K 16
</TABLE>
FORWARD-LOOKING STATEMENTS
Several of the matters discussed in this document contain
forward-looking statements that involve risks and uncertainties. Equity
Marketing, Inc. (the "Company") wishes to caution readers that forward-looking
statements are based on assumptions which may or may not prove accurate and
accordingly are necessarily speculative. Readers should not place undue reliance
on any such forward-looking statements, which speak only as of the date made.
Actual results could vary materially from those anticipated for a variety of
reasons. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Cautionary
Statements and Risk Factors."
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PART I
ITEM 1. BUSINESS
($000's omitted)
GENERAL
Equity Marketing, Inc. ("Equity Marketing" or the "Company") designs,
develops, produces, markets and distributes a wide variety of toy, gift and
other products generally based upon characters from popular entertainment
properties licensed primarily by television and motion picture studios. The
Company's products include character figurines, action vehicles, plush toys,
dolls, play sets, beverage containers, fashion accessories and other figural
items. Equity Marketing sells its products domestically and internationally to
quick service restaurant chains, oil and gas companies, mass market and
specialty market retailers, international toy, candy and gift distributors, and
other consumer products companies. Products of the promotions division of the
Company, Equity Promotions ("Promotions"), are utilized primarily in promotional
campaigns implemented by quick service restaurant and consumer products
customers, which include Burger King Corporation ("Burger King") and Shell Oil
Company ("Shell"), as well as international consumer product companies such as
Kellogg's De Mexico, S.A. de C.V., Duracell S.A. de C.V. and Coca-Cola Mexicana
S.A. de C.V. Equity Toys ("Toys"), the toy division of the Company, designs and
produces toys and other consumer products based upon licensed characters for
sale to major mass market and specialty market retailers such as Toys "R" Us,
Inc. ("Toys "R" Us"), Walmart Stores, Inc. ("Walmart"), Target Stores, Inc.
("Target"), Blockbuster Entertainment Group ("Blockbuster"), and to various
international distributors worldwide.
The Company's products are typically based upon characters from
entertainment properties licensed by television and motion picture studios and
others. Licenses for characters upon which Promotions' products are based are
generally obtained directly by the Company's customers from licensors, including
The Walt Disney Company ("Disney"), Warner Bros. Inc. ("Warner Bros."),
Universal Studios ("Universal"), Nickelodeon a division of MTV Networks, a
division of Viacom, DreamWorks, Sony Pictures Entertainment ("Sony"), and
Twentieth Century Fox ("Fox"). Such licenses are typically specific to the
promotional campaign implemented by the Company's customers and generally do
not extend beyond the end of the promotional campaign. In contrast, Equity
Toys generally obtains licenses directly from licensors. These licenses
generally grant the Company rights to design, manufacture and distribute
certain specific items or types of items in specific United States and/or
international markets for defined terms, typically one to three years.
The licensed properties from which the Company has developed or is
developing products include Babe: Pig in the City, The Lost World: Jurassic
Park: Anastasia, Godzilla, The Crayon Box, Small Soldiers, Rugrats The Movie,
Mulan, A Bugs Life, Hercules, Toy Story, The Lion King, Aladdin, Beauty and the
Beast, Looney Tunes, The Land Before Time, Wishbone, and The Simpsons. The
above named properties are trademarks of their respective proprietors.
The Company believes its principal competitive advantage is its
creative interpretation of popular licensed characters and its ability to
translate these creative concepts quickly into high quality products with
high-perceived value. These products are then sold through a broad range of
promotional and retail distribution channels worldwide.
The Company is seeking to acquire other companies and is also investing
in its sales force and infrastructure to target new markets through internal
growth. No assurance can be given that the Company will find suitable
acquisition candidates or that it will be successful in consummating such
transactions.
EQUITY PROMOTIONS
The Company's largest current market is promotional products used as
free premiums or sold in conjunction with the purchase of meals at quick service
restaurants, primarily Burger King. The Company also produces products for use
in promotional programs run by its consumer products and oil and gas company
customers. Premium-based promotions are used for marketing purposes by both the
companies sponsoring the promotions and the licensors of the entertainment
properties on which many of the promotional products are based. The use of
promotional products based upon entertainment properties allows promotion
sponsors to draw upon the popular identity developed by the licensed characters
through exposure in various media such as television programs, motion pictures
and publishing. Promotions are designed to benefit sponsors by generating
consumer loyalty, building market share and enhancing the sponsors' images as
providers of value-added products and services. In addition, motion picture and
television studio licensors often incorporate such promotions into their own
marketing plans because of the substantial advertising expenditures made by
sponsors of promotions and because the broad exposure of the licensed property
to consumers in the sponsors' restaurants and other retail outlets supplements
the marketing of motion pictures and television programs by the studios.
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Promotions' principal strategy is to continue to diversify its
promotions customer base outside of quick service restaurants and to continue to
expand its relationship with Burger King. The Company is seeking to establish
new channels of distribution in both domestic and international markets for the
Company's promotional products. These new channels include automobile service
stations, packaged foods companies, hotels and convenience stores. In connection
with these strategic goals, in September 1996, the Company acquired EPI Group
Limited ("EPI"), a designer, developer, producer and distributor of promotional
and other products for sale to oil and gas companies (primarily Shell), consumer
products companies and retailers. See Note 2 of the accompanying Notes to
Consolidated Financial Statements. In 1996 the Company was appointed as a
Premiums Agency of Record for Burger King. This appointment has allowed the
Company to expand upon its historical focus on children's premiums and be
considered for the full spectrum of Burger King's domestic and international
promotional activities. In connection with the Agency of Record appointment, the
Company has agreed to produce promotional products for Burger King exclusively
within the domestic and international quick service restaurant markets for the
duration of the Agency of Record agreement and for a six month period
thereafter. In February 1998, the Company was named Agency of Record for Shell
Oil Products Company's motorsports program. In connection with the Agency of
Record appointment, the Company will handle promotions, merchandising and
marketing for Shell's NASCAR, NHRA and CART sponsorship programs. The Company
entered into strategic relationships with several movie studios to produce
promotional items for a number of major event movies scheduled for release in
1998. These preferred premiums supplier agreements covering many key family
oriented movies scheduled for release in 1998, include Disney's Mulan and A
Bug's Life, DreamWorks SKG's Small Soldiers, Universal Studios'
Babe: Pig in the City and Columbia/Tri-Star's Godzilla.
Promotions performs a wide range of creative design, product
development and production services for its customers. The Company assists
customers with promotional concept development; provides an initial evaluation
of entertainment properties for which licenses are available; advises customers
as to which licenses are consistent with their marketing objectives and
sometimes assists customers in procuring such licenses. The Company also
proposes specific product-based promotions based on the properties secured by
its customers; develops promotional product concepts and designs utilizing the
property; provides the product development and engineering necessary to
translate the entertainment property, which often consists of two-dimensional
artwork, into finished products; obtains or coordinates licensor approval of the
product designs, prototypes and finished products; contracts for and supervises
the manufacture of the products; arranges for safety testing to customer and
regulatory specifications by an independent testing laboratory; and arranges
insurance, customs clearance and, in most instances, the shipping of finished
products to the customer. The Company also provides creative services as needed
to customers for packaging and point-of-sale advertising. In some cases,
customers obtain license rights or develop promotions concepts independently and
engage the Company only to design and produce specific products. In other cases,
the Company provides the full range of its services.
The Company's international promotions include unique products tailored
to local markets and the use of products from promotions originally run in the
United States. American entertainment properties are generally released in other
countries subsequent to the date of their release in the United States. Because
the Company has already made its investment in the creative development of
product concepts based upon such entertainment properties by the time of their
domestic release, it often has completed both creative, and in some instances,
production work in advance of their foreign release. The Company pursues
promotions opportunities worldwide. In 1997, the Company sold promotional
products internationally in the United Kingdom, Germany, Spain, Australia,
Philippines, South Africa, Mexico and throughout Latin America. The Company's
current plan is to expand its Promotions business in Europe and Asia.
Promotions revenues for the years ended December 31, 1995, 1996 and
1997 were $73,233, $92,812 and $116,022 or 87.2%, 83.1% and 79.2% of the
Company's revenues, respectively. A single promotions customer, Burger King,
accounted for 67.9%, 69.5% and 67.3% of the Company's total revenues for the
years ended December 31, 1995, 1996 and 1997, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Cautionary Statements and Risk Factors."
EQUITY TOYS
Equity Toys designs and manufactures toys and other consumer products
for sale to major mass market retailers such as Toys "R" Us, Walmart and Target,
specialty market retailers such as Store of Knowledge, Zany Brainy and
Blockbuster and to various international distributors worldwide. These products
incorporate licenses the Company has obtained from entertainment companies such
as Warner Bros. and Universal. In some cases, the products are based on the same
licensed properties that are used in the Company's promotions business.
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Since June 1994, the Company has held an exclusive design and
manufacturing license to produce plush toys, figurines and bendables for Warner
Bros. Looney Tunes characters for substantially all markets outside the United
States and Canada through the end of 1997, becoming non-exclusive through the
end of 1998. In October 1997, the Company elected not to pursue renewal of this
license. In 1995, the Company obtained the United States mass market license to
design, manufacture and distribute toys through 1998 for Big Feats
Entertainment's "Wishbone", a live action children's television program
broadcast on the Public Broadcasting System. In 1996, the Company obtained a
mass market license to design, manufacture and distribute toys through 1998,
associated with Universal's "The Land Before Time" animated home video series.
In September 1997, the Company obtained a three-year worldwide license with
Universal to design, manufacture, market and distribute toys for Babe: Pig in
the City. In October 1997, the Company obtained a worldwide, excluding Japan,
license with Sony Signatures to design and sell toys in connection with the
TriStar Pictures' monster epic Godzilla, through December 31, 2000. In January
1998, the Company obtained an exclusive three-year licensing agreement for the
United States and Canada with joint owners Polygram Video and Random House
Children's Publishing to design, manufacture and distribute toys for the
popular syndicated children's television show, The Crayon Box.
Equity Toys' principal strategy is to secure licenses that are likely
to produce revenue for several years, thus increasing the predictability of the
Company's revenues. Toys supplements these licenses with selected event related
licenses as well as its own original concepts. The Company intends to implement
this strategy through both internal growth and acquisitions. No assurance can be
given that the Company will be successful in obtaining or renewing licenses
under satisfactory terms or that the Company will find suitable acquisition
candidates.
Equity Toys revenues were $10,782, $18,935 and $30,486, or 12.8%, 16.9%
and 20.8% of the Company's total revenues, for the years ended December 31,
1995, 1996 and 1997, respectively.
BACKLOG
Order backlog at December 31, 1996 and 1997 was approximately $35,201
and $41,264, respectively. The Company expects the 1997 order backlog to be
filled by December 31, 1998.
MANUFACTURING
The Company's products are manufactured according to Company and
customer specifications by unaffiliated contract manufacturers. Equity Marketing
Hong Kong, Ltd., a wholly owned subsidiary of the Company, 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. The Company believes that the presence of a
dedicated staff in Hong Kong results in lower net costs, increased ability to
respond rapidly to customer orders and maintenance of more effective quality
control standards. Products manufactured in the Far East represented
approximately 95 percent of the Company's 1997 production. The Company's
products are also manufactured by third parties in the United States. Equity
Marketing generally retains, for itself or on behalf of its customers, ownership
of the molds and tooling required for the manufacture of its products. The
Company is not a party to any long term contractual arrangements with any
manufacturer.
TRADEMARKS AND COPYRIGHTS
The Company does not own trademarks or copyrights on properties on
which any of its current products are based. These rights are typically owned or
controlled by the creator of the property or by the entity which develops or
promotes a property, such as a motion picture or television producer. Equity
Marketing is the co-owner of the trademarks and copyrights associated with two
original entertainment concepts, Five Aliens with Big Heads and Little Monsters.
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COMPETITION
The domestic and international promotions and toy businesses are highly
competitive. In its core domestic promotions business, Equity Marketing competes
with several other companies, the most significant of which is Alcone Marketing
Group, a subsidiary of the Omnicom Group, Inc. Other competitors in promotions
include Promotional Partners International and Simon Marketing, Inc., a division
of Cyrk, Inc. Competition in the international promotions industry includes
local companies in each market and a small number of emerging international
promotions companies. The Company expects that in 1998, the principal
competitors to the Company's Toy business will be smaller toy companies like
Play By Play Toy & Novelties, Inc., Toy Biz, Inc. and Yes! Entertainment.
However, the toy industry includes major toy and game manufacturers such as
Hasbro, Inc. and Mattel, Inc. that compete in the same product categories as
Equity Toys. The Company believes the principal competitive factors affecting
its business are creative execution, license selection, price, product quality
and speed of production. The Company believes its competitive advantage is its
creative interpretation of popular licensed characters and its ability to
translate these creative concepts quickly into high quality products with high
perceived value. The Company's toy competitors include companies which have far
more extensive sales and development staffs and significantly greater financial
resources than does the Company. There can be no assurance that the Company will
be able to compete effectively against such companies in the future.
GOVERNMENT REGULATION
In the United States, the Company is subject to the provisions of,
among other laws, the Federal Consumer Product Safety Act and the Federal
Hazardous Substances Act (the "Acts"). The Acts empower the Consumer Product
Safety Commission (the "Consumer Commission") to protect the public against
unreasonable risks of injury associated with consumer products, including toys
and other articles. The Consumer Commission has the authority to exclude from
the market articles which are found to be hazardous and can require a
manufacturer to repair or repurchase such toys under certain circumstances. Any
such determination by the Consumer Commission is subject to court review.
Violations of the Acts may also result in civil and criminal penalties. Similar
laws exist in some states and cities in the United States and in many
jurisdictions throughout the world. The Company performs quality control
procedures (including the inspection of goods at factories and the retention of
independent testing laboratories) to ensure compliance with applicable laws.
EMPLOYEES
As of December 31, 1997, Equity Marketing employed 157 individuals,
including 40 individuals employed by and located at Equity Marketing Hong Kong,
Ltd. In addition, the Company utilizes on, an ongoing basis, the services of
freelance artists and other temporary staff. Equity Marketing believes it
maintains satisfactory relations with its employees.
ITEM 2. PROPERTIES
Equity Marketing's corporate offices and studio facilities occupy
approximately 28,000 square feet of leased space in Beverly Hills, California.
The lease expires October 31, 2005. Equity Marketing Hong Kong, Ltd. occupies
approximately 6,000 square feet of leased space in Hong Kong, under a lease
which expires November 30, 1999.
ITEM 3. LEGAL PROCEEDINGS
In 1994 a complaint was filed by an individual who claimed he was
entitled to compensation as a result of his having introduced the Company to
Josephthal Lyon & Ross Incorporated, the representative of the underwriters for
the Company's initial public offering ("the Offering"). The complainant sought
a "finders fee" of "not less than 4% of the cash and 150 basis points in stock
warrants based upon the stock sold in the Offering." Josephthal Lyon & Ross
Incorporated is defending the action on behalf of the Company and has agreed to
indemnify the Company and each of its officers and directors from and against
any and all damages resulting from a final non-appealable judgment against the
Company in such litigation. In March 1998, a judgement was obtained in favor of
the plaintiff for approximately $74, plus interest thereon from May 2, 1994.
The judgement is subject to appeal by the plaintiff.
The Company is involved in various legal proceedings generally
incidental to its business. While the result of any litigation contains an
element of uncertainty, management presently believes that the outcome of any
known, pending or threatened legal proceeding or claim, individually or
combined, will not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol EMAK.
As of March 20, 1998, there were approximately 1,071 holders of record
of the Company's Common Stock.
The Company currently has no plans to pay dividends on its Common
Stock. The Company intends to retain all earnings for use in its business. Under
the Company's current credit facility, the Company cannot pay dividends in
excess of $1,000 in any twelve-month period without the prior consent of the
lenders. See Note 4 of the accompanying Notes to Consolidated Financial
Statements.
The following table sets forth the high and low sales prices on the Nasdaq
National Market for the calendar periods indicated:
<TABLE>
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PRICE RANGE OF COMMON STOCK
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1996 1997
----------------------- -------------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter 14 5/8 11 3/8 21 1/4 16 1/4
Second Quarter 17 1/8 12 1/8 26 1/2 16 1/4
Third Quarter 22 3/4 13 30 3/4 23 1/4
Fourth Quarter 25 3/4 17 1/2 30 1/2 23 3/8
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain selected consolidated financial
and operating data for the Company as of and for each of the years in the
five-year period ended December 31, 1997. The selected consolidated financial
and operating data in the tables should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto, which have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report included elsewhere herein and in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<CAPTION>
YEAR ENDED DECEMBER 31, 1993 1994 1995 1996 1997
- ----------------------- ----------- ---------- ---------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME AND PER SHARE DATA:
Revenues $ 44,423 $ 61,776 $ 84,015 $ 111,747 $ 146,508
Cost of sales 33,972 47,721 65,096 83,598 110,508
----------- ---------- ---------- ---------- ----------
Gross profit 10,451 14,055 18,919 28,149 36,000
----------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 3,383 5,072 6,678 9,998 11,993
Selling, general and
administrative 2,671 3,816 5,289 6,736 8,882
Relocation expense -- 882 -- -- --
----------- ---------- ---------- ---------- ----------
Total operating expenses 6,054 9,770 11,967 16,734 20,875
----------- ---------- ---------- ---------- ----------
Income from operations 4,397 4,285 6,952 11,415 15,125
Other (expense) income, net (35) 112 449 259 522
----------- ---------- ---------- ---------- ----------
Income before provision for
income taxes 4,362 4,397 7,401 11,674 15,647
Provision for income taxes 499 1,847 2,812 4,231 6,024
----------- ---------- ---------- ---------- ----------
Net income $ 3,863 $ 2,550 $ 4,589 $ 7,443 $ 9,623
=========== ========== ========== ========== ==========
Pro forma income data (unaudited):
Pro forma net income(1) $ 2,399
=========== ========== ========== ========== ==========
Pro forma net income/basic
income per share(1) $ 0.65 $ 0.48 $ 0.83 $ 1.33 $ 1.63
=========== ========== ========== ========== ==========
Basic weighted average shares
outstanding 3,700,000 5,292,074 5,527,429 5,598,268 5,913,313
=========== ========== ========== ========== ==========
Pro forma net income/diluted
income per share(1) $ 0.61 $ 0.47 $ 0.80 $ 1.26 $ 1.55
=========== ========== ========== ========== ==========
Diluted weighted average shares
outstanding 3,921,834 5,462,425 5,728,549 5,891,357 6,216,794
=========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1993 1994 1995 1996 1997
- ------------------ ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 2,086 $ 9,535 $12,446 $17,952 $29,064
Total assets 12,205 25,732 26,262 37,193 57,153
Long term debt 1,296 -- -- -- --
Stockholders' equity $ 2,039 $10,573 $14,882 $25,033 $36,140
</TABLE>
(1) Prior to the Company's initial public offering in 1994, the Company
elected to be treated as an "S" Corporation for Federal, State and
Local income tax purposes where such treatment was available. The
pro-forma net income data for 1993 reflects provisions for (i) federal
income taxes and (ii) state and local income taxes, in each case as if
the Company had filed consolidated federal, state and local tax returns
as a "C" Corporation throughout the periods presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the Company's
operating expenses as a percentage of its total revenues:
<TABLE>
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YEAR ENDED DECEMBER 31, 1995 1996 1997
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<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales 77.5% 74.8% 75.4%
----- ----- -----
Gross profit 22.5% 25.2% 24.6%
----- ----- -----
Operating expenses:
Salaries, wages and benefits 7.9% 9.0% 8.2%
Selling, general and administrative 6.3% 6.0% 6.1%
----- ----- -----
Total operating expenses 14.2% 15.0% 14.3%
----- ----- -----
Income from operations 8.3% 10.2% 10.3%
Other income, net .5% .2% .4%
----- ----- -----
Income before provision for
income taxes 8.8% 10.4% 10.7%
Provision for income taxes 3.3% 3.8% 4.1%
----- ----- -----
Net income 5.5% 6.6% 6.6%
===== ===== =====
</TABLE>
Year ended December 31, 1997 compared to year ended December 31, 1996
Revenues in 1997 increased $34,761 or 31.1% to $146,508 from $111,747
in 1996. This increase was the result of increased revenues for both Promotions
and Toys. Promotions' revenues increased $23,210 or 25.0% to $116,022 due to
large promotions associated with Universal's The Lost World: Jurassic Park and
its home video feature The Land Before Time and Fox's Anastasia and due to
increases in the number of both domestic and international promotions programs
sold in 1997. Revenues for the Toys division increased $11,551 or 61.0% to
$30,486 from $18,935 due to sales associated with Universal's The Lost World:
Jurassic Park and The Land Before Time, increases in sales under the Company's
Warner Bros. international Looney Tunes license to design and manufacture
products for sale to various international distributors and sales of products
based on the PBS television property, Wishbone.
Cost of sales increased $26,910 or 32.2% to $110,508 in 1997 (75.4% of
revenues) from $83,598 (74.8% of revenues) in 1996. This increase was due to
higher sales volume in 1997. Gross profit as a percentage of revenues decreased
slightly in 1997 from 1996 due primarily to the sales mix, a greater percentage
of Toys revenues offset by higher volume, lower margin Promotions sales due to
competitive pressures in 1997.
Operating expenses increased $4,141 or 24.7% to $20,875 (14.3% of
revenues) in 1997 from $16,734 (15.0% of revenues) in 1996. The increase in
operating expenses in 1997 is attributable to the addition of approximately 23
employees plus the full year effect of the 26 employees added in 1996, which
increased salaries, wages and benefits by $1,995. In addition, 1997 operating
expenses increased due to (i) higher sales commissions associated with the
growth in the Toys revenues in 1997, (ii) increased telephone, postage, supplies
and occupancy costs associated with the increased number of employees and (iii)
increased travel costs associated with the Company's more aggressive sales
efforts in 1997.
Income from operations increased $3,710 or 32.5% to $15,125 in 1997
(10.3% of revenues) from $11,415 in 1996 (10.2% of revenues). This increase is
attributable to higher revenues, partially offset by higher operating costs in
1997.
The effective tax rate in 1997 was 38.5% compared to the effective tax
rate of 36.2% in 1996. The increase in the effective tax rate in 1997 was due
primarily to amoritization of goodwill related to the EPI, and increase in the
Federal tax rate applicable to the Company's pre-tax income in excess of
$10,000 and due to lower tax-free municiple bond interest income in 1997.
Net income increased $2,180 or 29.3% to $9,623 (6.6% of revenues) in
1997 from $7,443 (6.6% of revenues) in 1996 primarily due to the increases in
revenues and gross profit partially offset by increases in operating expenses
and an increase in the effective tax rate in 1997.
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Year ended December 31, 1996 compared to year ended December 31, 1995
Revenues for 1996 increased $27,732 or 33.0% to $111,747 from $84,015
in 1995. This increase was the result of increases in both the Promotions and
Toys divisions of the Company. Promotions revenues increased $19,579 to $92,812
due to an increase in Burger King revenues primarily as a result of volume
associated with promotions tied to the release of Disney's The Hunchback of
Notre Dame, and the home video releases of Disney's Pocahontas, Toy Story and
Oliver & Company, and by increases in sales to other domestic promotions
customers primarily as a result of the acquisition of EPI partially offset by a
decrease in international promotions revenues primarily due to the weak
Mexican peso in relation to the United States dollar. Revenues for the Toys
division increased $8,153 to $18,935 due to higher sales of Looney Tunes
products to international distributors under the Company's Warner Bros.
International Looney Tunes license and sales of toys based on the Company's
domestic licenses including Wishbone, Izzy, the 1996 Olympic mascot for the
games in Atlanta, GA.
Cost of sales increased $18,502 or 28.4% to $83,598 in 1996 (74.8% of
revenues) from $65,096 (77.5% of revenues) in 1995. This increase was due to
higher sales volume in 1996. Gross profit as a percentage of revenues increased
in 1996 over 1995 due primarily to the higher volume of higher margin Toys
revenues in 1996.
Operating expenses increased $4,767 or 39.8% to $16,734 (15.0% of
revenues) in 1996 from $11,967 (14.2% of revenues) in 1995. The increase in
operating expenses in 1996 was attributable to the addition of approximately 26
employees, and the full year effect of the 18 employees added in 1995, which
increased salaries, wages and benefits by $3,320. In addition, 1996 operating
expenses increased due to greater development expenses related to the Company's
expanded Toys product lines and increased occupancy costs and depreciation
expense related to the full year effect of the Company's new corporate
headquarters in Beverly Hills which the Company occupied in October 1995.
Income from operations increased $4,463 or 64.2% to $11,415 in 1996
(10.2% of revenues) from $6,952 (8.3% of revenues) in 1995. This increase was
attributable to higher gross margin during 1996 partially offset by increases in
operating expenses.
The effective tax rate in 1996 was 36.2% compared to the effective tax
rate of 38.0% in 1995. The decrease in the effective tax rate in 1996 is due to
differences in the locations to which products where shipped in 1996.
Net income increased $2,854 or 62.2% to $7,443 (6.6% of revenues) in
1996 from $4,589 (5.5% of revenues) in 1995 primarily due to increases in sales
and gross profit offset by increases in operating expenses.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 1997, the Company's investment in accounts
receivable increased $14,726 from the balance at December 31, 1996. This
increase was attributable to fourth quarter programs shipping late in the
fourth quarter of 1997. As of March 20, 1998, substantially all of the
receivables related to fourth quarter 1997 shipments had been collected. At
December 31, 1997, inventory increased approximately $3,943 over the balance at
December 31, 1996, primarily as a result of production-in-process related to
Toys and Promotions programs which were scheduled to ship in the first and
second quarters of 1998 and an increase in finished goods inventories held for
sale to the Company's Toys customers.
At December 31, 1997, accounts payable increased $9,676 from the prior
year. This increase was primarily attributable to accounts payable to vendors
associated with the manufacturing of fourth quarter shipments made late in 1997.
At December 31, 1997, working capital was $29,064 as compared to
$17,952 at December 31, 1996. The increase in working capital was primarily
due to the Company's increased investment in accounts receivable and
inventory, partially offset by the increase in accounts payable, as
discussed above.
The Company has commitments for guaranteed royalty and advertising
payments of $782 for the year ended December 31, 1998. See Note 9 of the
accompanying Notes to Consolidated Financial Statements. The Company had
no material commitments for capital expenditures at December 31, 1997.
10
<PAGE> 11
CREDIT FACILITIES
The Company maintains a credit agreement with two commercial banks
which makes available to the Company, through April 1998, a line of credit
of up to $25 million. The credit facility is secured by substantially all of the
Company's assets. As of December 31, 1997, there were no amounts outstanding
under this credit agreement. Subsequent to December 31, 1997, the line of credit
was extended through June 30, 2000. See Note 4 of the accompanying Notes to
Consolidated Financial Statements.
INFLATION
The effect of inflation on the Company's operations during 1997 was
insignificant. The Company will continue its policy of controlling costs and
adjusting prices to the extent permitted by competitive factors.
YEAR 2000
In 1997, the Company began several information system improvement
initiatives that will require increased expenditures in future years. These
initiatives include the implementation of computer systems that are year 2000
compliant. The Company also is communicating with suppliers, distributors,
financial institutions and others with which it does business to coordinate
year 2000 requirements. These ongoing initiatives are not anticipated to be
material to the Company's results of operations, liquidity or its capital
resources.
CAUTIONARY STATEMENTS AND RISK FACTORS
Certain factors associated with the Company's forward-looking
statements, which could cause actual results to differ materially from those
forecast in the statements appearing below. In addition to the other
information in this document, readers should carefully consider the following
cautionary statements and risk factors:
Dependence on and Relationship with Key Customer
A single customer, Burger King, accounted for 67.9%, 69.5% and 67.3% of
the Company's revenues for the years ended December 31, 1995, 1996 and 1997,
respectively. Burger King has no contractual commitment to continue to do
business with the Company, and there can be no assurance that it will do so in
the future. The termination or a significant reduction by Burger King of its
business with the Company would have a material adverse effect upon the Company.
The Company's dependence on Burger King is expected to continue in the
foreseeable future. See "Business -- Equity Promotions" and Note 10 of Notes to
Consolidated Financial Statements.
Variability of Operating Results
The Company has experienced, and expects to continue to experience,
significant quarter-to-quarter variability in its revenues and net income. This
is due in part to the seasonality of the licensed property promotions business,
which tends to include larger promotions in the summer and during the winter
holiday season. In addition, there are year-to-year variations in major movie
and television release schedules which influence the promotional schedules of
the Company's customers, as well as the particular promotions for which the
Company is retained. Furthermore, the licensed property promotions business is
primarily based upon motion picture or television characters which may only be
popular for short periods of time or not at all. There may not be comparable
popular characters or similar promotional campaigns in subsequent financial
reporting periods. In seeking diversification of Promotions' clients and
distribution channels, as well as through possible acquisitions like that of EPI
in 1996 and the growth of the Toy division, the Company's goal is to reduce the
potential variability of its quarterly results in the coming years.
Success of Products Dependent on Popularity of Licensed Materials
Many of the Company's promotional products and toys are based on
entertainment properties, such as characters from current motion pictures or
television programs. The success of these promotional products and toys is
dependent, to a large extent, on the popularity of the entertainment properties
on which they are based. Each motion picture and television program is an
individual artistic work and its commercial success is dependent on consumer
preferences, which are inherently unpredictable. Often the Company expends
substantial resources in obtaining licenses and developing and manufacturing
products prior to a release of the motion picture or television program upon
which the products are based. This is especially true with respect to the
Company's promotional products, where the Company's customers, such as quick
service restaurants, require delivery schedules that coincide with the release
of the underlying entertainment properties. The Company's results of operations
may be adversely effected if the entertainment properties upon which the
Company's products are based (as a result of incorrectly predicting consumer
preferences or for any other reason) turn out to be less popular than the
Company anticipates. Also, delays in the release of motion pictures or
television programs could result in delays or cancellations of the Company's
promotions. See "Business."
11
<PAGE> 12
Need For Continual New Product Development; Reliance on Limited Number of
Product Orders
A substantial portion of the Company's revenues during any given year
has historically been derived from a relatively limited number of promotional
programs by its fast-food customers, which promotions are in effect for only a
limited period of time and generally are not repeated. Thus, the Company must
continually develop and sell new products for utilization in new promotional
programs. See "Business -- Equity Promotions." As a result of changing consumer
preferences, many toys are successfully marketed for only one or two years.
Accordingly, the success of the Company's toy business is dependent in large
part on its ability to develop and market new products associated with new
entertainment properties. There can be no assurance that any new retail product
line will be successful. See "Business -- Equity Toys." The cancellation or
premature termination of one or more retail product lines or promotional
programs, because of the Company's inability to renew or extend licenses (which
typically have terms of less than three years) on favorable terms or otherwise,
or a significant change in promotional practices within the fast-food restaurant
industry, could have a material adverse effect upon the Company. In addition,
there can be no assurance that the Company or its customers will be able to
secure licenses for additional entertainment properties on which to base its
promotional and retail products or that, if secured, such licenses will result
in successful products. See "--Success of Products Dependent on Popularity of
Licensed Materials." The Company's toy competitors include companies which have
far more extensive sales and development staffs and significantly greater
financial resources than does the Company. There can be no assurance that the
Company will be able to compete effectively against such companies in the
future.
Reliance on Foreign Manufacturers
During 1997, approximately 95% of the Company's products were
manufactured at facilities located in the Far East. Foreign manufacturing is
subject to a number of risks, including, without limitations, transportation
delays and interruptions, political and economic disruptions, the imposition of
tariffs, quotas and other import or export controls, and changes in governmental
policies. In 1997, approximately 86 percent of the Company's products were
manufactured for the Company in China. China currently enjoys Most Favored
Nation trading status with the United States. Under the Trade Act of 1974, the
President of the United States is authorized, upon making specified findings, to
waive certain restrictions that would otherwise render China ineligible for Most
Favored Nation treatment. The President has waived these provisions each year
since 1979. The most recent waiver was granted on May 29, 1997, and extended
China's most favored nation status until July 3, 1998. No assurance can be given
that China will continue to enjoy Most Favored Nation status in the future. In
addition, over the last several years, the United States has threatened to
impose trade sanctions on Chinese products over such issues as human rights,
market access, and protection of United States intellectual property rights. Any
legislation or administrative action by the United States government that
revokes or places further conditions on China's Most Favored Nation status, or
otherwise limits imports of Chinese products into the United States could, if
enacted, have a material adverse effect on the demand for the Company's products
because products originating from China could be subjected to substantially
higher rates of duty. The Company believes that any such adverse effect would
generally be applicable to all producers of toys. The Company believes
alternative manufacturers are available in other countries and continues to
evaluate their ability to compete in terms of cost, quality, production capacity
and other considerations. In this regard, the Company has manufactured products
in the Philippines, Indonesia, Thailand and Macau for delivery in Mexico and
Europe and continues to explore other low cost production sources. The Company
believes that the raw materials from which its products are made are widely
available from multiple sources.
Expansion of Business
The Company's business strategy provides for further diversification of
the Company's core domestic promotions business into international markets, the
further development of the Company's global retail business and expansion into
related product categories. In order to implement this plan, the Company may
finance product production and assume the related risk of temporarily
maintaining inventory. There can be no assurance that the expansion of the
Company's business will be successfully implemented.
The Company is seeking to acquire other companies and is also investing
in its sales force and infrastructure to target new markets through internal
growth. No assurance can be given that the Company will find suitable
acquisition candidates or that it will be successful in consummating and
integrating such transactions. Significant growth in the Company's business or
potential acquisitions may acquire additional financing. It is anticipated that
such financing would be obtained, depending upon availability and market
conditions, through bank financing, the issuance of additional equity or debt or
a combination of these sources. However, there can be no assurance that
sufficient funding will be available at terms considered favorable by the
Company.
12
<PAGE> 13
Potential for Product Liability Claims
Products that have been or may be developed or sold by the Company may
expose the Company to potential liability from claims by end-users of such
products. Although none of the Company's products have ever been the subject of
a safety or quality recall, the nature of the Company's business exposes it
regularly to the possibility of liability from claims by end-users of products
that have been or may be developed, licensed and sold by the Company and to the
possibility that its products may be subject to a recall. The Company currently
maintains product liability insurance coverage in amounts that it believes are
adequate. There can be no assurance that the Company will be able to maintain
such coverage or obtain additional coverage on acceptable terms, or that such
insurance will provide adequate coverage against all potential claims or for a
product recall. See "Legal Proceedings."
Control by Present Shareholders
Donald A. Kurz and Stephen P. Robeck, who are directors and Co-Chief
Executive Officers of the Company, beneficially own approximately 25% and 23%,
respectively, of the outstanding Common Stock of the Company and together will
be able to exert significant control over the policies and operations of the
Company.
Possible Adverse Impact of Issuance of Preferred Stock
The Board of Directors of the Company has authority to issue up to
1,000,000 shares of Preferred Stock, and to fix the rights, preferences,
privileges and restrictions of those shares without any further vote or action
by the shareholders. The potential issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company,
may discourage bids for the Common Stock at a premium over the market price of
the Common Stock and may adversely affect the market price of, and the voting
and other rights of, the holders of Common Stock. The Company currently has no
plans to issue shares of Preferred Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements referred to in the
accompanying Index setting forth the consolidated financial statements of the
Company, together with the report of Arthur Andersen LLP dated February 23,
1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to the executive
officers and directors of the Company. All officers are elected by the Board of
Directors and may be removed with or without cause by the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stephen P. Robeck 49 Chairman, Co-Chief Executive Officer and Director
Donald A. Kurz 42 President, Co-Chief Executive Officer and Director
Albert Ovadia 47 Executive Vice President - Worldwide Promotions
Kim H. Thomsen 45 Executive Vice President - Creative Director
Gary L. Trumbo 49 Executive Vice President - Equity Toys
Michael J. Welch 45 Executive Vice President, Chief Financial Officer and Treasurer
David A. Valdez 39 Senior Vice President - Operations
Mark E. Lewis 36 Senior Vice President - Business Affairs and Administration
Lawrence Elins 50 Director
Merrill M. Kraines 42 Director and Secretary
Bruce Raben 44 Director
</TABLE>
STEPHEN P. ROBECK has been a senior executive of Equity Marketing and
its predecessor business since 1986. He became a director of the Company in 1989
and was elected Chairman and Co-Chief Executive Officer in September 1991.
Between 1987 and September 1991, Mr. Robeck served as Chief Operating Officer of
Equity Marketing. Mr. Robeck received a B.A. in Philosophy from Lake Forest
College.
DONALD A. KURZ joined the Company as Executive Vice President and was
elected a director in September 1990, and was elected President and Co-Chief
Executive Officer in September 1991. Prior to joining the Company, Mr. Kurz was
a management consultant for seven years with the general management consulting
division of Towers Perrin, where he was a Vice President (Senior Partner) and,
most recently, Manager of the New York office. Mr. Kurz received his B.A. from
The Johns Hopkins University and his MBA from the Columbia University Graduate
School of Business.
MARK E. LEWIS joined the Company in July 1994 as Vice President of
Business Affairs and was promoted to Senior Vice President, Business Affairs and
Administration in 1996. From 1991 to 1994, Mr. Lewis was in-house counsel with
Paramount Pictures Corporation. Mr. Lewis received his B.A. degree from Florida
International University and his J.D. from Pepperdine University School of Law.
ALBERT OVADIA joined the Company in August 1996. From 1995 to 1996, Mr.
Ovadia was President of News America FSI. From 1988 to 1995, he was the
President of 20th Century Fox Licensing and Merchandising. Mr. Ovadia received
his B.A. degree from the University of Washington in Seattle.
KIM H. THOMSEN joined the Company in October 1991, and is responsible
for the Company's creative direction for all product. For more than five years
prior to joining Equity Marketing, she had her own business as a creative
consultant. Ms. Thomsen received her B.A. and B.F.A. degree from Cornell
University.
GARY L. TRUMBO joined the Company in June 1993, and is primarily
responsible for the Company's Toys division. For more than five years prior to
joining Equity Marketing, he was Senior Vice President of Marketing of Applause
Inc., a toy and gift company. Mr. Trumbo received his B.S. degree in Marketing
and Economics at California State University Northridge.
DAVID A. VALDEZ joined the Company in July 1995 as Vice President,
Operations and was promoted to Senior Vice President, Operations in 1996. Prior
to joining the Company, Mr. Valdez was a management consultant, first with
Mercer Management Consulting from 1983 through 1991, as an independent
consultant from 1991 through 1993, and with Towers Perrin General Management
Consulting from 1993 to 1995. Mr. Valdez received his B.S. degree from the
Wharton School at the University of Pennsylvania and his MBA degree from the
Harvard Business School.
14
<PAGE> 15
MICHAEL J. WELCH joined the Company in January 1997. From 1989 to 1997,
Mr. Welch was employed by Mattel, Inc. in various positions including Vice
President, Corporate Development and Assistant Treasurer. Previously, he held
various key financial positions at Security Pacific National Bank including
Senior Vice President, Strategic Projects Division, and First Vice President,
International Banking and Investments. Mr. Welch received his B.S. and his MBA
from the University of Southern California.
LAWRENCE ELINS became a director of the Company in April 1994. Until
1988 he was employed by Applause, Inc. where he served as President. Since 1988
Mr. Elins has been President of Elins Enterprises, a Financial and Real Estate
Investment Company. Mr. Elins received his B.A. from California State University
Northridge.
MERRILL M. KRAINES was elected secretary of the Company in April 1993
and a director of the Company in March 1994. Mr. Kraines has been a partner of
Fulbright & Jaworski L.L.P., or its predecessor firm Reavis & McGrath, since
January 1987, having originally joined such firm in 1979. Mr. Kraines received
his B.A. from Dartmouth College and his J.D. from the Columbia University School
of Law.
BRUCE RABEN became a director of the Company in January 1993. From 1990
through 1995, Mr. Raben was an Executive Vice President of Jeffries & Company,
Inc., an investment banking firm. In 1996 Mr. Raben joined CIBC Wood Gundy, an
investment banking firm, as a Managing Director. Mr. Raben is also a director of
Terex Corp. and Optical Security, Inc. Mr. Raben received a B.A. from Vassar
College and an MBA from the Columbia University Graduate School of Business.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to this item appears under the captions "THE BOARD
OF DIRECTORS AND COMMITTEES OF THE BOARD", "EXECUTIVE COMPENSATION" and
"COMPENSATION COMMITTEE REPORT" in the Company's Proxy Statement relating to the
Company's 1998 Annual Meeting of Stockholders, which are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to this item appears under the caption "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement
relating to the Company's 1998 Annual Meeting of Stockholders, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to this item appears under the captions "EXECUTIVE
COMPENSATION", "CERTAIN TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION" in the Proxy Statement relating to the Company's 1998
Annual Meeting of Stockholders, which are incorporated herein by reference.
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(A). List of documents filed as part of this Report.
Financial Statements:
EQUITY MARKETING, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants...................................................... 17
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1996 and 1997............................................ 18
Statements of Income for the Years Ended December 31, 1995, 1996 and 1997.................. 19
Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997.... 20
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997.............. 21
Notes to Consolidated Financial Statements................................................. 22
</TABLE>
Note: All supplementary schedules are omitted since they are not applicable
or the required information can be obtained from the consolidated
financial statements.
(B). Reports on Form 8-K
Report on Form 8-K filed with the Securities and Exchange Commission
on October 9, 1997 (Item 5).
Report on Form 8-K filed with the Securities and Exchange Commission
on February 25, 1998 (Item 5).
16
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Equity Marketing, Inc.:
We have audited the accompanying consolidated balance sheets of Equity
Marketing, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Equity
Marketing, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
February 23, 1998
17
<PAGE> 18
EQUITY MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
ASSETS 1996 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,502 $ 8,935
Accounts receivable (net of allowances for doubtful accounts of
$555 and $600 as of December 31, 1996 and 1997, respectively) 13,092 27,773
Inventory 4,715 8,658
Prepaid expenses and other current assets 2,797 3,749
-------- --------
Total current assets 29,106 49,115
FIXED ASSETS, net 2,285 2,550
INTANGIBLE ASSETS, net 5,124 5,079
OTHER ASSETS 678 409
-------- --------
Total assets $ 37,193 $ 57,153
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,884 $ 14,560
Accrued payroll and payroll related costs 2,272 769
Accrued liabilities 3,998 4,722
-------- --------
Total current liabilities 11,154 20,051
LONG-TERM LIABILITIES 1,006 962
-------- --------
Total liabilities 12,160 21,013
-------- --------
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, 5,832,087 and 6,010,103 shares
outstanding as of December 31, 1996 and
1997, respectively -- --
Additional paid-in capital 11,297 13,371
Retained earnings 15,433 25,056
-------- --------
26,730 38,427
LESS--
Treasury stock, 1,892,841 shares at cost as of
December 31, 1996 and 1997 (1,279) (1,279)
Stock subscription receivable (53) (43)
Unearned compensation (365) (965)
-------- --------
Total stockholders' equity 25,033 36,140
-------- --------
Total liabilities and stockholders' equity $ 37,193 $ 57,153
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
18
<PAGE> 19
EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 84,015 $ 111,747 $ 146,508
COST OF SALES 65,096 83,598 110,508
----------- ----------- -----------
Gross profit 18,919 28,149 36,000
OPERATING EXPENSES:
Salaries, wages and benefits 6,678 9,998 11,993
Selling, general and administrative 5,289 6,736 8,882
----------- ----------- -----------
Total operating expenses 11,967 16,734 20,875
----------- ----------- -----------
Income from operations 6,952 11,415 15,125
OTHER (EXPENSE) INCOME:
Interest expense (36) (94) (89)
Interest income 485 353 611
----------- ----------- -----------
Income before provision for income taxes 7,401 11,674 15,647
PROVISION FOR INCOME TAXES 2,812 4,231 6,024
----------- ----------- -----------
Net income $ 4,589 $ 7,443 $ 9,623
=========== =========== ===========
BASIC INCOME PER SHARE $ 0.83 $ 1.33 $ 1.63
=========== =========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 5,527,429 5,598,268 5,913,313
=========== =========== ===========
DILUTED INCOME PER SHARE $ 0.80 $ 1.26 $ 1.55
=========== =========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 5,728,549 5,891,357 6,216,794
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
19
<PAGE> 20
EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON STOCK PAID-IN RETAINED TREASURY SUBSCRIPTION
SHARES AMOUNT CAPITAL EARNINGS STOCK RECEIVABLE
------ ------ ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 5,556,782 $ -- $ 8,163 $ 3,401 $ (917) $(74)
Net income -- -- -- 4,589 -- --
Purchase of treasury stock (57,100) -- -- -- (368) --
Exercise of stock options 10,000 -- 60 -- -- --
Tax benefit from exercise of stock options -- -- 18 -- -- --
Loan forgiveness -- -- -- -- -- 10
--------- ----- ------- ------- ------- ----
Balance, December 31, 1995 5,509,682 -- 8,241 7,990 (1,285) (64)
Net income -- -- -- 7,443 -- --
Issuance of shares pursuant to restricted
stock plan 22,500 -- 387 -- -- --
Amortization of restricted stock grants -- -- -- -- -- --
Issuance of treasury stock to
401(k) Tax Deferred Savings Plan 14,259 -- 131 -- 6 --
Exercise of underwriters' warrants 110,646 -- 887 -- -- --
Exercise of stock options 175,000 -- 739 -- -- --
Tax benefit from exercise of stock options -- -- 912 -- -- --
Loan forgiveness -- -- -- -- -- 11
--------- ----- ------- ------- ------- ----
Balance, December 31, 1996 5,832,087 -- 11,297 15,433 (1,279) (53)
Net income -- -- -- 9,623 -- --
Issuance of shares pursuant to restricted
stock plan 27,620 -- 658 -- -- --
Amortization of restricted stock grants -- -- -- -- -- --
Exercise of underwriters' warrants 61,968 -- 467 -- -- --
Exercise of stock options 88,428 -- 459 -- -- --
Tax benefit from exercise of stock options -- -- 490 -- -- --
Loan forgiveness -- -- -- -- -- 10
--------- ----- ------- ------- ------- ----
Balance, December 31, 1997 6,010,103 -- $13,371 $25,056 $(1,279) $(43)
========= ===== ======= ======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
UNEARNED
COMPENSATION TOTAL
------------ -----
<S> <C> <C>
Balance, December 31, 1994 $-- $ 10,573
Net income -- 4,589
Purchase of treasury stock -- (368)
Exercise of stock options -- 60
Tax benefit from exercise of stock options -- 18
Loan forgiveness -- 10
----- --------
Balance, December 31, 1995 -- 14,882
Net income -- 7,443
Issuance of shares pursuant to restricted
stock plan (387) --
Amortization of restricted stock grants 22 22
Issuance of treasury stock to
401(k) Tax Deferred Savings Plan -- 137
Exercise of underwriters' warrants -- 887
Exercise of stock options -- 739
Tax benefit from exercise of stock options -- 912
Loan forgiveness -- 11
----- --------
Balance, December 31, 1996 (365) 25,033
Net income -- 9,623
Issuance of shares pursuant to restricted
stock plan (658) --
Amortization of restricted stock grants 58 58
Exercise of underwriters' warrants -- 467
Exercise of stock options -- 459
Tax benefit from exercise of stock options -- 490
Loan forgiveness -- 10
----- --------
Balance, December 31, 1997 $(965) $ 36,140
===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
20
<PAGE> 21
EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,589 $ 7,443 $ 9,623
Adjustments to reconcile net income to net cash provided
by (used in) operating activities-
Depreciation and amortization 643 1,079 1,247
Provision for allowance for doubtful accounts 60 361 92
Tax benefit from exercise of stock options 18 912 490
Amortization of restricted stock -- 22 58
Issuance of treasury stock to 401(k) Tax Deferred Savings Plan -- 137 --
Other 10 11 17
Changes in assets and liabilities-
Increase (decrease) in cash and cash equivalents
Accounts receivable 13,729 (10,625) (14,773)
Inventory (1,291) 95 (3,943)
Prepaid expenses and other current assets (1,248) 1,110 (1,049)
Other assets (420) 174 269
Accounts payable (5,346) (1,942) 9,676
Accrued liabilities 1,295 (2,622) (779)
Long-term liabilities 272 219 (44)
-------- -------- --------
Net cash provided by (used in) operating activities 12,311 (3,626) 884
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of EPI Group Limited -- (3,729) (280)
Purchases of marketable securities (27,760) (34,658) --
Proceeds from sales and maturities of marketable securities 15,825 46,593 --
Purchases of fixed assets (1,893) (773) (1,097)
-------- -------- --------
Net cash provided by (used in) investing activities (13,828) 7,433 (1,377)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit -- 19,150 11,300
Repayments on line of credit -- (19,150) (11,300)
Repayment on EPI loan payable to bank -- (1,000) --
Proceeds from exercise of stock options 60 739 459
Proceeds from exercise of underwriters' warrants -- 887 467
Purchase of treasury stock (368) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (308) 626 926
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,825) 4,433 433
Cash acquired in purchase of EPI Group Limited -- 129 --
CASH AND CASH EQUIVALENTS, beginning of year 5,765 3,940 8,502
======== ======== ========
CASH AND CASH EQUIVALENTS, end of year $ 3,940 $ 8,502 $ 8,935
======== ======== ========
CASH PAYMENTS DURING YEAR FOR:
Interest $ 31 $ 112 $ 65
======== ======== ========
Taxes $ 2,847 $ 4,762 $ 4,399
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE> 22
EQUITY MARKETING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Equity Marketing, Inc. ("Equity Marketing" or the "Company"), designs,
develops, produces, markets and distributes a wide variety of toy, gift and
other consumer products primarily based upon popular entertainment properties
licensed primarily from television and motion picture studios and other
licensors. The Company has been in business since 1984. The Company was
originally incorporated in New York and reincorporated in Delaware in 1995.
Equity Marketing Hong Kong, Ltd. ("EMHK"), a Delaware corporation,
began operations in 1993 and is 100% owned by 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.
Synergy Promotions S.A. de C.V. ("Synergy") was incorporated in Mexico
on March 6, 1996 and is 65% owned by the Company. Synergy markets the Company's
products to consumer products companies in Mexico.
As discussed in Note 2, in September 1996, the Company purchased 100%
of the common stock of EPI Group Limited ("EPI"), a Delaware corporation, a
designer, developer, producer and distributor of promotional and other products
for sale to oil companies, consumer products companies and retailers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant accounts and
transactions between the Company and its subsidiaries have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with a maturity at the
date of purchase of three months or less to be cash equivalents. Short-term
investments included in cash and cash equivalents are valued at amortized cost,
which approximates fair value as of December 31, 1996 and 1997.
22
<PAGE> 23
REVENUE RECOGNITION
The Company records sales when title and risk of loss pass to the
customer. When a right of return exists, the Company's practice is to estimate
and provide for any future returns at the time of sale, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 48.
INVENTORY
Inventory consists of production-in-process which represents direct
costs related to product development, procurement and tooling which are deferred
and amortized over the life of the products and finished products held for sale
to customers and finished products in transit to customers' distribution
centers. Inventory is stated at the lower of average cost or market. As of
December 31, 1996 and 1997, inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
-------- --------
<S> <C> <C>
Production-in-process $ 3,136 $ 4,935
Finished goods 1,579 3,723
-------- --------
$ 4,715 $ 8,658
======== ========
</TABLE>
FIXED AND INTANGIBLE ASSETS
Fixed assets are stated at cost. Depreciation and amortization is
provided on a straight-line basis over estimated useful lives as follows:
Leasehold improvements -- Life of related lease
Furniture, fixtures, equipment and software -- 3-7 years
Intangible assets consist primarily of goodwill and other intangibles
related to the purchase of EPI (See Note 2). These intangible assets are being
amortized using the straight-line method over their estimated useful lives
ranging from 3 to 20 years. Accumulated amortization at December 31, 1996 and
1997 was $81 and $406, respectively. For the years ended December 31, 1995, 1996
and 1997, amortization expense amounted to $234, $472 and $422, respectively.
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" which
requires impairment losses to be recorded on long-lived assets used in
operations when indications of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. No adjustments to fixed and intangible assets' carrying values
were required as of December 31, 1995, 1996 and 1997.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statements and tax basis of assets and liabilities using
the tax rates in effect for the years in which the differences are expected to
reverse (See Note 8).
NET INCOME PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share" (EPS),
effective for the year ending December 31, 1997 and has restated its earnings
per share disclosure for the periods ended December 31, 1995 and 1996 to comply
with SFAS No. 128. Under SFAS No. 128, primary EPS is replaced by "Basic" EPS,
which excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. "Diluted" EPS, which is computed similarly to fully 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.
When dilutive, stock options are included as share equivalents in computing
diluted earnings per share using the treasury stock method. The impact of
including unexercised dilutive options and warrants was to increase weighted
average shares outstanding by 201,120 in 1995, 293,089 in 1996 and 303,481 in
1997. Options to purchase 240,000, 70,000 and 268,000 shares of common stock
were outstanding as of December 31, 1995, 1996 and 1997, respectively and
excluded from the computation of diluted income per share as they would have
been anti-dilutive.
23
<PAGE> 24
ROYALTIES
The Company enters into agreements to license trademarks, copyrights,
and patents. The agreements may call for minimum amounts of royalties to be paid
in advance and throughout the term of the agreement which are non-refundable in
the event that product sales fail to meet certain minimum levels. Advance
royalties resulting from such transactions are stated at amounts estimated to be
recoverable from future sales of the related products.
CONCENTRATION OF RISK
Accounts receivable represent unsecured balances due from its customers
and the Company is at risk to the extent such amounts become uncollectible. The
Company regularly extends credit to several distribution companies in connection
with its business with Burger King. One of these distribution companies'
accounts for more than half of the products purchased for the Burger King system
in any given year. Failure by one or more distribution companies to honor their
payment obligations to the Company could have a material adverse effect on the
Company's operations.
The Company purchases a significant portion of its manufactured
products from suppliers located outside the United States including China (86%).
Foreign manufacturing is subject to a number of risks, including transportation
delays and interruptions, political and economic disruptions, the imposition of
tariffs, quotas and other import or export controls, and changes in governmental
policies. China currently enjoys Most Favored Nation trading status with the
United States. No assurance can be given that China will continue to enjoy Most
Favored Nation status in the future. The Company believes that if these Chinese
suppliers were no longer available, it would be able to obtain its manufactured
products from existing suppliers located within the United States and suppliers
in foreign countries other than China and other foreign countries. However,
there can be no assurance that the Company would be able to obtain manufactured
products under acceptable terms.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which are effective for
financial statements for fiscal years beginning after December 15, 1997. The new
accounting pronouncements require the presentation of comprehensive income and
segment disclosure which will have no impact on the financial results of the
Company.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform them with the 1997 presentation.
2. ACQUISITION
On September 18, 1996, the Company acquired 100% of the common stock of
EPI for $2,891 in cash plus related transaction costs of $838. Potential
additional cash consideration may be paid based upon the results of operations
of the EPI business during the three-year period ending December 31, 1999. In
October 1997, an additional $280 was paid to the stockholders of EPI and
allocated to goodwill. The EPI acquisition has been accounted for using the
purchase method and accordingly the results of operations of EPI have been
included in the accompanying Consolidated Statements of Income for the period
from September 18, 1996 (acquisition date). The excess of purchase price over
the fair value of the net assets acquired has been allocated to goodwill, which
is being amortized over a period of 20 years. The allocation of the acquisition
costs (based upon fair values) was as follows:
<TABLE>
<S> <C>
Accounts receivable $ 1,079
Inventory 1,514
Deferred taxes 868
Other current assets 1,049
Fixed assets 139
Intangibles 223
Goodwill 5,262
Accounts payable (1,100)
Accrued liabilities (2,283)
Deferred revenue (1,742)
Loan payable to bank (1,000)
-------
$ 4,009
=======
</TABLE>
Deferred income taxes have been recorded for the basis differential of
the assets acquired between financial reporting purposes and tax reporting
purposes.
24
<PAGE> 25
Unaudited pro forma results of operations of the Company assuming the
acquisition had taken place effective January 1, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues $ 89,998 $ 115,794
Net income $ 5,089 $ 7,071
Pro forma basic income per share $ 0.92 $ 1.26
Pro forma diluted income per share $ 0.89 $ 1.20
Pro forma basic weighted average
shares outstanding 5,527,429 5,598,268
Pro forma diluted weighted average
shares outstanding 5,728,549 5,891,357
</TABLE>
3. FIXED ASSETS, NET
Fixed assets, net is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
--------- ---------
<S> <C> <C>
Furniture, fixtures, equipment and software $ 2,650 $ 3,559
Leasehold improvements 636 765
--------- ---------
Fixed assets, at cost 3,286 4,324
Accumulated depreciation and amortization (1,001) (1,774)
--------- ---------
Fixed assets, net $ 2,285 $ 2,550
========= =========
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, depreciation and
amortization expense related to fixed assets was $409, $607 and $825,
respectively.
4. LINE OF CREDIT
At December 31, 1996 and 1997, the Company was party to a revolving
credit agreement ("Credit Agreement") with two commercial banks. The Credit
Agreement provides a line of credit up to $25 million with borrowing
availability determined by a formula based on qualified assets. Interest on
outstanding borrowings is based on either a fixed rate equivalent to Eurodollar
plus 2.25 percent or a variable rate equivalent to the lead bank's reference
rate plus .25 percent. The Company is also required to pay an unused line fee of
.25 percent per annum and certain letter of credit fees. The Credit Agreement is
secured by substantially all of the Company's assets and contains financial and
non-financial covenants.
As of December 31, 1997, there were no amounts outstanding under the
Credit Agreement. During 1997, the Company's maximum borrowings under the line
were approximately $7,400 and the weighted average interest rate on all
borrowings was 8.87%. Letters of credit amounts outstanding as of December 31,
1996 and 1997 were $1,130 and $4,156, respectively.
Subsequent to December 31, 1997, the Credit Agreement was extended
through June 30, 2000. In addition, the Credit Agreement was amended to reduce
the interest rate on borrowings to Eurodollar plus 1.75 percent and the
interest rate on reference rate borrowings to the lead bank's reference rate.
5. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Tax Deferred Savings Plan ("the 401(k) Plan"),
which became effective on January 1, 1992. The 401(k) Plan covers substantially
all of its eligible employees, as defined under the 401(k) Plan. The Company
makes annual contributions to the 401(k) Plan consisting of a discretionary
matching contribution equal to a determined percentage of the employee's
contribution and a discretionary amount determined each year by the Company and
paid out of the Company's current or accumulated net profit. Costs related to
contributions to the 401(k) Plan for the years ended December 31, 1995, 1996,
and 1997 were $56, $107 and $137, respectively.
25
<PAGE> 26
6. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has two stock option plans, the 1992 Employee Stock Option
Plan (the "Employee Plan") and the 1992 Non-Employee Director Stock Option Plan
(the "Director Plan"), together referred to as the "Option Plans". A total of
1,930,000 shares of common stock are reserved for issuance, pursuant to options
granted and to be granted under these stock option plans. 347,440 shares are
available for grant as of December 31, 1997. Options pursuant to the Employee
Plan vest over three to five years and expire ten years from the date of grant
and expires in 2001. Options pursuant to the Director Plan vest over six months
and expire ten years from the date of grant and expires in 2003.
The Option Plans provide for option grants at exercise prices not less
than the fair market value on the date of grant in the case of qualified
incentive stock options, and not less than par value in the case of
non-qualified options.
Transactions involving the Option Plans are summarized as follows:
<TABLE>
<CAPTION>
EXERCISABLE AT END OF YEAR
WEIGHTED AVERAGE ---------------------------
NUMBER EXERCISE PRICE WEIGHTED AVERAGE
OF SHARES PER SHARE SHARES EXERCISE PRICE
---------- ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 655,350 $ 3.76 216,066 $ 2.51
======= ========
Granted 145,000 8.66
Exercised (10,000) 6.00
Canceled (50,000) 5.20
--------- --------- ------- --------
Outstanding at December 31, 1995 740,350 4.59 334,708 $ 3.09
======= ========
Granted 340,000 16.04
Exercised (175,000) 4.22
Canceled (34,000) 5.88
--------- --------- ------- --------
Outstanding at December 31, 1996 871,350 9.08 322,350 $ 4.26
======= ========
Granted 438,000 24.09
Exercised (88,428) 5.20
Canceled (18,572) 9.13
--------- --------- ------- --------
Outstanding at December 31, 1997 1,202,350 $ 14.84 429,778 $ 6.89
========= ========= ======= ========
</TABLE>
574,350 of the 1,202,350 options outstanding at December 31, 1997 have
exercise prices between $.32 and $14.25 per share, with a weighted average
remaining contractual life of 7.19 years. 361,778 of these options are
exercisable. The remaining 628,000 options outstanding at December 31, 1997 have
exercise prices between $16.13 and $28.13 per share, with a weighted average
exercise price per share of $22.16 and a weighted average remaining contractual
life of 9.25 years. 68,000 of these options are exercisable.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," issued in October 1995. In accordance with provisions of SFAS No.
123, the Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Net income - as reported $ 4,589 $ 7,443 $ 9,623
Net income - pro forma $ 4,504 $ 6,919 $ 8,138
Basic earnings per share - as reported $ 0.83 $ 1.33 $ 1.63
Basic earnings per share - pro forma $ 0.81 $ 1.24 $ 1.38
Diluted earnings per share - as reported $ 0.80 $ 1.26 $ 1.55
Diluted earnings per share - pro forma $ 0.79 $ 1.17 $ 1.31
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro-forma compensation
cost may not be representative of the cost to be expected in future years.
26
<PAGE> 27
The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 61.91% 61.91% 65.73%
Risk free interest rate 6.00% 6.00% 5.53%
Expected life of options 3 years 3 years 3 years
</TABLE>
The weighted average fair value of options granted during 1996 and 1997
is $15.49 and $24.09, respectively.
WARRANTS
At December 31, 1997, there were 4,131 underwriters' warrants
outstanding relating to the Company's initial public offering, which are
exercisable at $8.02 per share. The warrants expire on January 31, 1999.
PREFERRED STOCK
The Company has authorized 1,000,000 shares of preferred stock, par
value $.001 per share ("Preferred Stock"). The Board of Directors is empowered
to issue Preferred Stock from time to time in one or more series, without
stockholder approval, and to determine the rights, preferences and restrictions,
including dividend, conversion, voting, redemption (including sinking fund
provisions), and other rights, liquidation preferences and the number of shares
constituting any series and the designations of such series. To date, no series
of Preferred Stock has been issued.
STOCK SUBSCRIPTION RECEIVABLE
On September 27, 1991, a minority stockholder of the Company purchased
1,850,000 shares of the Company's treasury stock for an aggregate purchase
price of $107. Since the stock was sold below cost, the loss on the issuance of
the treasury stock was charged to retained earnings.
The purchase price for these shares was paid with promissory notes,
payable in ten years, together with interest at an annual rate of 8.41% per
year on the unpaid principal balance. The notes are subject to the terms of the
Loan Forgiveness Agreements dated September 27, 1991, pursuant to which the
principal amount of the notes will be forgiven at 10% per year, provided that
the stockholder remains employed by the Company at such time. The stock
subscription receivable is included in the balance sheet as a reduction of
stockholders' equity. The Company records the annual reduction as compensation
expense.
RESTRICTED STOCK
The Company has reserved 100,000 shares of common stock for issuance
under the 1995 Stock Award Plan, ("the Plan"), which covers certain key salaried
employees who are not officers or directors of the Company. As of December 31,
1997, 43,920 shares with an aggregate market value on the date of grant of $658
had been issued under the Plan. The shares are subject to restrictions which
lapse over a three to five year period, and continued employment with the
Company.
Unearned compensation was charged for the market value of the
restricted shares as these shares were issued in accordance with the Plan. The
unearned compensation is shown as a reduction of shareholders' equity in the
accompanying consolidated balance sheets and is being amortized ratably over the
restricted period. Compensation charged to expense was $0, $22 and $58 in 1995,
1996 and 1997, respectively. At December 31, 1997, 56,080 shares were available
for issuance under the Plan.
8. INCOME TAXES
In accordance with SFAS 109, deferred income taxes reflect the impact
of temporary differences between values recorded for assets and liabilities for
financial reporting purposes and the values utilized for measurement in
accordance with current tax laws.
The provisions for income taxes consist of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
CURRENT:
Federal $2,064 $2,045 $4,713
State and local 503 264 728
------ ------ ------
2,567 2,309 5,441
------ ------ ------
DEFERRED:
Federal 207 920 84
State and local 20 90 9
------ ------ ------
227 1,010 93
------ ------ ------
Additional paid-in capital from
benefit of stock options exercised 18 912 490
------ ------ ------
$2,812 $4,231 $6,024
====== ====== ======
</TABLE>
27
<PAGE> 28
Income taxes recorded by the Company differ from the amounts computed
by applying the statutory United States Federal income tax rate to income before
income taxes. The following schedule reconciles income tax expense at the
statutory rate and the actual income tax expense as reflected in the
accompanying consolidated statements of income.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Tax at the Federal statutory rate $ 2,516 $ 3,986 $ 5,476
State income taxes, net of the Federal tax benefit 391 267 597
Municipal bond interest not subject to Federal or State taxes (107) (49) --
Other 12 27 (49)
------- ------- -------
$ 2,812 $ 4,231 $ 6,024
======= ======= =======
</TABLE>
The tax effects of the significant temporary differences giving rise to
the Company's deferred tax assets (liabilities) for the years ended December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Allowance for doubtful accounts $ 210 $ 228
Capitalized costs in inventories 151 159
Accrued expenses 585 573
Depreciation 297 115
Other 111 186
--------- ----------
$ 1,354 $ 1,261
========= ==========
</TABLE>
As of December 31, 1996 and 1997, the Company recorded its deferred tax
assets in prepaid expenses and other current assets in the accompanying
consolidated balance sheets.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has operating leases for its properties, which expire at
various dates through 2005.
Future minimum lease payments under non-cancelable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998 $ 1,087
1999 970
2000 728
2001 740
2002 734
Thereafter through 2005 2,081
---------
Total $ 6,340
=========
</TABLE>
Aggregate rental expenses for operating leases was $743, $1,007 and
$1,069 for the years ended December 31, 1995, 1996 and 1997, respectively.
GUARANTEED ROYALTIES
For the years ended December 31, 1995, 1996 and 1997, the Company
incurred $907, $3,273 and $3,761, respectively in royalty expense. License
agreements for certain copyrights and trademarks require minimum guaranteed
royalty payments over the respective terms of the licenses. As of December 31,
1997, the Company was committed to pay total minimum guaranteed royalties as
follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998 $ 782
1999 750
2000 4,535
---- ---------
Total $ 6,067
=========
</TABLE>
28
<PAGE> 29
EMPLOYMENT AGREEMENTS
The Company has employment agreements with several key executives.
Guaranteed compensation under these agreements is as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998 $ 1,400
1999 850
2000 400
2001 400
---------
Total $ 3,050
=========
</TABLE>
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings generally incidental
to its business. While the result of any litigation contains an element of
uncertainty, management presently believes that the outcome of any known,
pending or threatened legal proceeding or claim, individually or combined, will
not have a material adverse effect on the Company's financial position or
results of operations.
10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company's revenues are highly dependent on obtaining major
contracts from a limited number of customers. Approximately 68%, 69% and 67% of
the Company's revenues for the years ended December 31, 1995, 1996 and 1997,
respectively, were from one customer.
Information about the Company's operations by geographical area is as
follows:
<TABLE>
<CAPTION> AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Revenues:
United States $65,630 $ 99,938 $117,701
International 18,385 11,809 28,807
------- -------- --------
Total revenues $84,015 $111,747 $146,508
======= ======== ========
Income from operations:
United States $ 5,882 $ 10,873 $ 12,316
International 1,070 542 2,809
------- -------- --------
Total operating income $ 6,952 $ 11,415 $ 15,125
======= ======== ========
Identifiable assets:
United States $25,592 $ 36,792 $ 56,665
International 670 401 488
------- -------- --------
Total identifiable assets $26,262 $ 37,193 $ 57,153
======= ======== ========
</TABLE>
11. RELATED PARTY TRANSACTIONS
During 1995, 1996 and 1997, the Company paid legal fees of
approximately $104, $447 and $160, respectively, to a law firm, one of whose
partners is a director of the Company.
29
<PAGE> 30
12. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Revenues $ 21,650 $ 46,665 $ 27,597 $ 50,596
Gross profit $ 5,803 $ 11,249 $ 7,469 $ 11,479
Net income $ 1,142 $ 3,408 $ 1,448 $ 3,625
Net income per share:
Basic $ 0.20 $ 0.57 $ 0.24 $ 0.61
Diluted $ 0.19 $ 0.55 $ 0.23 $ 0.57
Weighted average shares
outstanding:
Basic 5,848,226 5,927,055 5,956,307 5,966,398
Diluted 6,152,751 6,203,964 6,289,128 6,318,001
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Revenues $ 18,173 $ 38,443 $ 20,099 $ 35,032
Gross profit $ 4,459 $ 9,509 $ 5,821 $ 8,360
Net income $ 1,038 $ 2,818 $ 1,158 $ 2,429
Net income per share:
Basic $ 0.19 $ 0.51 $ 0.21 $ 0.43
Diluted $ 0.18 $ 0.48 $ 0.20 $ 0.40
Weighted average shares
outstanding:
Basic 5,531,919 5,572,028 5,559,539 5,709,731
Diluted 5,885,301 5,918,346 5,924,223 6,082,315
</TABLE>
Summarized Quarterly Financial Data has been restated for the interim
periods ended December 31, 1996 to comply with SFAS No. 128. Under SFAS No. 128,
primary EPS has been replaced by "Basic" EPS and fully diluted EPS has been
replaced by "Diluted EPS."
30
<PAGE> 31
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 31ST DAY OF MARCH, 1998.
EQUITY MARKETING, INC.
By: /s/ Donald A. Kurz
-------------------------------------
Donald A. Kurz
President, Co-Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Stephen P. Robeck Chairman, Co-Chief Executive March 31, 1998
- ---------------------- Officer and Director (Principal
Stephen P. Robeck Executive Officer)
/s/ Donald A. Kurz President, Co-Chief Executive March 31, 1998
- ---------------------- Officer and Director
Donald A. Kurz (Principal Executive Officer)
/s/ Michael J. Welch Executive Vice President and Chief March 31, 1998
- ---------------------- Financial Officer (Principal
Michael J. Welch Financial and Accounting Officer)
/s/ Bruce Raben Director March 31, 1998
- ----------------------
Bruce Raben
/s/ Merrill M. Kraines Director March 31, 1998
- ----------------------
Merrill M. Kraines
/s/ Lawrence Elins Director March 31, 1998
- ----------------------
Lawrence Elins
31
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
2.0 Amended and Restated Plan of Merger.(7) -
3.1 Certificate of Incorporation.(8) -
3.2 Bylaws.(8) -
10.1 Equity Marketing, Inc. Stock Option Plan. (1) -
10.2 Non-Employee Director Stock Option Plan. (1) -
10.3 Agreement of Lease, dated January 3, 1995, between Wide Harvest
Investment Ltd. and Equity Marketing Hong Kong, Ltd. (5) -
10.4 Loan Forgiveness Agreements, dated September 27, 1991, between
Equity Marketing, Inc. and Donald A. Kurz. (1) -
10.5 Tax indemnification Agreement, dated October 1, 1993, among
Stephen P. Robeck, Donald A. Kurz and Equity Marketing, Inc. (1) -
10.6 Form of Representative's Warrant Agreement between Equity
Marketing, Inc. and Josephthal, Lyon & Ross Incorporated. (1) -
10.7 Form of Director's and Officer's Indemnification Agreement. -
10.8 Form of Indemnification Agreement between Equity Marketing, Inc.
and Josephthal, Lyon & Ross Incorporated. (1) -
10.9 Equity Marketing Inc. Non-Employee Director Stock Option Plan.
(9) -
10.10 Stock Purchase Agreement, dated September 27, 1991, among Equity
Marketing, Inc., Black Rock Licensing, Inc., M 101 Limited and
Martin D. Kornblum. (1) -
10.11 Non-Compete and Rights Agreement, dated September 27, 1991,
among Equity Marketing, Inc., Black Rock Licensing, Inc., M 101
Limited and Martin D. Kornblum. (1) -
10.12 Promissory Notes, dated September 27, 1991, issued by Donald A.
Kurz to Equity Marketing, Inc. (1) -
10.13 Reimbursement Agreement, dated October 1, 1993, among Donald A.
Kurz, Stephen P. Robeck and Equity Marketing. (1) -
10.14 Agreement of lease dated April 12, 1995 between Rodeo Wilshire
Realty, Inc. and Equity Marketing, Inc. (6) -
10.15 Credit Agreement dated January 26, 1996 between Equity
Marketing, Inc., Sanwa Bank California, and Imperial Bank. (8) -
10.16 Equity Marketing, Inc. Deferred Compensation Plan. (8) -
10.17 Employment agreement dated August 5, 1996 between Equity
Marketing, Inc. and Albert R. Ovadia. (9) -
10.18 Employment agreement dated September 18, 1996 between Equity
Marketing, Inc. and Christopher Reynolds. (9) -
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
10.19 Employment Agreement dated September 18,1996 between Equity
Marketing, Inc. and Meryll L. Reynolds. (9) -
10.20 Employment Agreement dated September 18, 1996 between Equity
Marketing, Inc. and Ronda L Drummond. (9) -
10.21 First amendment to credit agreement dated September 18, 1996
between Equity Marketing, Inc., Sanwa Bank California and
Imperial Bank. (9) -
10.22 Equity Marketing, Inc. Stock Option Plan. (9) -
10.23 Stock Purchase Agreement dated September 18, 1996 by and among
Equity Marketing, Inc., and the stockholders of EPI Group
Limited. (10) -
10.24 Employment agreement dated January 1, 1997 between Equity
Marketing, Inc. and Donald A. Kurz. (11) -
10.25 Employment agreement dated January 1, 1997 between Equity
Marketing, Inc. and Stephen P. Robeck. (11) -
10.26 Second amendment to credit agreement dated December 31, 1996
between Equity Marketing, Inc., Sanwa Bank California and
Imperial Bank. 35
10.27 Third amendment to credit agreement dated June 30, 1997 between
Equity Marketing, Inc., Sanwa Bank California and Imperial Bank. 38
10.28 Fourth amendment to credit agreement dated March 18, 1998
between Equity Marketing, Inc., Sanwa Bank California and
Imperial Bank. 41
10.29 Agreement of Lease, dated January 3, 1995, between Wide Harvest
Investment Ltd. and Equity Marketing Hong Kong, Ltd. 46
10.30 Equity marketing, Inc. Stock Option Plan. 76
10.31 Equity Marketing Inc. Non-Employee Director Stock Option Plan 80
21. Subsidiaries of the Registrant. 83
23. Consent of Arthur Andersen LLP. 84
27.1997 Financial Data Schedule. 85
27.1996 Restated Financial Data Schedule for fiscal year 1996. 86
27.1995 Restated Financial Data Schedule for fiscal year 1995. 87
27.1997.1Q Restated Financial Data Schedule for first quarter 1997. 88
27.1997.2Q Restated Financial Data Schedule for second quarter 1997. 89
27.1997.3Q Restated Financial Data Schedule for third quarter 1997. 90
27.1996.1Q Restated Financial Data Schedule for first quarter 1996. 91
27.1996.2Q Restated Financial Data Schedule for second quarter 1996. 92
27.1996.3Q Restated Financial Data Schedule for third quarter 1996. 93
</TABLE>
- ---------------------------
(1) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (Registration Statement No. 33-67778), which is
incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Statement on Form
10-K for the year ended December 31, 1993, which is incorporated herein
by reference.
(3) Previously filed as an exhibit to the Registrant's Statement on Form
10-Q for the quarterly period ended June 30, 1994, which is
incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Statement on Form
10-Q for the quarterly period ended September 30, 1994, which is
incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Statement of Form
10-K for the year ended December 31, 1994, which is incorporated herein
by reference.
(6) Previously filed as an exhibit to the Registrant's Statement on Form
10-Q for the quarter ended March 31, 1995, which is incorporated herein
by reference.
(7) Previously filed as an exhibit to the Registrant's Statement on Form
10-Q for the quarter ended June 30, 1995, which is incorporated herein
by reference.
(8) Previously filed as an exhibit to the Registrant's Statement on Form
10-K for the year ended December 31, 1995, which is incorporated herein
by reference.
33
<PAGE> 34
(9) Previously filed as an exhibit to the Registrant's Statement on Form
10-Q for the quarter ended September 30, 1996, which is incorporated
herein by reference.
(10) Previously filed as an exhibit to the Registrant's Current Report on
Form 8-K/A filed with the Securities and Exchange Commission which is
incorporated herein by reference.
(11) Previously filed as an exhibit to the Registrant's Statement on Form
10-Q for the quarter ended June 30, 1997, which is incorporated herein
by reference.
34
<PAGE> 1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Second
Amendment") is made and dated as of the 31st day of December, 1996, by and among
SANWA BANK CALIFORNIA ("Sanwa") and IMPERIAL BANK, as the current Lenders under
the Credit Agreement referred to below (and as the term "Lenders" and
capitalized terms not otherwise defined herein are used in the Credit
Agreement), SANWA, in its capacity as Agent for the Lenders, and EQUITY
MARKETING, INC., a Delaware corporation (the "Company").
RECITALS
A. Pursuant to that certain Credit Agreement dated as of January
26, 1996, by and among the Agent, the Lenders and the Company (as amended from
time to time, the "Credit Agreement"), the Lenders agreed to extend credit to
the Company on the terms and subject to the conditions set forth therein.
B. Subject to the terms and conditions of the First Amendment to
the Credit Agreement and Consent to Acquisition dated as of the 18th day of
September, 1996 (the "First Amendment"), the Lenders consented, in accordance
with Paragraph 8(d) of the Credit Agreement, to the acquisition by the Company
of the outstanding capital stock of EPI Group Limited ("EPI").
C. Among those terms and conditions was that EPI have no further
business or operations and have no trade debt by December 31, 1996.
D. The Company has requested that such date be extended until
June 30, 1997.
E. The Agent and the Lenders have agreed to such extension and
desire to set forth herein the terms and conditions of such agreement and to
amend the Credit Agreement in certain respects as set forth more particularly
below.
NOW, THEREFORE, in consideration of the foregoing Recitals and
for other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Modification of Representation and Warranty re EPI. Effective
as of the date hereof, the representation and warranty made by the Company
pursuant to Paragraph 1 of the First Amendment to the effect that "EPI will have
no further business or operations by December 31, 1996" is hereby amended to
delete the date "December 31, 1996" appearing therein and to replace the same
with the date "June 30, 1997".
1
<PAGE> 2
2. Amendment to Credit Agreement. Effective as of the date
hereof, the parenthetical "(or, in the case of EPI, trade debt existing on the
date of conslummation of the acquisition of the outstanding capital stock of EPI
by the Company which is satisfied in full no later than December 31, 1996)"
added to Paragraph 8(b)(3) of the Credit Agreement pursuant to the First
Amendment is hereby amended to delete the date "December 31, 1996" appearing
therein and to replace the same with the date "June 30, 1997".
3. Reaffirmation of Security Agreement. The Company hereby
affirms and agrees that (a) the execution and delivery by the Company of and the
performance of its obligations under this Second Amendment shall not in any way
amend, impair, invalidate or otherwise affect any of the obligations of the
Company or the rights of the Secured Parties under the Security Agreement or any
other document or instrument made or given by the Company in connection
therewith, (b) the term "Obligations" as used in the Security Agreement
includes, without limitation, the Obligations of the Company under the Credit
Agreement as amended hereby and (c) the Security Agreement remains in full force
and effect.
4. Effective Date. This Second Amendment shall be retroactively
effective as of the date hereof on and after the date that the Agent receives
duly executed signature pages for this Second Amendment from each party hereto;
5. Representations and Warranties. The Company hereby represents
and warrants to the Agent and the Lenders as follows:
(a) The Company has the corporate power and authority and
the legal right to execute, deliver and perform this Second Amendment and has
taken all necessary corporate action to authorize the execution, delivery and
performance of this Second Amendment. This Second Amendment has been duly
executed and delivered on behalf of the Company and constitute the legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms.
(b) At and as of the date of execution hereof and at and
as of the effective date of this Second Amendment and both prior to and after
giving effect hereto: (i) the representations and warranties of the Company
contained in the Credit Agreement and the other Loan Documents are accurate and
complete in all respects, and (ii) there has not occurred an Event of Default or
Potential Default.
6. No Other Amendment. Except as expressly amended hereby, the
Loan Documents shall remain in full force and effect as written and amended to
date.
7. Counterparts. This Second Amendment may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and all of which
2
<PAGE> 3
when taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed as of the day and year first above written.
EQUITY MARKETING, INC.,
a Delaware corporation
By: /s/ WILLIAM M. KING
--------------------------------
Name: William M. King
------------------------------
Title: Vice President, Finance
-----------------------------
SANWA BANK CALIFORNIA, as Agent and as a
Lender
By: /s/ JOHN C, HYCHE
---------------------------------
Name: John C. Hyche
-------------------------------
Title: Vice President
------------------------------
IMPERIAL BANK, as a Lender
By: /s/ JEFF COLVIN
---------------------------------
Name: Jeff Colvin
-------------------------------
Title: Senior Vice President
------------------------------
3
<PAGE> 1
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is
made and dated as of the 30th day of June, 1997, by and among SANWA BANK
CALIFORNIA ("Sanwa") and IMPERIAL BANK, as the current Lenders under the Credit
Agreement referred to below (and as the term "Lenders" and capitalized terms not
otherwise defined herein are used in the Credit Agreement), SANWA, in its
capacity as Agent for the Lenders, and EQUITY MARKETING, INC., a Delaware
corporation (the "Company").
RECITALS
A. Pursuant to that certain Credit Agreement dated as of January
26, 1996, by and among the Agent, the Lenders and the Company (as amended from
time to time, the "Credit Agreement"), the Lenders agreed to extend credit to
the Company on the terms and subject to the conditions set forth therein.
B. The Company, the Agent and the Lenders desire to modify the
Credit Agreement in certain respects as set forth more particularly below.
NOW, THEREFORE, in consideration of the foregoing Recitals and
for other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Increase in Permitted Capital Expenditures. To reflect the agreement
of the parties to an increase in permitted Capital Expenditures in fiscal year
1997, Paragraph 8(n) of the Agreement is hereby amended to read in its entirety
as follows:
"8(n) Capital Expenditures. And shall not permit any
Subsidiary to, make or commit to make (by way of acquisition of the
securities of any Person or otherwise), Capital Expenditures, taken in the
aggregate for the Company and its consolidated Subsidiaries, in excess of
$1,500,000.00 during fiscal 1997 or $500,000.00 during any fiscal year
thereafter."
2. Reaffirmation of Security Agreement. The Company hereby affirms and
agrees that (a) the execution and delivery by the Company of and the performance
of its obligations under this Amendment shall not in any way amend, impair,
invalidate or otherwise affect any of the obligations of the Company or the
rights of the Secured Parties under the Security Agreement or any other document
or instrument made or given by the Company in connection therewith, (b) the term
"Obligations" as used in the Security Agreement includes, without limitation,
the Obligations of the Company under the Credit Agreement as amended hereby and
(c) the Security Agreement remains in full force and effect.
<PAGE> 2
3. Effective Date. This Amendment shall be effective as of the date that
the Agent receives duly executed signature pages for this Amendment from each
party hereto.
4. Representations and Warranties. The Company hereby represents and
warrants to the Agent and the Lenders as follows:
(a) The Company has the corporate power and authority and the
legal right to execute, deliver and perform this Amendment and has taken all
necessary corporate action to authorize the execution, delivery and performance
of this Amendment. This Amendment has been duly executed and delivered on behalf
of the Company and constitutes the legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their respective
terms.
(b) At and as of the date of execution hereof and at and as of
the effective date of this Amendment and both prior to and after giving effect
hereto: (i) the representations and warranties of the Company contained in the
Credit Agreement and the other Loan Documents are accurate and complete in all
respects, and (ii) there has not occurred an Event of Default or Potential
Default.
5. No Other Amendment. Except as expressly amended hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
EQUITY MARKETING, INC.,
a Delaware corporation
By: /s/ WILLIAM M. KING
---------------------------------
Name: William M. King
-------------------------------
Title: Vice President, Finance
------------------------------
<PAGE> 3
SANWA BANK CALIFORNIA, as Agent and as a
Lender
By: /s/ JOHN C. HYCHE
---------------------------------
Name: John C. Hyche
-------------------------------
Title: Vice President
------------------------------
IMPERIAL BANK, as a Lender
By: /s/ JEFF COLVIN
---------------------------------
Name: Jeff Colvin
-------------------------------
Title: Senior Vice President
------------------------------
<PAGE> 1
Exhibit 10.28
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made and
dated as of the 18th day of March, 1998, by and among SANWA BANK CALIFORNIA
("Sanwa") and IMPERIAL BANK, as the current Lenders under the Credit Agreement
referred to below (and as the term "Lenders" and capitalized terms not otherwise
defined herein are used in the Credit Agreement), SANWA, in its capacity as
Agent for the Lenders, and EQUITY MARKETING, INC., a Delaware corporation (the
"Company").
RECITALS
A. Pursuant to that certain Credit Agreement dated as of January 26,
1996, by and among the Agent, the Lenders and the Company (as amended from time
to time, the "Credit Agreement"), the Lenders agreed to extend credit to the
Company on the terms and subject to the conditions set forth therein.
B. The Company, the Agent and the Lenders desire to modify the Credit
Agreement in certain respects as set forth more particularly below.
NOW, THEREFORE, in consideration of the foregoing Recitals and for
other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Extension of Maturity Date. To reflect the agreement of the parties
to extend the term of the Credit Agreement, effective as of the Effective Date
(as defined in Paragraph 8 below) the definition of "Maturity Date" as set forth
in Paragraph 12 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"'Maturity Date' shall mean the earlier of: (a) June 30, 2000,
and (b) the date the Lenders terminate their obligation to make further
Loans hereunder pursuant to Paragraph 9 above."
2. Interest Rate. To reflect the agreement of the parties to reduce the
interest rate applicable to COF Loans and Reference Rate Loans, effective as of
the Effective Date:
(a) The definition of "Applicable COF Rate" as set forth in
Paragraph 12 of the Credit Agreement is hereby amended in its entirety to read
as follows:
"'Applicable COF Rate' shall mean with respect to any Interest
Period, the COF Rate for such Interest Period plus one and
three-quarters percent (1.75%)."
1
<PAGE> 2
(b) Paragraph 1(b) of the Credit Agreement is hereby amended to
delete the words "plus one-quarter of one percent (0.25%)" appearing in
subsection (2) thereof.
3. Document Supported Loans. To reflect the agreement of the parties to
liberalize the conditions under which a Product Acceptance Certificate is
required to be furnished to the Agent, effective as of the Effective Date the
definition of "Document Supported Loan" as set forth in Paragraph 12 of the
Credit Agreement is hereby amended to read in its entirety as follows:
"'Document Supported Loan' shall mean a Loan funded on any
date on which the principal amount of outstanding Loans and Outstanding
Letters of Credit, whether prior to or as a result of funding of such
Loan, is or will be greater than $15,000,000.00."
4. Reports. To reflect the agreement of the parties to modify the
timing requirements for delivery certain reports are required to be furnished to
the Agent and the Lenders, effective as of the Effective Date Paragraph 7(b)(2)
of the Credit Agreement is hereby amended to read in its entirety as follows:
"(2) No later than the forty-fifth day following the end of
each fiscal quarter, an aged accounts receivable trial balance and an
aged accounts payable trial balance in a form reasonably acceptable to
the Agent;"
5. Permitted Acquisitions. To reflect the agreement of the parties to
increase the aggregate dollar amount of acquisitions permitted during the term
of the Credit Agreement without the need for obtaining consent of the Agent and
the Lenders thereto, Paragraph 8(d) of the Credit Agreement is hereby amended to
delete the dollar amount "$1,000,000.00" appearing therein and to replace the
same with the dollar amount "$2,000,000.00".
6. Financial Covenants. To reflect the agreement of the parties to
modify certain of the financial covenants contained in the Credit Agreement,
effective as of the Effective Date:
(a) Paragraph 8(i) of the Credit Agreement is hereby amended to
read in its entirety as follows:
"8(i) Minimum Tangible Net Worth. Permit:
(1) The Company's Tangible Net Worth as of the last day
of any calendar quarter, commencing September 30, 1998, to be less than
the sum of: (i) $20,000,000.00, plus (ii) on a cumulative basis (with
no deduction for losses) for each calendar quarter after September 30,
1998, (y) seventy-five percent (75%) of the Company's Net Profit After
Taxes during such calendar quarter plus (z) seventy-five percent (75%)
of the net proceeds of any additional equity shares or Subordinated
Debt issued by the Company; or
(2) The Company's consolidated Tangible Net Worth as of
the last day of any calendar quarter, commencing September 30, 1998, to
be less than the sum of (i) $20,000,000.00, plus (ii) on a cumulative
basis (with no deduction for losses) for each
2
<PAGE> 3
calendar quarter after September 30, 1998, (y) seventy five percent
(75%) of the Company's consolidated Net Profit After Taxes during such
calendar quarter plus (z) seventy five percent (75%) of the net
proceeds of any additional equity shares or Subordinated Debt issued by
the Company or its Subsidiaries."
(b) Paragraph 8(j) is hereby amended to read in its entirety as
follows:
"8(j) Ratio of Total Liabilities to Net Worth.
(1) Permit: (i) the Company's ratio of Total Liabilities
(including Outstanding Letters of Credit) to Tangible Net Worth, or
(ii) the Company's ratio of consolidated Total Liabilities (including
Outstanding Letters of Credit) to consolidated Tangible Net Worth as of
the last day of any calendar quarter to be more than 3.00:1; or
(2) Permit: (i) the Company's ratio of Total Liabilities
(excluding Outstanding Letters of Credit) to Tangible Net Worth, or
(ii) the Company's ratio of consolidated Total Liabilities (excluding
Outstanding Letters of Credit) to consolidated Tangible Net Worth as of
the last day of any calendar quarter to be more than 2.25:1.00."
(c) Paragraph 8(k) is hereby amended to read in its entirety as
follows:
"8(k) Minimum Current Ratio. Permit: (1) the Company's ratio
of Current Assets to Current Liabilities (excluding Indebtedness
permitted under Paragraph 8(b)(7) above), or (2) the Company's ratio of
consolidated Current Assets to consolidated Current Liabilities
(excluding Indebtedness permitted under Paragraph 8(b)(7) above), to be
less than 1.25:1.00 at and as of the last day of any calendar quarter."
(d) Paragraph 8(n) is hereby amended to read in its entirety as
follows:
"8(n) Capital Expenditures. And shall not permit any
Subsidiary to, make or commit to make (by way of acquisition of the
securities of any Person or otherwise), Capital Expenditures, taken in
the aggregate for the Company and its consolidated Subsidiaries, in
excess of $2,000,000.00 during fiscal 1998 or any fiscal year
thereafter."
7. Reaffirmation of Security Agreement. The Company hereby affirms and
agrees that (a) the execution and delivery by the Company of and the performance
of its obligations under this Amendment shall not in any way amend, impair,
invalidate or otherwise affect any of the obligations of the Company or the
rights of the Secured Parties under the Security Agreement or any other document
or instrument made or given by the Company in connection therewith, (b) the term
"Obligations" as used in the Security Agreement includes, without limitation,
the Obligations of the Company under the Credit Agreement as amended hereby and
(c) the Security Agreement remains in full force and effect.
8. Effective Date. This Amendment shall be effective, retroactive to
March 18, 1998 (the "Effective Date"), as of the date that the Agent receives
duly executed signature pages for this Amendment from each party hereto.
3
<PAGE> 4
9. Representations and Warranties. The Company hereby represents and
warrants to the Agent and the Lenders as follows:
(a) The Company has the corporate power and authority and the legal
right to execute, deliver and perform this Amendment and has taken all necessary
corporate action to authorize the execution, delivery and performance of this
Amendment. This Amendment has been duly executed and delivered on behalf of the
Company and constitute the legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms.
(b) At and as of the date of execution hereof and at and as of the
Effective Date of this Amendment and both prior to and after giving effect
hereto: (i) the representations and warranties of the Company contained in the
Credit Agreement and the other Loan Documents are accurate and complete in all
respects, and (ii) there has not occurred an Event of Default or Potential
Default.
10. No Other Amendment. Except as expressly amended hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
11. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
EQUITY MARKETING, INC.,
a Delaware corporation
By: /s/ WILLIAM M. KING
--------------------------------------------
Name: William M. King
------------------------------------------
Title: Vice President, Finance
-----------------------------------------
SANWA BANK CALIFORNIA, as Agent and as a Lender
By: /s/ ROBERT G. MOORE
-------------------------------------------
Name: Robert G. Moore
-----------------------------------------
Title: Vice President
----------------------------------------
IMPERIAL BANK, as a Lender
By: /s/ JEFF COLVIN
-------------------------------------------
Name: Jeff Colvin
-----------------------------------------
Title: Senior Vice President
----------------------------------------
4
<PAGE> 5
<PAGE> 1
OFFICE PREMISES
DATED DECEMBER
1, 1997.
WIDE HARVEST INVESTMENT LIMITED
and
EQUITY MARKETING HONG KONG, LTD.
*************************************************
TENANCY AGREEMENT
of
Suite Nos. 10,11,12,13 and Store Room A
on the 19th Floor of Tower 3, China Hong Kong City,
China Ferry Terminal, Canton Road, Kowloon.
*************************************************
BAKER & McKENZIE
Solicitors
1401 Hutchison House
Hong Kong
<PAGE> 2
AN AGREEMENT made the first day of December One thousand nine
hundred and ninety-seven
Parties BETWEEN WIDE HARVEST INVESTMENT LTD whose registered
office is situate at 11th-12th Floor, Tsim Sha Tsui Centre,
Salisbury Road, Kowloon, Hong Kong (hereinafter called "the
Landlord which expression shall include its successors and
assigns") of the one part and the person, firm or company
set out in Part I of the First Schedule hereto (hereinafter
called "the Tenant") of the other part.
WHEREBY IT IS AGREED as follows :-
Premises 1. In consideration of the rent hereinafter
mentioned and of the terms by the Tenant hereinafter
contained the Landlord hereby lets and the Tenant hereby
takes ALL THAT Portion of the building as set out in Part II
of the First Schedule hereto forming part of the Office
Towers of CHINA HONG KONG CITY, CHINA FERRY TERMINAL Canton
Road, Kowloon, Hong Kong (hereinafter referred to as "the
said building") (which said Portion for the purpose of
identification only is delineated and described on the Plan
hereto annexed and thereon coloured Pink and marked "P")
(hereinafter called "the said premises") standing on ALL
THAT piece or parcel of ground registered in the Land
Registry as KOWLOON INLAND LOT NO. 10743 TOGETHER with the
use and enjoyment in common with the Landlord and/the other
persons entitled thereto of the entrances, staircases,
landings, lavatories, corridors and passages in the said
building insofar as the same are necessary for the proper
use and enjoyment of the said premises AND TOGETHER with the
use in common with others having the like right of the lifts
escalators and central air-conditioning services serving the
said premises whenever the same shall be operating for the
term defined in Part III of the First Schedule hereto ("the
said term") YIELDING AND PAYING therefor throughout the term
such rent and other charges as are from time to time payable
in advance and in accordance with the Provisions set out in
the Second Schedule and subject to the Tenant's use,
occupation and enjoyment of the said premises only for the
purposes set out in Part IV of the First Schedule hereto and
not for any other purposes whatsoever.
Rental deposit 2. The Tenant shall on the signing hereof
deposit with the Landlord the sum specified in Part V of the
First Schedule hereto (adjusted where necessary in the
manner hereinafter provided) and security for the due
payment of the said rent and the due observance and
performance of the terms conditions and stipulations herein
contained and on the part of the Tenant to be observed and
performed and the said deposit shall be retained by the
Landlord throughout the said term free of any interest to
the Tenant with power for the Landlord without prejudice to
any other right or remedy hereunder to deduct therefrom the
amount of any rent, surcharge or other payments fall due
under this Agreement and subject as aforesaid the same or
the balance thereof after satisfaction of the amount of any
costs, expenses, loss or damage sustained by the Landlord as
a result of any non-observance or non-performance by the
Tenant of any such agreement stipulation or condition shall
be returned to the Tenant without compensation or interest
within 45 days
<PAGE> 3
after the Tenant shall have delivered up vacant possession
of the said premises pursuant to Clause 5(j) hereof PROVIDED
that any sum already paid by way of part payment on account
of the deposit shall be automatically transferred as part
payment of the monies payable under this Clause and only the
balance shall then be payable at the time stipulated herein
but without prejudice to the Landlord's rights to claim any
further damages which the Landlord has sustained or may
sustain.
3. The Tenant to the intent that the obligations hereunder
shall continue throughout the said term of tenancy hereby
agrees with the Landlord as follows :
Rent and (a) (i) To pay the said rent and surcharge on the
surcharge days in manner aforesaid without any
deduction or set-off.
Computation of (ii) If the day on which the rent, surcharge or
time of payment other payments falls due under this
Agreement is a public holiday, the
relevant payment of rents, surcharge or
otherwise shall be due and payable on
the preceding business day.
(iii) The Landlord is not obliged to accept
payment of amounts payable hereunder in
any form other than banknotes and if
payment is made by the Tenant by cheque,
such cheque must reach the office of the
Landlord before 3:30 o'clock in the
afternoon if such payment is made on any
weekday except Saturday, and before 12
noon if such payment is made on a
Saturday otherwise the payment shall be
deemed to have been paid by the Tenant
on the following day and the Tenant
shall be deemed to have defaulted in
making due payment.
Adjustment of (iv) If at any time during the said term the
charges operating cost relative to the supply of
the said air-conditioning and/or the
costs and expenses of management of the
said building shall have risen over
costs prevailing at the commencement of
the said term the Landlord shall be
entitled to serve one month's notice in
writing upon the Tenant to increase the
said surcharges or any of them by
appropriate amount(s) and thereafter
such increased charges shall prevail.
Further increase shall be made in the
same manner in the event of costs rising
after an earlier notice of increase
shall have become operative. The
Landlord's assessments of the
appropriate increase shall be conclusive
and binding on the Tenant.
Additional air- (v) If the Tenant shall require air-
conditioning conditioning outside the hours set out in
charges Clause 4(c) hereof, the same can normally
be provided on not less than 48 hours
notice in writing stipulating at what
time the Tenant shall require additional
air-conditioning the Landlord at such
adjusted rates as may be charged by the
Landlord from time to time.
<PAGE> 4
(vi) Should the surcharge be increased in
accordance with the provisions of Clause
3(a)(iv) of this Agreement or should
there be any other increase in the rent
during the term, the Tenant shall upon
such increase becoming applicable pay to
the Landlord by way of an increase in
the said deposit a sum proportional
thereto in order to restore the ratio of
deposit to the rent plus the surcharge
to that previously subsisting and the
payment of such increase should be a
condition precedent to the continuation
of this tenancy.
Rates (b) (i) To pay and discharge punctually during the
said term all rates, Government rent,
taxes, assessments, duties, charges,
impositions and outgoings of an annual
or recurring nature whatsoever now or
hereafter to be assessed imposed or
charged on the said premises or upon the
owner or occupier in respect thereof by
the Hong Kong Government or other lawful
authority (Property Tax only excepted).
(ii) In the event that an assessment to rates
in respect of the said premises shall be
raised directly upon the Landlord the
Landlord shall during the month
immediately preceding any quarter in
respect of which such rates may fall due
be at liberty to debit the Tenant with
the amount thereof and the same shall
forthwith be paid by the Tenant to the
Landlord whereupon the Landlord shall
account for the same to the Government
of Hong Kong.
(iii) In the event that no valuation of the said
premises shall have been made in
accordance with the Rating Ordinance
(Cap.116) or any statutory amendment or
modification thereof for the time being
in force the Landlord shall be at
liberty and entitled to make an interim
valuation equivalent to 7.5% of the
annual rents of the said premises and to
debit the Tenant with the amount which
would be payable upon such interim
valuation and the same shall forthwith
be paid by the Tenant to the Landlord
and any over-payment or under-payment by
the Tenant on such interim valuation
shall be adjusted when a valuation under
the Rating Ordinance shall have been
made known.
(iv) The Landlord shall be entitled to treat
non-payment of any amount debited to the
Tenant in accordance with the foregoing
provisions of this Clause or any part
thereof in all respects as non-payment
of rent under this Agreement.
Water, gas and (c) To pay and discharge punctually during the said
electricity charges term all charges (including all necessary
deposits) in respect of water, gas, electric
light, power and telephones as may be shown by the
separated meter
<PAGE> 5
or meters installed upon the said premises or by
accounts rendered to the Tenant.
Cleaning charges (d) To keep the said premises in clean and sanitary
condition and to employ cleaning contractors for
the said premises which cleaning contractors shall
be only such persons or such firm as may be
nominated by the Landlord. Such cleaning
contractors shall be employed at the sole expense
of the Tenant and at the rate agreed by the
Landlord with the contractors and on such terms
and conditions which shall have been previously
approved by the Landlord, all such payments to be
made by the Tenant to such contractors direct. In
case the Tenant shall have for disposal wet
garbage or any garbage of a perishable nature
including but not limited to food or food remains,
the Tenant shall use plastic bags of such
standards, size and thickness as shall be
prescribed by the Landlord for the removal or
disposal of such garbage and shall direct and
procure cleaning contractors appointed as
aforesaid to use such plastic bags for such
purposes at the sole costs of the Tenant.
Interior Fitting out (e) To fit out the interior of the said premises in
accordance with the drawings approved by the
Landlord. The Tenant will not cause or permit to
be made any variation to the interior design or
layout of the said premises without the prior
written approval of the Landlord first having been
obtained.
Fitting up (f) To fit up the said premises in a style and manner
appropriate to a first class office building and
so to maintain the same throughout the said term
in good condition and repair to the satisfaction
of the Landlord.
Decoration works (g) To construct at the Tenant's own expense within
the said premises by the Tenant or furnish items
to the said premises as follows:
(i) (a) A ceiling of non-combustible
material and electrical light
fittings. In case of extension or
relocation of the sprinkler heads
and/or the smoke detectors and other
fire services equipment installed by
the Landlord is needed, the cost of
such work will be paid by the Tenant.
(b) Vertical window blinds, tracks and
fittings and Tenant's expenses.
(ii) Paint and decorate the interior of the
said premises.
(iii) Furnish and install floor fill and floor
finishes. PVC tiles shall not be used
unless approved by the Landlord.
<PAGE> 6
(iv) With the relevant plan showing all the
details including but not limiting to
the gauge of wire, etc. duly approved in
writing in advance by the Landlord,
complete all internal electrical and
mechanical installations (heating,
ventilation, air-conditioning, plumbing,
drainage and fire services) of
workmanships and materials of a standard
to the approval of the Landlord.
(v) Furnish and install or arrange for the
installation of telephones as well as
other Tenant's requirements within the
said premises together with such meters
as are necessary to measure the Tenant's
consumption thereof.
(vi) Install, support and connect all
lighting fixtures, including lamps,
switches and wiring, save that in the
case of support involving cutting into
structure prior written approval of the
Landlord will be required.
(vii) Install such fire extinguishers or other
means of fire-fighting equipment inside
the said premises as may be required
from time to time by all relevant
Ordinances and regulations of the Hong
Kong Government.
Telephone System (h) To install at the Tenant's own expense empty
conduits for telephone service to the said
premises. Telephone service to the premises shall
only be installed by the Hong Kong Telephone
Company Limited and the Tenant shall leave pull
wire in all conduits and pay to the Landlord the
expenses incurred in the installation of telephone
jacks and conduits to the said premises.
Electrical Testing (i) To test all circuits for shorts and ground and to
balance loads on all panels.
Pass for Service (j) The Tenant agrees that permanent utility lines
may pass through the ceiling cavity of the said
premises to service other premises and areas in
the said building.
Building Service (k) To employ at the Tenant's expenses only such
& Builder's Work contractors as may be nominated by the Landlord
from time to time for the purpose of designing and
carrying out and installing all the necessary
building services and builder's work as
hereinafter defined in the said premises in manner
as prescribed by the Landlord or its nominated
contractors and in particular to pay the Landlord
vetting fees consultancy fees and relating charges
at the pre-determined scales as set out by the
Landlord. For the purpose of this sub-clause,
subject to amendments/alterations from time to
time and to such extent as the Landlord shall in
its discretion deem appropriate or necessary.
<PAGE> 7
(a) The expression "building services" shall mean all
mechanical and electrical engineering work and
arrangement related to the said premises including
but not confined to electrical air-conditioning,
plumbing, building automation and fire fighting
installation.
(b) The expression "Builders' work" shall mean all
renovation work not specified under "building
service" including but not confined to light
track, light trough and graphic panel.
Submission of (1) (i) All specification, prints, copies and
Information drawing information or materials are to
be furnished by the Tenant as required
by the Landlord and shall be delivered
to the Landlord's office.
(ii) Prior to the commencement of construction
of Tenant's work, the Tenant shall
furnish the Landlord with the following
information and items:
(1) The name and address of the
appointed design/agent for the said
premises.
(2) The name(s) and address(es) of the
general contractor(s) the Tenant
intends to engage in the
construction of Tenant's work
(3) The name and address of the Tenant's
authorized agent/representative, if
any.
(4) The actual commencement date of
interior decoration and the
estimated date of completion of
decoration work, fixturing work, and
date of projected opening.
(iii) The Tenant when notified by the Landlord
has to submit office layout drawing
within 2 weeks to the Landlord for its
approval.
(iv) For the nominated mechanical and electrical
contractors to prepare the corresponding
designs and drawings, the Tenant shall
provide the Landlord the followings:
(1) Three copies of the reflected
ceiling plan with schedule on
voltage, type, wattage, quantity and
location of outlets for all light
fittings and air-conditioning.
(2) Three copies of the floor plan with
partitions.
(3) Three layout prints of all case work
including the
<PAGE> 8
location of all sockets, switches,
fuse box, telephone points, size,
weight and location of safe, if any.
(4) Three sets of elevations to describe
the space with all electric outlets.
Statutes, Codes & (m) The Tenant shall have the sole responsibility to
Ordinances comply with all applicable statutes, codes,
ordinances and other regulations for all work
performed by or on behalf of the Tenant within the
said premises and the Landlord or the Landlord's
agents or representative's approval of plans,
specifications, calculations or of the Tenant's
work shall not constitute any implication,
representation or certification by the Landlord
that the said improvements are in compliance with
said statutes, codes, ordinances, and other
regulations.
Inspection by (n) All Tenant's work shall be subject to the
Landlord inspection of the Landlord, the Landlord's
Architect and Landlord's General Contractor from
time to time during the period in which Tenant's
work aforesaid is being performed.
Reimbursement to (o) The Landlord shall have the right to perform on
Landlord behalf of and for the account of the Tenant, any
of the Tenant's work which the Landlord determines
shall be so performed. Such work shall be limited
to work which the Landlord deems necessary to be
done on an emergency basis, work caused by the
Tenant's fault, and work which pertains to
structural components, the general utility systems
for the said Building and the erection of
temporary safety barricades and temporary signs
during construction.
Good repair of (p) To keep all the interior of the said premises,
interior the flooring and interior plaster or other
finishing material or rendering to walls floors
and ceilings, and the Landlord's fixtures therein
and all addition thereto including doors, window,
electric wires and installations and fittings for
light and power in good clean, tenantable and
proper repair and condition and properly preserved
and painted as may be appropriate when from time
to time required and to so maintain the same at
the expenses of the Tenant and deliver up the same
to the Landlord at the expiration or sooner
determination of the term in such repair and the
like condition (fair wear and tear excepted).
Replacement of (q) To reimburse to the Landlord the cost of
windows replacing all broken and damaged windows door
glass and fixtures within the said premises
whether the same be broken or damaged by the
negligence of the Tenant or owing to circumstances
beyond the control of the Tenant.
<PAGE> 9
Good repairs & (r) To keep all taps lavatories wash basins sinks
replacement of sanitary and water apparatus and other internal
sanitary apparatus pipes and all drains & electrical (if any) in or
wiring belonging to the inside of the said premises
clean and in good order and repair and to keep in
clean and good order and repair all other pipes
and all wires cables conduits fittings and
apparatus within or exclusively serving the said
premises and used for or in connection with the
services of water gas or electricity in the said
premises (fair wear and tear save and excepted)
and to repair or replace the same (including burnt
out fluorescent tubes or light bulbs) at the
expenses of the Tenant if so required by the
Landlord or other competent authority. In the
event of the Tenant failing to proceed diligently
with the necessary repairs or replacements so
required within 14 days after the landlord has
notified the Tenant in writing then the Landlord
may proceed with such repairs or replacement and
recover all costs incurred thereby from the Tenant
as a debt.
Cleansing & (s) In the event of the pipes or drains of the said
Clearing of Drains building becoming choked or stopped up owing to
the careless use by the Tenant its servants agents
licensees invitees the Tenant shall pay the costs
incurred by the Landlord in cleansing and clearing
the same from obstruction.
Entry by Landlord (t) To permit the Landlord or its agents with or
without workmen or other persons authorised by it
and with or without appliances at all reasonable
times to enter into and upon the said premises and
to examine the conditions thereof and thereupon
the Landlord may serve upon the Tenant notice in
writing specifying any repairs necessary to be
done and require the Tenant forthwith to execute
the same and if the Tenant shall not within ten
days after the service of such notice proceed
diligently with the execution of such repairs then
to permit the Landlord to enter upon the said
premises and execute such repairs and the costs
thereof (the amount thereof in case of difference
to be determined by the Landlord's agent) together
with the interest thereon at the rate of 2% per
month calculated from the date on which such costs
are incurred by the Landlord to be paid by the
Tenant shall be a debt due from the Tenant to the
Landlord and be forthwith recoverable by action.
Entry by the (u) To permit the Landlord or its authorised agents at
Landlord to carry all reasonable times to enter the said premises
out repairs and for the purpose of taking inventories of fixtures
take inventories therein and carrying out any repairs therein
provided that in the event of emergency the
Landlord or its authorised agents may without
notice enter the said premises forcibly and the
Tenant shall at its own expense reinstate the
entrance to the said premises to its original
position.
Entry by the (v) To keep all windows and doors of the said premises
Landlord to close closed and to permit the Landlord or its servants
and agents and others from time
<PAGE> 10
Windows and to time during the said term to enter upon the
doors said premises for the purpose of closing any
doors or windows.
Notify Landlord (w) To notify the Landlord in writing of any
of damage accidents to or defects in the water pipes gas
pipes electrical wire or fittings fixtures or
other facilities provided by the Landlord in the
said premises whether or not the Tenant is liable
hereunder for the repair of the same forthwith
upon the Tenant becoming aware whether actually or
constructively of the same arising and to
indemnify the Landlord against any claim made
against the Landlord by any third party and any
loss suffered by the Landlord either directly or
indirectly as a result of any breach by the Tenant
of this provision.
To make good & (x) To make good and pay for all damage caused by the
take care of all Tenant his servants or licensees to any fixtures
articles provided fittings and other articles in the said premises
by Landlord and provided by the Landlord and shall take
reasonable care of the same and shall not remove
any of them from the said premises.
Repair of (y) To permit the Landlord and its duly authorised
neighbouring agents workmen and others appointed by it at all
premises reasonable times during the said term (but upon
giving a reasonable previous notice in writing
save in case of emergency) to enter into and upon
the said premises and to execute any works of
renewal cleansing alteration or repair to any
adjacent or neighbouring premises or to the
building of which the said premises form part.
Combustible or (z) Not to store or bring upon the said premises or
dangerous goods any part thereof any unlicensed arms ammunition
gun-powder spirits saltpetre or kerosene any
articles of a specially combustible inflammable or
unlawful goods or dangerous nature.
Storage of goods (aa) Not to use the said premises or any part thereof
for the storage of goods or merchandise other than
in small quantities consistent with the nature of
the Tenant's business by way of samples and
exhibits.
Insurance against (ab) To indemnify the Landlord against any proceedings
claims loss/damage from actions or demands whatsoever by any person for
Interior Defects loss and damage suffered as a result of the
want of repair of the interior of the said
premises or the spread of fire or the overflow of
water or the escape of any substance or anything
from the said premises due to the default or
negligence of the Tenant its servants agents
licensees or customers; and to effect and maintain
a policy or policies of insurance which should
include the Landlord's properties and fixtures
inside the said premises against the risks
hereinbefore mentioned in a reputable insurance
company to be approved by the Landlord in such
amount as the Landlord may reasonably determine
and to produce to the Landlord the policy or
policies and the receipt on request provided
<PAGE> 11
always that if the Tenant shall at any time fail
to keep such insurance on foot the Landlord may do
all things necessary to effect and maintain such
insurance and any monies expended by the Landlord
for that purpose shall be recoverable from the
Tenant on demand.
Breach of (ac) Not to do or permit to be done anything whereby
Insurance Policy the policy or policies of the insurance of the
said building against damage by fire or other
risks for the time being subsisting may become
void or voidable or whereby the rate of premium
thereon may be increased and the premium and all
expenses incurred by the Landlord in or about any
renewal or such policy or policies rendered
necessary by breach of this term shall be borne by
the Tenant and shall be recoverable from the
Tenant by the Landlord on demand.
Illegal or immoral (ad) Not to use or permit or suffer to be used the said
purposes premises or any part thereof for any illegal or
immoral purposes.
Installation & (ae) (i) To fit out the interior of the said
Alterations premises in accordance with the drawings
approved by the Landlord and not without
the prior written consent of the Landlord
to make any alteration or addition to the
said premises or any part thereof either
internally or externally or to any fixtures
or fittings or electrical wiring or
electrical mechanical or air-conditioning
installations therein or to any item
therein (whether or not of a structural
nature).
(ii) Not to place in or upon any part of the
said premises or the said building any
equipment apparatus machinery or load
likely to or which may cause damage
thereto and not to cause permit or
suffer any load to be placed in any part
of the said premises if the weight of
such load exceeds that permitted from
time to time by the Landlord in using
the said premises or the said building
or any lifts serving the same or any
other thing in or upon the said premises
or the said building.
(iii) Not to install set up or affix or permit
to be installed set up affixed in or
upon the said premises or any part
thereof in any manner whatsoever any
engine machinery or mechanical device or
plant or air-conditioning or heating
system.
(iv) To observe and comply with all rules
regulations and instructions from time
to time prescribed by the Landlord or
its authorised representative or officer
in carrying out any alterations
additions or improvements to the said
premises.
<PAGE> 12
(v) To observe and comply with all rules
regulations and instructions from time
to time prescribed by The China Light &
Power Company Limited or the relevant
authority relating to the electrical
wiring and installation in the said
premises.
(vi) Not to cut maim injure damage alter or
interfere with any of the walls
structural members pipes drains
appurtenances electrical cables wires
fixtures or fittings of or in the said
premises or any part thereof or suffer
or permit the same to be done.
(vii) Not to change or in any way to alter the
standard entrance door provided by the
Landlord for access to and egress from
the said premises without having first
obtained the written consent of the
Landlord therefor.
(viii) Not to install additional locks bolts or
additional fittings to the entrance
doors of the said premises or in any way
to cut or alter the same without having
first obtained the written consent of
the Landlord therefor.
(ix) To display and decorate the show windows
up to a first class standard and in such
manner as not to be offensive to the
Landlord who has the right to require
the removal of any part of the display
as in the Landlord's absolute discretion
considers offensive.
Protection from (af) To take all necessary precautions to protect the
typhoon interior of the said premises against damage by
storm typhoon heavy rainfall or the like and in
particular to ensure all exterior doors and
windows are securely fastened upon the threat of
such adverse weather conditions.
Subletting (ag) Not to assign underlet or otherwise part with the
Assigning possession of the said premises or any part
thereof in any way whether by way of subletting
lending sharing or other means whereby any
organization company firm or person or persons not
a party to this Agreement obtains the use or
possession of the said premises or any part
thereof irrespective of whether any rental or
other consideration is given for such use or
possession and in the event of any such transfer
sub-letting sharing assignment or parting with the
possession of the said premises (whether for
monetary consideration or not) this Agreement
shall absolutely determine and the Tenant shall
forthwith vacate the said premises on notice to
that effect from the Landlord. The Tenancy shall
be personal to the Tenant named in this Agreement
and without in any way limiting the generality of
the foregoing the following acts and events shall,
unless approved in writing by the Landlord, be
deemed to be breaches of this Clause:
<PAGE> 13
(i) In the case of a tenant which is a
partnership the taking in of one or more
new partners whether on the death or
retirement of an existing partner or
otherwise.
(ii) In the case of a tenant who is an
individual (including a sole surviving
partner of a partnership tenant) the
death insanity or disability of that
individual to the intent that no right
to use possess occupy or enjoy the said
premises or any part thereof shall vest
in the executors administrators personal
representatives next of kin trustee or
committee of any such individual.
(iii) In case of a tenant which is a
corporation any take-over reconstruction
amalgamation merger voluntary
liquidation or change in the person or
persons who owns or own a majority of
its voting shares or who otherwise has
or have effective control thereof.
(iv) The giving by the Tenant of a Power of
Attorney or similar authority whereby the
donee of the Power obtains the right to use
posses occupy or enjoy the said premises or
any part thereof or does in fact use
possess occupy or enjoy the same.
(v) The change of the Tenant's business name
without the previous written consent of the
Landlord which consent the Landlord may
give or withhold at its discretion.
Compliance with (ah) To carry out and comply with all ordinances
ordinance, Crown regulations by-laws and rules and all notices and
Lease and Deed of requirements of the appropriate government
Mutual Covenant authorities in connection with or in relation to
the said premises and not to do anything or suffer
or permit anything to be done in contravention of
the provisions of the Conditions of Sales or Crown
Lease and Deed of Mutual Covenant under which the
Landlord holds the said premises and to indemnify
the Landlord against any breach of the terms of
this clause.
Noise (ai) Not to do or permit or suffer to be done upon the
said premises or any part thereof any music noise
(including sound produced by broadcasting from
Television, Radio and any apparatus or instrument
capable of producing or reproducing music and
sound) or other act matter or thing whatsoever
which may be or tend to the nuisance annoyance
damage or disturbance of the Landlord or the
owners tenants lessees or occupiers of any
adjoining or neighbouring premises.
Responsible for (aj) To be wholly responsible for and to indemnify the
acts of servants Landlord against all damage loss or injury
occasioned to the said premises or any part of the
said building or any adjacent or neighbouring
premises to any
<PAGE> 14
agents and person whether directly or indirectly through the
licensees defective or damaged conditions of any part of
the interior of the said premises or any fixtures
fittings wiring or piping therein for the repair
of which the Tenant is responsible hereunder or
through or in any way owing to the spread of fire
or smoke or the leakage or overflow of water
including storm or rain water from the said
premises or any part thereof or through the act
default or neglect of the Tenant or the servants
agents licensees or invitees of the Tenant.
Preparation of (ak) Not to prepare or permit or suffer to be prepared
food any food in the said premises.
Sleeping of (al) Not without the Landlord's prior permission in
domestic use writing, permit any person to remain in the said
premises overnight. Such permission shall only be
given to enable the Tenant to post watchmen to
look after the contents of the said premises,
which shall not be used as sleeping quarters or as
domestic premises within the meaning of the
Landlord and Tenant (Consolidation) Ordinance for
the time being in force.
Installation in (am) Not to lay, install, affix or attach any wiring,
Common Area, cables or other article or thing whatsoever in or
etc. upon any areas or parts of the Building in
common use or in any place which is not hereby
exclusively let to the Tenant.
Obstructions in (an) Not to encumber obstruct or permit to be
common area encumbered or obstructed with any boxes,
packaging, merchandise, rubbish or other articles
or obstructions of any kind or nature at any of
the entrances, exits, staircases, landings,
passages, lifts, escalators, lobbies or other
parts of the said building not included in the
said premises. In addition to any other remedies
which the Landlord may have hereunder, the
Landlord, its servants or agents may without any
prior notice to the Tenant remove any such
obstruction and dispose of the same as they may
think fit without incurring any liability therefor
and the Tenant shall on demand pay to the Landlord
all costs and expenses incurred in such removal.
Signs (ao) Not to affix, erect, attach, exhibit, display or
permit or suffer so to do to be done upon any part
within or on the exterior of the said premises or
to or through any windows thereof any writing
sign, decoration, signboard notice advertisement
placard neon light or other device whether
illuminated or not which may be visible from
outside the said premises except the display of
name-plate or signboard of the Tenant and their
lawful subtenant or licensee at the entrance to
the said premises the size and position of such
name-plate or signboard shall be subject to the
approval of the Landlord. The Landlord or its
authorised agents shall have absolute discretion
in granting or refusing such approval and any
approval to
<PAGE> 15
be granted shall be subject to such conditions as
the Landlord or its authorised agents may think
fit. The landlord or its authorised agents shall
have the right to remove at the cost and expense
of the Tenant any unauthorised writing, sign,
decoration signboard notice advertisement placard
neon light or device affixed or put up or
displayed without the proper approval of the
Landlord or its agents.
Sale by auction or (ap) Not to permit or suffer to be held upon the said
etc. premises any sales by auction, fire, bankruptcy,
closing-down or sale of similar nature or any
discount-type of retail business or any form of
unethical business operation Provided that this
clause shall not preclude genuine promotional,
clearance or periodic seasonal sales.
Movement of safe (aq) Not to move any safe heavy machinery equipment
and heavy and freight bulky matter or fixtures in and out
machinery of the said building during normal office hours
without first obtaining the Landlord's written
consent. The Tenant shall keep the Landlord
indemnified against all damages sustained by any
person or property and for any damages or monies
paid out by the Landlord in settlement of any
claim or judgments as well as legal costs incurred
in connection therewith and all costs incurred in
repairing any damage to the said building or its
appurtenances resulting from movement of any heavy
machinery equipment freight bulky matter or
fixtures. The Tenant requiring to move to and from
the said building such items undertakes at all
times to use the service lifts provided by
Landlord for such purposes and to notify Landlord
and arrange with the Landlord a suitable time for
such deliveries to be effected.
Adjacent (ar) If any excavation or other building works shall be
excavation or made or authorised in the vicinity of said
shoring building, the Tenant shall permit the Landlord his
servants or agents to enter the said premises to
do such work as may be deemed necessary to
preserve the exterior wall of the said building
from injury or damage without any claim for
damages or indemnity against the Landlord.
Floor loading (as) The Tenant shall not place any load upon any
floor of the said premises in excess of the
loading capacity for which the floor is designed.
The Landlord preserves the right to prescribe the
weight and position of all safes and any heavy
articles which must be placed so as to distribute
the weight. Business machines and mechanical
equipment authorised by the Landlord shall be
placed and maintained by the Tenant at the
Tenant's expense in settings sufficient in the
Landlord's judgment to absorb and prevent
vibration noise and annoyance to occupiers of the
other portions of the said building.
Vermin (at) The Tenant shall take all due precautions to
ensure that the said premises do not become
infested with insects or vermin. In the
<PAGE> 16
event of the premises becoming so infested the
Tenant shall pay the cost of extermination as
arranged or approved by the Landlord and the
selected exterminators shall be given full access
to the said premises for such purpose.
Rules and (au) To observe faithfully and comply strictly with
Regulations such reasonable Rules and Regulations as the
Landlord or the Landlord's agents from time to
time prescribe for the proper management and
maintenance of the said premises and the said
building. Notice of any additional Rules or
Regulations shall be given in such manner as the
Landlord may elect. The Rules and Regulations set
out in the Third Schedule hereto and such
additional Rules or Regulations shall constitute
the initial Rules and Regulations binding upon the
Tenant and shall have the same force and effect as
if set out in the body of this agreement.
Keep premises (av) To keep the said premises well and sufficiently
well lighted lighted throughout the business hours of the
Tenant.
No incense to be (aw) Not to burn or permit to be burnt incense in the
burnt said premises or in any part of the said building.
Fire Risk (ax) Not to do or permit any act or thing to be done
which is likely to cause any fire risk or other
hazard in the said building.
Loading & (ay) To ensure that the Tenant's employees servants
Unloading Areas agents or visitors do not obstruct those areas of
the building allocated to temporary vehicle
parking or designated as loading/unloading areas
and at all times comply with the directions of the
Landlord staff and accredited agents in exercising
due control of such areas and the delivery of
goods generally.
Toilet Facilities (az) To use in common with others the lavatories and
washing accommodations and facilities provided by
the Landlord in the said building and not to
permit or suffer the same to be used in any
improper manner or whereby the soil or waste pipes
may become impeded or blocked and at all times to
indemnify the Landlord against liability for
damage by the escape of water thereby caused to
the properties or effects of the tenants or
occupiers of the other part of the said building.
Parking (ba) Not to park in obstruct or otherwise use nor
permit any employee agent or licencee of the
Tenant to park in obstruct or otherwise use these
areas of the said building allocated to the
parking or movement of or access for vehicles or
designated as loading/unloading areas otherwise
than in accordance with the regulations from time
to time made by the Landlord.
<PAGE> 17
Use of building (bb) Not without the previous written consent of the
name Landlord to use or permit to be used the
name/logo or any part of the name/logo of the
Landlord or of the said building or any picture
representation or likeness of the whole or any
part of such name/logo or of the said building or
of the said premises in connection with the
business or operations of the Tenant or for any
purpose whatsoever other than to indicate the
address and place of business of the Tenant.
4. The Landlord hereby agrees with the Tenant as follows : -
Quiet enjoyment (a) To permit the Tenant (duly paying the rent
surcharge and rates and observing and performing
the terms and conditions herein contained) to have
quiet possession and enjoyment of the said
premises during the said term without any
interruption by the Landlord or any person or
persons lawfully claiming through under or in
trust for the Landlord.
Roof and main (b) To amend and repair such defects in the roof,
structure main electricity supply cables, main drain pipes,
main walls and exterior windows frames of the said
building and the lifts and the central
air-conditioning plant therein as the Landlord
shall discover or as the Tenant or other
authorised person or Authority shall by notice in
writing bring to the attention of the Landlord and
to maintain the same in a proper state of repair
and condition at the cost of the Landlord PROVIDED
that the Landlord shall be entitled to be given a
reasonable period of time wherein to view any such
defects and to amend and repair the same.
Air-conditioning (c) To provide and maintain lifts, escalators
services air-conditioning service during the hours of
8:00 o'clock in the forenoon to 6:00 o'clock in
the afternoon on weekdays and during the hours of
8:00 o'clock in the forenoon to 2:00 o'clock in
the afternoon on Saturdays (excluding Sundays and
public holidays). The supply of air-conditioning
shall be controlled and regulated by the Landlord
at its sole discretion, and also such electricity
as is attributable to lights of the entrances,
passages, corridors, staircases, landings and
lavatories PROVIDED however the Landlord shall
neither be liable to pay compensation to the
Tenant in respect of any period during which due
to circumstances beyond the control of the
Landlord the proper operation of the said lifts or
central air-conditioning plant shall be
interrupted as the result of defects, mechanical
failure or breakdown or need for repair or
overhaul, nor shall the Landlord be liable thereby
to grant any abatement of rent and/or
air-conditioning service charge in respect of such
interruption.
Property Tax (d) To pay the Property Tax for the time being
payable in respect of the said premises.
<PAGE> 18
Maintenance of (e) (i) To be responsible for the maintenance
common parts lighting cleaning operating and servicing
of all the common parts of the said
building.
(ii) To carry out all necessary decoration to
the common parts of the said building as
and when the Landlord shall in its
absolute discretion decide the same is
necessary.
(iii) To keep the common parts toilets and other
parts of the said building for common use
clean and in proper condition.
(iv) To use its best endeavours to maintain lifts
escalators fire and security services
equipment air-conditioning plant and other
facilities of the said building in proper
working order.
Directory board (f) To provide and maintain at the main entrances and
in all other appropriate places suitable directory
boards indicating to all persons entering the said
building the whereabouts of the said premises with
the Tenant's name in such uniform lettering or
characters as shall be designated by the Landlord.
For the avoidance of doubt, the expression "the
Tenant's name" herein contained shall mean the
name of the Tenant as set out in First Schedule of
this Agreement and if the Tenant carries on
business under a name other than his own name such
expression shall mean the first of his business
names as the Landlord shall be notified by the
Tenant. For any subsequent change of the name of
the Tenant or his business name which necessitates
the replacement of the directory board or name
plates thereon, the costs for the new directory
boards and the new name plates shall be borne
solely by the Tenant.
5. It is hereby expressly provided as follows :
Default (a) (i) If the rent or the surcharge reserved or
interest thereon, if any, or any part
thereof shall be unpaid (whether
formally or legally demanded or not) for
fifteen days next after any of the days
on which the same ought to have been
paid or in the case of the breach or
non-performance of any of the
stipulations and agreements herein
contained on the part of the Tenant to
be kept done or performed or if the
Tenant shall become bankrupt or go into
liquidation it shall be lawful for the
Landlord at any time thereafter to
re-enter into and upon the said premises
or any part hereof in the name of the
whole and thereupon this Agreement shall
absolutely determine but without
prejudice to the right of action of the
Landlord in respect of any breach by the
Tenant of the terms of this Agreement.
All costs and expenses incurred
<PAGE> 19
by the Landlord in demanding the rent
and the surcharge and other charges (if
the Landlord elects to demand) shall be
paid by the Tenant and shall be
recoverable from him as a debt.
(ii) Notwithstanding anything hereinbefore
contained in the event of default in
payment of rent and the surcharge on the
date on which the same falls due for
payment, the Tenant shall further pay to
the Landlord on demand interest on the
amount in arrears at the rate of (1.5%) per
month calculated from the date on which the
same became due for payment (as stipulated
in Clause 1 hereof) until the date of
payment as liquidated damages and not as
penalty provided that the demand and/or
receipt by the Landlord of interest
pursuant to this provision shall be without
prejudice to and shall not affect the right
of the Landlord to exercise any other right
or remedy hereof (including the right of
re-entry) exercisable under the terms of
this Agreement.
(iii) Notwithstanding anything herein contained
in the event of default in payment of the
surcharge on the date on which the same
falls due for payment or any interest
thereon the Landlord shall in addition to
its other rights under the terms of this
Agreement be entitled to disconnect the
supply of air-conditioning to the said
premises until the amount in arrears shall
have been fully paid by the Tenant without
incurring any liability to the Tenant for
any loss or damages suffered by the Tenant
as a result thereof.
Distraint (iv) For the purpose of Part III of the
Landlord and Tenant (Consolidation)
Ordinance relating to distress for rent or
of these presents the rent payable in
respect of the said premises shall be and
be deemed to be in arrear if not paid in
advance at the time and in manner
hereinbefore provided for payment therefor.
All costs and expenses for and incidental
to the distraint shall be paid by the
Tenant and shall be recoverable from him as
a debt.
Abatement (b) If the said premises or any part thereof are
rendered uninhabitable by fire water storm wind
typhoon defective construction white ants
earthquake subsidence of the ground or any
calamity beyond the control of the Landlord and
not attributable to any failure by the Tenant to
observe and carry out the terms of this Agreement
the rent or a part thereof proportionate to the
extent to which the said premises shall have been
so rendered uninhabitable shall abate and cease to
be payable until the same shall have been again
rendered fit for occupation Provided always that
the Landlord shall not be required to reinstate
the said premises if by reason of the condition
<PAGE> 20
of the same or any local Regulations or other
circumstances beyond the control of the Landlord
it is not practicable or reasonable to do so.
Condemnation (c) If at any time during the continuance of this
tenancy the competent authorities shall condemn
the said building as a dangerous structure and it
shall be pulled down or shall make a demolition
order which shall become operative in respect of
the said premises or any part thereof or a closure
order in respect of a part of the said premises
under their powers the tenancy hereby created
shall cease as from the commencement of the
pulling down of the said premises or from the time
when such demolition or closure order shall become
operative.
Expression (d) the expression "the Tenant" shall (where the
of Tenant context permits) mean and include the party or
parties specifically named and shall not include
the executors and administrators or any such party
or where such party is a corporation any
liquidator thereof.
Acceptance of rent (e) The acceptance of rent by the Landlord hereby
stipulated shall not be deemed to operate as a
waiver by the Landlord of any right to proceed
against the Tenant in respect of a breach by the
Tenant of any of the Tenant's obligations herein
contained.
Fire and overflow (f) The Landlord shall not be under any liability to
of water the Tenant or to any other person whomsoever in
respect of any loss or damage to person or
property sustained by the Tenant or any such other
person caused by or through or in any way owing to
the overflow of water or the escape of fumes,
smoke, fire or any other substance or thing from
anywhere within the said building. The Tenant
shall fully and effectually indemnify the Landlord
from and against all claims and demands made
against the Landlord by any person in respect of
any loss, damage or injury caused by or through or
in any way owing to the overflow of water or the
escape of fumes, smoke, fire or any other
substance or thing from the said premises or to
the neglect or default of the Tenant his servants,
agents or licensees or to the defective or damaged
condition of the interior of the said premises or
any fixtures or fittings for the repair of which
the Tenant is responsible hereunder and against
all costs and expenses incurred by the Landlord in
respect of any such claim or demand.
Injury to Tenant (g) The Landlord shall not be liable for any injury
caused by lifts, to the Tenant his servants licensees or invitees
escalators caused by any defect in or by the defective or
negligent working of any lift or escalators in the
said building by the Landlord's servants or
otherwise and the Tenant shall indemnify the
Landlord against all claims actions and
proceedings in respect of such injuries.
<PAGE> 21
Accidents and (h) The Landlord shall not be responsible to the
Injury to Tenant's Tenant or the Tenant's licensees servants agents
chattel or other persons in the said premises or calling
upon the Tenant for any accident happening or
injury suffered or damage to or loss of any
chattel or property sustained on the said premises
or in the said building.
Re-Letting notices (i) During the three(3) months immediately preceding
the determination of the said term of tenancy the
Landlord shall be at liberty to affix and retain
without interference upon any external part of the
said premises a notice for re-letting the same and
the Tenant shall permit persons with written
authority from the Landlord or its agents at
reasonable hours of the day to view the said
premises or any part thereof.
Delivery of vacant (j) The Tenant shall deliver up vacant possession of
the said premises possession to the Landlord with
all fixtures fittings and additions therein and
thereto at the expiration or sooner determination
of this Agreement in good clean and tenantable
repair and condition in accordance with the
stipulations herein before contained together with
all keys giving access to all parts of the said
premises provided that where the Tenant has made
any alterations or installed any fixtures fittings
or additions in or to the said premises and
notwithstanding that the Landlord's consent for so
doing may have been obtained, the Landlord may at
its sole discretion require the Tenant at the
Tenant's sole cost and expense to reinstate or
remove or do away with all or any such alterations
fixtures fittings or additions or any part or
portion thereof and to make good and repair in a
proper and workman like manner any damage to the
said premises and the Landlord's fixtures and
fittings therein as a result thereof before
delivering up the said premises to the Landlord.
Landlord not (k) the Landlord shall not be bound by any oral
bound by oral representations or oral promises with respect to
representation the said building and its appurtenances or in
respect of the said premises except as herein
expressly set forth with the object and intention
that the whole of the agreement between the
Landlord and the Tenant shall be set forth herein
and in no way modified by any oral discussions
which may have preceded the signing of this
Agreement.
No waiver (l) No condoning excusing or overlooking by the
Landlord of any default breach or non-observance
or non-performance by the Tenant at any time or
times of any of the Tenant's obligations herein
contained shall operate as a waiver of the
Landlord's rights hereunder in respect of any
continuing or subsequent default breach of
non-observance or non-performance or so as to
defeat or affect in any way the right of the
Landlord herein in respect of any such
<PAGE> 22
continuing or subsequent default or breach and no
waiver by the Landlord shall be inferred from or
implied by anything done or admitted by the
Landlord unless expressed in writing and signed by
the Landlord.
No excuse for (m) This Agreement and the obligation of the Tenant
non-payment of to pay rent and other sums due hereunder and
rent perform the Tenant's obligations hereunder shall
in no way be affected impaired or excused because
the Landlord is unable due to circumstances beyond
his control to fulfil any of his obligations under
this Agreement or to supply or is delayed in
supplying any service expressly or impliedly to be
supplied or is unable to make or is delayed in
making any repair additions alterations or
decoration or is unable to supply or is delayed in
supplying any equipment or fixtures if the
Landlord is prevented or delayed from so doing by
reason of strike labour troubles shortage of
materials or any outside cause whatsoever or by
reason of any order or regulation of any
department of Hong Kong Government.
No actual eviction (n) the Landlord shall also have the right at any
in certain events time without constituting an actual or
constructive eviction of the Tenant and without
incurring any liability to the Tenant therefor to
install or erect at the entrances passages
passageways doorways corridors landings staircases
lobbies or other public parts of the said building
counters showcases or light boxes or to change the
arrangement and/or location of entrances
passageways doors doorways corridors landings
staircases lobbies lifts escalators toilets or
other public parts of the said building or any
service or apparatus serving the said building and
to change the name number or designation by which
the said building is known.
Stamp Duty and (o) The stamp duty payable on this Agreement shall be
legal costs borne by the parties hereto in equal shares but
the land registration fee (if any) shall be paid
by the Tenant. The Tenant shall also bear Baker &
McKenzie's costs and disbursements of and
incidental to the preparation and completion of
this Agreement calculated a half of 75% of full
scale cost.
Service of notice (p) Any notice hereunder shall be in writing and any
notice to be served by one party on the other
party under the terms of this Agreement shall be
duly served if left at or despatched by registered
post to the last known address of the other party
in Hong Kong.
Approval of (q) No approval by the Landlord is valid unless it is
Landlord in writing and signed by the Landlord or its
authorised agents.
No premium or (r) The Tenant hereby expressly admits and declares
fine that no premium or fine or other consideration or
key money has been paid to the
<PAGE> 23
Landlord by the Tenant for the creation of this
tenancy.
Sale and (s) If at any time during the tenancy hereby created
redevelopment the Landlord shall enter into a contract for the
sale of the said building or of any part thereof
which shall include the said premises or if the
Landlord shall resolve to redevelop the said
building or any part thereof whether wholly by
demolition and rebuilding or otherwise, or
partially by renovation, re-furbishment or
otherwise (which intention so to redevelop shall
be sufficiently evidenced by a copy of a
Resolution of its Directors certified to be a true
and correct copy by its Secretary) then in either
of such events the Landlord shall be entitled to
give six clear calendar months' notice in writing
expiring at the end of any calendar month during
the tenancy hereby created terminating this
Agreement and immediately upon the expiration of
such notice this Agreement and everything herein
contained shall cease and be void but without
prejudice to the rights and remedies of either
party against the other in respect of any
antecedent claim or breach of any of the
agreements or stipulations herein set out.
(t) The Tenant hereby expressly agrees to deprive
itself of all rights (if any) to protection
against eviction or ejectment provided by any
existing or future legislation from time to time
in force and applicable to the said premises or to
this tenancy and the Tenant agrees to deliver up
vacant possession of the said premises to the
Landlord on the expiration or sooner termination
of the tenancy hereby created notwithstanding any
rule of law or equity to the contrary.
Reservation of (u) The Landlord reserves the right exercisable
Rights at any time or times : -
(i) To change the name or description of the
said building or any part thereof,
(ii) To make or caused to be made any structural
or non-structural alteration or improvement
in or addition to entrances landings
staircases driveways passages lobbies or
any part of the said building in common
use, without incurring any liability to
make any payment to the Tenant on any
account whatsoever provided that in the
happening of case (i) hereof the Landlord
shall give to the Tenant and the Postal and
other Government Authorities not less than
three months' notice in writing or any such
change.
(iii) The Landlord reserves the right from time
to time and by notice in writing to the
Tenant to make and introduce and
subsequently amend adapt or abolish if
necessary such regulations as it may
consider necessary for the management and
maintenance of the said building as a first
class
<PAGE> 24
commercial Building.
(iv) Such regulations shall be supplementary to
the terms and conditions contained in this
Agreement and shall not in any way derogate
from such terms and conditions. In the
event of conflict between such regulations
and the terms and conditions of this
Agreement the terms and conditions of this
Agreement shall prevail.
Special Condition (v) The parties hereto hereby agree that the terms or
conditions or matters set out in the Fourth
Schedule hereto (if any) shall apply to this
Agreement and shall be incorporated as an integral
part of the Agreement.
Joint and Several (w) In this Agreement where the context so permits or
Liability requires the words importing the singular number
shall include the plural number and vice versa and
word importing the masculine gender shall include
the feminine gender and neuter gender and where
there are two or more persons included in the
expression "the Tenant" covenants expressed to be
made by the Tenant shall be deemed to be made by
such persons jointly and severally.
Marginal notes (x) The marginal notes are intended for guidance only
and do not form part of this Agreement nor shall
any of the provisions of this Agreement be
construed or interpreted by reference thereto or
in any way affected or limited thereby.
<PAGE> 25
THE FIRST SCHEDULE ABOVE REFERRED TO
PART I
EQUITY MARKETING HONG KONG, LTD. a company incorporated in Delaware, USA and
having its principal place of business in Hong Kong at Suite 10-12, 19th Floor
Tower 3, China Hong Kong City, 33 Canton Road, Tsimshatsui, Kowloon,, Hong kong.
PART II - PREMISES
Suite Nos. 10,11,12,13 and Store Room A on the 19th Floor of Tower 3 of China
Hong Kong City, China Ferry Terminal, Canton Road, Kowloon which for the
purposes of identification only is shown on the Floor Plan annexed hereto and
thereon coloured Pink.
PART III -TERM
Two years commencing from the 1st day of December 1997 to the 30th day of
November 1999 (both days inclusive.)
PART IV - USER
To use or occupy the suites of the said premises or any part thereof solely and
exclusively for the purpose of office and the store room solely and exclusively
for the purpose of a storeroom ancillary to office use which shall not be
changed without the previous written
consent of the Landlord and in particular not to use or permit the same to be
used for domestic purpose or for shops or as sleeping quarters and not to allow
any person to remain in the said premises overnight.
PART V - DEPOSIT
The deposit subject to increase in accordance with Clause 3 (a) (vi) of this
Agreement shall be HK$507,897.00.
<PAGE> 26
THE SECOND SCHEDULE ABOVE REFERRED TO
PART I
PARTICULARS OF RENT
The rent throughout the said term hereby created shall be HK$148,950.00 per
calendar month payable in advance on the first day of each and every calendar
month.
PART II
PARTICULARS OF SURCHARGES
The monthly surcharge to cover the costs of building management and
air-conditioning throughout the said term subject to increase in accordance with
clause 3 (a)(iv) of this Agreement shall be HK$20,349.00 per calendar month
payable in advance on the first day of each and every calendar month.
<PAGE> 27
THE THIRD SCHEDULE ABOVE REFERRED TO
RULES AND REGULATIONS
1. Plumbing fixture shall be used only for the purposes for which they were
constructed. No sweepings rubbish rags or other alien substances shall be
deposited therein. All costs for making good damage resulting from any
misuse of the plumbing fixtures shall be borne by the Tenant.
2. No Tenant shall drill into or in any way deface part of the said premises
or the said building. No drilling shall be permitted save with prior
written approval of the Landlord and as the Landlord may direct.
3. Save with prior written consent of the Landlord, which consent will not
normally be granted, no flagholes or aerials shall be erected, and no
flags shall be flown from windows or elsewhere in or upon the said
building.
4. Each Tenant must upon the termination of his tenancy restore to the
Landlord all keys of offices and toilet rooms used by the Tenant.
5. All removals or the carrying in or out of furniture or bulky matter of
any description must take place after office hours and during the hours
which the Landlord or his agent may determine from time to time. The
Landlord reserves the right to exclude goods from the said building which
violate any of these Rules and Regulations or the Agreement of which
these Rules and Regulations are a part.
6. No Tenant nor any of the Tenant's servants employees agents visitors or
licensees shall bring into any passenger lift in the said building any
goods effects chattels luggage bulky parcels food trays tiffin carriers
or other space-occupying items and the Tenant shall ensure that such
items are restricted to the designated lift.
7. No Tenant shall do or permit to be done in the said premises or any part
thereof any act which shall or might subject the Landlord to any
liability or responsibility for injury to any person or to property.
8. Windows shall remain closed or locked save in an emergency such as fire
or break-down of the air-conditioning system and the reasonable extent
necessary to enable the Tenant to clean the same.
9. Canvassing touting and peddling in the said building is prohibited and
each Tenant shall co-operate to prevent the same.
10. Save with the prior written consent of the Landlord, which consent will
not normally be granted, no cooking or preparation of food shall be
permitted by any Tenant in the said premises. No Tenant shall permit any
unusual or objectionable odours to be produced upon or to permeate from
the said premises.
<PAGE> 28
11. Not to do or permit or suffer anything in the said premises or in the
said building which may be or go to be a nuisance or annoyance to the
Landlord or any other Tenants or occupiers thereof or of any adjoining
building or affect the reputation of the said building as a high class
office building.
12. The Tenant shall no install in the said premises any partitioning other
than the supplied or approved by the Landlord.
13. Not to keep or permit or suffer to be kept upon any part of the said
premises any lives-stocks or animals and to carry out such pest control
for the said premises upon the request by the Landlord for the said
premises via nominated pest control companies at the Tenant's expense.
14. All blinds and/or curtains used within the said premises shall conform
externally to standard colour and design and such blinds and/or curtains
shall be approved by the Landlord so as to preserve a uniform external
appearance.
15. The Tenant shall not carry on or permit or suffer to be carried on in or
upon the said premises or any part thereof any trade or business which
the Landlord shall in its absolute discretion regard as dangerous noxious
noisy or offensive.
<PAGE> 29
THE FOURTH SCHEDULE ABOVE REFERRED TO
SPECIAL CONDITION
NIL
<PAGE> 30
AS WITNESS the hands of the parties hereto the day and year first
above written.
SIGNED by )
) (signed by Sino real Estate
) Agency Ltd. Lawrence Chong
) Koo Siong of Sino Real
) Estate Agency Limited, a
) company duly authorised by
for and on behalf of the Landlord ) the Board of Directors of
whose signature is verified by :- ) the Landlord)
(SIGNED)
Cheung Fong, Debbie
Solicitor, Hong Kong SAR
Messrs. Baker & McKenzie
SIGNED BY )
for and on behalf of the Tenant ) (signed by Equity Marketing
in the presence of :- ) Hong Kong Ltd.
by Mr. Wong Cho Kuen)
(Signed by Ms. Chan So Ping
Holder of Hong Kong Identity
Card No. G547826(9))
R E C E I V E D the day and year )
first above written of and from the )
Tenant the sum of HONG KONG DOLLARS ) (signed by Sino Real Estate
FIVE HUNDRED AND SEVEN THOUSAND ) Agency Ltd.
EIGHT HUNDRED AND NINETY SEVEN ) Agent for the landlord for
(of which HK$490,704.00 shall be transferred ) the sole purpose of
from the previous Tenancy Agreement) being the ) execution of this Agreement)
above mentioned deposit to be paid by the )
Tenant to the Landlord. ) HK$507,897.00
<PAGE> 1
EXHIBIT 10.30
EQUITY MARKETING, INC.
STOCK OPTION PLAN
1. PURPOSE. The purpose of the Equity Marketing, Inc. Stock Option Plan
(the "Plan") is to enable Equity Marketing, Inc. (the "Company") and its
stockholders to secure the benefits of common stock ownership by key personnel
of the Company and its subsidiaries. The Board of Directors of the Company (the
"Board") believes that the granting of options under the Plan will foster the
Company's ability to attract, retain and motivate those individuals who will be
largely responsible for the profitability and long-term future growth of the
Company.
2. STOCK SUBJECT TO THE PLAN. The Company may issue and sell a total of
1,640,000 shares of its common stock (the "Common Stock"), pursuant to the Plan.
Such shares may be either authorized and unissued or held by the Company in its
treasury. New options may be granted under the Plan with respect to shares of
Common Stock which are covered by the unexercised portion of an option which has
terminated or expired by its terms, by cancellation or otherwise.
3. ADMINISTRATION. The Plan will be administered by the Board, or at the
discretion of the Board, a committee (the "Committee") consisting of at least
two directors appointed by and serving at the pleasure of the Board. If the Plan
is administered by the Board, references in the Plan to the "Committee" shall
mean the "Board". [If the Company is covered by Section 16 of the Securities
Exchange Act of 1934, then, unless the Board determines otherwise, the members
of the Committee will be "disinterested directors" within the meaning and for
the purposes of Rule 16(b)-3 under said Act.] Subject to the provisions of the
Plan, the Committee, acting in its sole and absolute discretion, will have full
power and authority to grant options under the Plan, to interpret the provisions
of the Plan, to fix and interpret the provisions of option agreements made under
the Plan, to supervise the administration of the Plan, and to take such other
action as may be necessary or desirable in order to carry out the provisions of
the Plan. A majority of the members of the Committee will constitute a quorum.
The Committee may act by the vote of a majority of its members present at a
meeting at which there is a quorum or by unanimous written consent. The decision
of the Committee as to any disputed question, including questions of
construction, interpretation and administration, will be final and conclusive on
all persons. The Committee will keep a record of its proceedings and acts and
will keep or cause to be kept such books and records as may be necessary in
connection with the proper administration of the Plan.
4. ELIGIBILITY. Options may be granted under the Plan to present or future
key employees of the Company or a subsidiary of the Company (a "Subsidiary")
within the meaning of Section 424(f) of the Internal Revenue Code of 1986 (the
"Code"), and to consultants to the Company or a Subsidiary who are not
employees. Options may also be granted to directors of the Company who are not
employees of or consultants to the Company and/or a Subsidiary. Subject to the
provisions of the Plan, the Committee may from time to time select the persons
to whom options will be granted, and will fix the number of shares covered by
each such option and establish the terms and conditions thereof (including,
without limitation, the exercise price, restrictions on exercisability of the
option and/or on the disposition of the shares of Common Stock issued upon
exercise thereof, and whether or not the option is to be treated as an incentive
stock option within the meaning of Section 422 of the Code (an "Incentive Stock
Option").
5. TERMS AND CONDITIONS OF OPTIONS. Each option granted under the Plan will
be evidenced by a written agreement in a form approved by the Committee. Each
such option will be subject to the terms and conditions set forth in this
paragraph and such additional terms and conditions not inconsistent with the
Plan as the Committee deems appropriate. No person may receive options to
purchase more than 500,000 shares of Common Stock under the Plan.
(a) OPTION EXERCISE PRICE. In the case of an option which is not treated
as an Incentive Stock Option, the exercise price per share may not be less than
the par value of a share of Common Stock on the date the option is granted; and,
in the case of an Incentive Stock Option, the exercise price per share may not
be less than 100% of the fair market value of a share of Common Stock on the
date the option is granted (110% in the case of an optionee who, at the time the
option is granted,
-25-
<PAGE> 2
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or a Subsidiary (a "ten percent shareholder")).
For purposes hereof, the fair market value of a share of Common Stock on any
date will be equal to the closing sale price per share as published by a
national securities exchange on which shares of the Common Stock are traded on
such date or, if there is no sale of Common Stock on such date, the average of
the bid and asked prices on such exchange at the closing of trading on such date
or, if shares of the Common Stock are not listed on a national securities
exchange on such date, the closing price or, if none, the average of the bid and
asked prices in the over the counter market at the close of trading on such
date, or if the Common Stock is not traded on a national securities exchange or
the over the counter market, the fair market value of a share of the Common
Stock on such date as determined in good faith by the Committee.
(b) OPTION PERIOD. The period during which an option may be exercised
will be fixed by the Committee and will not exceed ten years from the date the
option is granted (five years in the case of an Incentive Stock Option granted
to a "ten percent shareholder").
(c) EXERCISE OF OPTIONS. No option will become exercisable unless the
person to whom the option is granted remains in the continuous employ or service
of the Company or a Subsidiary for at least one year (or for such other period
as the Committee may designate) from the date the option is granted. The
Committee will determine and will set forth in the option agreement any vesting
or other restrictions on the exercisability of the option, subject to any
earlier termination of the option required hereunder. All or part of the
exercisable portion of an option may be exercised at any time during the option
period. [except that, without the consent of the Committee, no partial exercise
of an option may be for less than 25% of the number of shares originally covered
by the option.] An option may be exercised by transmitting to the Company (1) a
written notice specifying the number of shares to be purchased, and (2) payment
of the exercise price in cash or by personal check or by such other means or in
such other manner of payment as the Committee may permit, together with the
amount, if any, deemed necessary by the Committee to enable the Company to
satisfy its income tax withholding obligations with respect to such exercise
(unless other arrangements acceptable to the Company are made with respect to
the satisfaction of such withholding obligations).
(d) PAYMENT OF EXERCISE PRICE. The purchase price of shares of Common
Stock acquired pursuant to the exercise of an option granted under the Plan may
be paid in cash and/or such other form of payment as may be permitted under the
option agreement, including, without limitation, previously-owned shares of
Common Stock.
(e) RIGHTS AS A STOCKHOLDER. No shares of Common Stock will be issued in
respect of the exercise of an option granted under the Plan until full payment
therefor has been made. The holder of an option will have no rights as a
stockholder with respect to any shares covered by an option until the date a
stock certificate for such shares is issued to him or her. Except as otherwise
provided herein, no adjustments shall be made for dividends or distributions of
other rights for which the record date is prior to the date such stock
certificate is issued.
(f) NONTRANSFERABILITY OF OPTIONS. No option shall be assignable or
transferable except upon the optionee's death to a beneficiary designated by the
optionee in accordance with procedures established by the Committee or, if no
designated beneficiary shall survive the optionee, pursuant to the optionee's
will or by the laws of descent and distribution. During an optionee's lifetime,
options may be exercised only by the optionee or the optionee's guardian or
legal representative.
(g) TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless extended by the
Committee, if an optionee ceases to be employed by or to perform services for
the Company and any Subsidiary for any reason other than death or disability
(defined below), then each outstanding option granted to him or her under the
Plan will terminate on the date of such termination of employment or service,
or, if the optionee's employment is terminated by the Company without cause
(defined below), three months after such date. If an optionee's employment or
service is terminated by reason of the optionee's death or disability (or if the
optionee's employment or service is terminated by reason of his or her
disability and the optionee dies within one year after such termination of
employment or service), then each outstanding option granted to the optionee
under the Plan will terminate on the date one year after the date of such
termination of employment or service (or one year after the later death of a
disabled optionee) or, if earlier, the date specified in the option agreement.
For purposes hereof, the term
<PAGE> 3
"disability" means the inability of an optionee to perform the customary duties
of his or her employment or other service for the Company or a Subsidiary by
reason of a physical or mental incapacity which is expected to result in death
or be of indefinite duration; and the term "cause" means (1) failure or refusal
by optionee to perform the duties of his or her employment with the Company, (2)
commission by the optionee of a crime involving moral turpitude, or (3) the
optionee's dishonesty or willful engagement in conduct which is injurious to the
business or reputation of the Company, all as determined by the Board in its
sole discretion.
[(h) Transfer Restrictions; Repurchase Option. Notwithstanding anything
to the contrary contained herein, Common Stock acquired pursuant to the exercise
of an option shall not be transferable without the consent of the Board (acting
in its sole and absolute discretion) until the earliest of (a) the date on which
the Company completes its first offering of stock pursuant to a registration
statement under the Securities Act of 1933, as amended, with a minimum net
proceeds to the Company and/or its controlling stockholders of $10 million; (b)
the date on which occurs an Exchange Transaction (as defined in paragraph 6(c))
in respect of which the stockholders of the Company receive stock in another
company which is traded on a national securities exchange or in the over the
counter market; or (c) the date immediately following the date on which the
Company's repurchase option (described in the next sentence) expires. Until the
first anniversary of the date of the termination of an optionee's employment
with the Company and its Subsidiaries (or, if later, the first anniversary of
the date his or her option is exercised), the Company (or its designee) shall
have the right, exercisable in its sole discretion, to purchase from the
optionee (or the successor of a deceased optionee, as the case may be) all of
the shares of Common Stock acquired by the optionee (or by the optionee's
successor), to the extent such shares are otherwise nontransferable in
accordance with the preceding sentence, for a purchase price equal to the fair
market value of such shares as determined by the Company. At the election of the
Company, all or part of such purchase price may be payable in substantially
equal annual or more frequent installments over a period not to exceed five
years, together with interest at least equal to the Citibank, N.A. prime rate in
effect on the date the Company's repurchase option is exercised.]
(h) [i] OTHER PROVISIONS. The Committee may impose such other conditions
with respect to the exercise of options, including, without limitation, any
conditions relating to the application of federal or state securities laws, as
it may deem necessary or advisable.
6. Capital Changes, Reorganization, Sale.
(a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate number and
class of shares for which options may be granted under the Plan, the number and
class of shares covered by each outstanding option and the exercise price per
share shall all be adjusted proportionately or as otherwise appropriate to
reflect any increase or decrease in the number of issued shares of Common Stock
resulting from a split-up or consolidation of shares or any like capital
adjustment, or the payment of any stock dividend, and/or to reflect a change in
the character or class of shares covered by the Plan arising from a readjustment
or recapitalization of the Company's capital stock.
(b) CASH, STOCK OR OTHER PROPERTY FOR STOCK. Except as otherwise
provided in this subparagraph, in the event of an Exchange Transaction (as
defined below), all optionees will be permitted to exercise their outstanding
options in whole or in part (whether or not otherwise exercisable) immediately
prior to such Exchange Transaction, and any outstanding options which are not
exercised before the Exchange Transaction will thereupon terminate.
Notwithstanding the preceding sentence, if, as part of the Exchange Transaction,
the stockholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock, and if the
Board, in its sole discretion, so directs, then all outstanding options will be
converted into options to purchase shares of Exchange Stock. The amount and
price of converted options will be determined by adjusting the amount and price
of the options granted hereunder on the same basis as the determination of the
number of shares of Exchange Stock the holders of Common Stock will receive in
the Exchange Transaction and, unless the Board determines otherwise, the vesting
conditions with respect to the converted options will be substantially the same
as the vesting conditions set forth in the original option agreement.
(c) DEFINITION OF EXCHANGE TRANSACTION. For purposes hereof, the term
"Exchange Transaction" means a merger (other than a merger of the Company in
which the holders of
<PAGE> 4
Common Stock immediately prior to the merger have the same proportionate
ownership of Common Stock in the surviving corporation immediately after the
merger), consolidation, acquisition of property or stock, separation,
reorganization (other than a mere reincorporation or the creation of a holding
company), liquidation of the Company or any other similar transaction or event
so designated by the Board in its sole discretion, as a result of which the
stockholders of the Company receive cash, stock or other property in exchange
for or in connection with their shares of Common Stock.
(d) FRACTIONAL SHARES. In the event of any adjustment in the number of
shares covered by any option pursuant to the provisions hereof, any fractional
shares resulting from such adjustment will be disregarded, and each such option
will cover only the number of full shares resulting from the adjustment.
(e) DETERMINATION OF BOARD TO BE FINAL. All adjustments under this
paragraph 6 shall be made by the Board, and its determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding and
conclusive.
7. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend or terminate
the Plan. Except as otherwise provided in the Plan with respect to equity
changes, any amendment which would increase the aggregate number of shares of
Common Stock as to which options may be granted under the Plan, materially
increase the benefits under the Plan, or modify the class of persons eligible to
receive options under the Plan shall be subject to the approval of the Company's
stockholders. No amendment or termination may affect adversely any outstanding
option without the written consent of the optionee.
8. NO RIGHTS CONFERRED. Nothing contained herein will be deemed to give any
individual any right to receive an option under the Plan or to be retained in
the employ or service of the Company or any Subsidiary.
9. GOVERNING LAW. The Plan and each option agreement shall be governed by
the laws of the State of California.
10. DECISIONS AND DETERMINATIONS OF COMMITTEE TO BE FINAL. Except to the
extent rights or powers under this Plan are reserved specifically to the
discretion of the Board, all decisions and determinations of the Committee are
final and binding.
11. TERM OF THE PLAN. The Plan shall be effective as of January 1, 1992,
the date on which it was adopted by the Board and approved by the stockholders
of the Company. The Plan will terminate on December 31, 2001, the date ten years
after the date of adoption, unless sooner terminated by the Board. The rights of
optionees under options outstanding at the time of the termination of the Plan
shall not be affected solely by reason of the termination and shall continue in
accordance with the terms of the option (as then in effect or thereafter
amended).
<PAGE> 1
EXHIBIT 10.31
EQUITY MARKETING, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The purpose of this Non-Employee Director Stock Option Plan
(the "Plan") is to enable Equity Marketing, Inc. (the "Company") to provide
compensatory stock options to members of its Board of Directors (the "Board")
who are not also employees of the Company and who are first elected or appointed
as directors after the date this Plan becomes effective ("Non-Employee
Directors"). It is intended that the Plan will constitute a "formula plan"
within the meaning and for the purposes of Rule 16b-3 issued by the Securities
and Exchange Commission under Section 16 of the Securities Exchange Act of 1934.
The provisions of the Plan and of any option agreement made pursuant to the Plan
will be interpreted and applied accordingly.
2. STOCK SUBJECT TO THE PLAN. The Company may issue and sell a total of
290,000 shares (subject to equitable adjustment for stock dividends and certain
capital changes) of its common stock, $.001 par value (the "Common Stock"),
pursuant to the Plan. Such shares may be either authorized and unissued or held
by the Company in its treasury. New options may be granted under the Plan with
respect to shares of Common Stock which are covered by the unexercised portion
of an option which has terminated or expired.
3. ADMINISTRATION. The Plan shall be administered by the Board. Subject to
the provisions of the Plan and applicable law, the Board, acting in its sole and
absolute discretion, shall have full power and authority to interpret the
provisions of the Plan and option agreements made under the Plan, to supervise
the administration of the Plan, and to take such other action as may be
necessary or desirable in order to carry out the provisions of the Plan. The
decisions of the Board as to any disputed question, including questions of
construction, interpretation and administration, shall be final and conclusive
on all persons.
4. AUTOMATIC OPTION GRANTS. Except as otherwise provided herein, an option
to purchase 25,000 shares of Common Stock will automatically be granted to each
Non-Employee Director on the date following the effective date of the Plan on
which he or she is initially appointed or elected as a director (by the Board or
the shareholders, as the case may be), and an option to purchase an additional
10,000 shares of Common Stock will automatically be granted to each Non-Employee
Director on each anniversary of his or her initial grant date provided he or she
is still serving as a director on such anniversary.
5. TERMS AND CONDITIONS OF OPTIONS. Each option granted under the Plan
shall be evidenced by a written agreement containing the following terms and
conditions:
a. OPTION PRICE. The purchase price per share shall be equal to the fair
market value of a share of Common Stock on the date the option is granted which,
for so long as the Company's Common Stock is listed on the NASDAQ National
Market System, shall be the closing price per share as listed on the NASDAQ
National Market System on such date.
b. OPTION PERIOD. Unless sooner terminated in accordance with the
provisions hereof, the period during which an option may be exercised shall be
10 years from the date the option is granted.
c. EXERCISE OF OPTIONS. No option shall be exercisable unless the
Non-Employee Director to whom the option was granted remains in the continuous
service as a director of the Company for at least six months from the date the
option is granted. All or part of the exercisable portion of an option may be
exercised at any time during the option period, except that, without the consent
of the Board, no partial exercise of an option shall be made for less than 100
shares. An option may be exercised by transmitting to the Company (1) a written
notice specifying the number of shares to be purchased, and (2) payment in full
of the purchase price, together with the amount, if any, deemed necessary to
enable the Company to satisfy its income tax withholding obligations with
respect to such exercise (unless other arrangements acceptable to the Board are
made with respect to the satisfaction of such withholding obligations).
Notwithstanding anything in the Plan to the contrary, no option may be
<PAGE> 2
exercised unless and until a registration statement covering the shares of
Common Stock issuable upon exercise of options granted hereunder has been filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
d. PAYMENT OF OPTION PRICE. The purchase price of shares of Common Stock
acquired pursuant to the exercise of an option granted under the Plan shall be
payable in cash or check and/or previously-owned shares of Common Stock. If the
shares of Common Stock are tendered as payment of the option exercise price, the
value of such shares shall be the fair market value as of the date of exercise.
If such tender would result in the issuance of fractional shares of Common
Stock, the Company shall instead return the difference in cash or by check to
the optionee.
e. RIGHTS AS A SHAREHOLDER. No shares of Common Stock shall be issued in
respect of the exercise of an option granted under the Plan until full payment
therefor has been made. The holder of an option shall have no rights as a
shareholder with respect to any shares covered by an option until the date a
stock certificate for such shares is issued to him or her. Except as otherwise
provided herein, no adjustments shall be made for dividends or distributions of
other rights for which the record date is prior to the date such stock
certificate is issued.
f. NONTRANSFERABILITY OF OPTIONS. No option shall be assignable or
transferable except upon the optionee's death to a beneficiary designated by the
optionee in accordance with procedures established by the Board or, if no
designated beneficiary shall survive the optionee, pursuant to the optionee's
will or by the laws of descent and distribution. During an optionee's lifetime,
options may be exercised only by the optionee or the optionee's guardian or
legal representative.
g. TERMINATION OF SERVICE. If an optionee ceases to perform services as
a director of the Company for any reason other than death or permanent
disability, then each outstanding option granted to him or her under the Plan
shall terminate on the date three months after the date of such termination of
service or, if earlier, the date specified in the option agreement. If an
optionee's service as a director of the Company is terminated by reason of the
optionee's death or permanent disability, or if the optionee's service as a
director of the Company is terminated by reason of his or her disability and the
optionee dies within one year after such termination of service as a director,
then each outstanding option granted to the optionee under the Plan shall
terminate on the date one year after the date of such termination of service (or
one year after the later death of a disabled optionee) or, if earlier, the date
specified in the option agreement. For the purposes hereof, the term "permanent
disability" means the continuous inability of an optionee to perform the duties
of his or her service as a director for ninety (90) consecutive days, or if
during any consecutive twelve (12) month period during his or her term of
office, the inability or unwillingness of the optionees to perform his or her
duties for a total period of ninety (90) days, either consecutively or not, by
reason of ill health, physical or mental illness, or for other causes beyond the
optionee's control.
h. OTHER PROVISIONS. The Board may impose such other conditions with
respect to the exercise of options, including, without limitation, any
conditions relating to the application of federal or state securities laws, as
it may deem necessary or advisable.
6. CHANGE IN CONTROL; CAPITAL CHANGES.
a. CHANGE IN CONTROL. If any event constituting a "Change in Control of
the Company" shall occur, all options granted under the Plan which are
outstanding at the time a Change of Control of the Company occurs shall
immediately become exercisable. A "Change in Control of the Company" shall be
deemed to occur if (1) there shall be consummated (a) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (b) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, or (2)
the stockholders of the Company shall approve any plan or proposal for
liquidation or dissolution of the Company, or (3) any person (as such term is
used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of 40% or more of the Company's
outstanding Common
<PAGE> 3
Stock other than pursuant to a plan or arrangement entered into by such person
and the Company, or (4) during any period of two consecutive years, individuals
who at the beginning of such period constitute the entire Board of Directors
shall cease for any reason to constitute a majority thereof unless the election,
or the nomination for election by the Company's shareholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
b. CAPITAL CHANGES. In the event of any stock split, stock dividend or
similar transaction which increases or decreases the number of outstanding
shares of Common Stock, appropriate adjustment shall be made by the Board to the
number of shares which may be issued under the Plan, as well as the maximum
number of shares which may be issued to any Non-Employee Director pursuant to
Section 4 hereof, and to the number and option exercise price per share of
Common Stock which may be purchased under any outstanding options. In the case
of a merger, consolidation or similar transaction which results in a replacement
of the Company's Common Stock with stock of another corporation but does not
constitute Change in Control of the Company, the Company will make a reasonable
effort, but shall not be required, to replace any outstanding options granted
under the Plan with comparable options to purchase the stock of such other
corporation, or will provide for immediate maturity of all outstanding options,
with all options not being exercised within the time period specified by the
Board being terminated.
c. FRACTIONAL SHARES. In the event of any adjustment in the number of
shares covered by any option pursuant to the provisions hereof, any fractional
shares resulting from such adjustment will be disregarded, and each such option
will cover only the number of full shares resulting from the adjustment.
d. DETERMINATION OF BOARD TO BE FINAL. All adjustments under this
paragraph 6 shall be made by the Board, and its determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding and
conclusive.
7. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend or terminate
the Plan. Except as otherwise provided in the Plan with respect to equity
changes, any amendment which would increase the aggregate number of shares of
Common Stock as to which options may be granted under the Plan, materially
increase the benefits under the Plan, or modify the class of persons eligible to
receive options under the Plan shall be subject to the approval of the
shareholders of the Company. No amendment or termination may adversely affect
any outstanding option without the written consent of the optionee.
Notwithstanding anything to the contrary contained herein or in any option
agreement made hereunder, the provisions of paragraphs 4 and 5(a) of the Plan
and any other provision of the Plan or of an option agreement relating to the
timing of option grants, the amount of shares covered thereby and the exercise
price thereunder may not be amended more than once every six months, and no
amendment may be made to the Plan or an option agreement if, as a result of such
amendment, the Plan would no longer qualify as a "formula plan" under Rule 16b-3
issued by the Securities and Exchange Commission under Section 16 of the
Securities Exchange Act of 1934.
8. NO RIGHTS CONFERRED. Nothing contained herein will be deemed to give any
individual any right to be retained or elected or re-elected as a member of the
Board.
9. GOVERNING LAW. The Plan and each option agreement shall be governed in
all respects by the internal laws of the State of California without giving
effect to the provisions relating to conflicts of law.
10. TERM OF THE PLAN. The Plan shall be effective as of the date on which
stockholder approval of the Plan is obtained. The Plan will terminate on the
date ten years after the date on which it is approved by the shareholders of the
Company, unless sooner terminated by the Board. The rights of optionees under
options outstanding at the time of the termination of the Plan shall not be
affected solely by reason of the termination and shall continue in accordance
with the terms of the option.
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
1. Equity Marketing Hong Kong, Ltd. a Delaware Corporation.
2. Synergy Promotions, S.A. de C.V., a Mexico Corporation (65% owned by
the Registrant).
3. EPI Group Limited, a Delaware Corporation.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 23, 1998 included in this Form 10-K, into
the Company's previously filed Form S-8 registration statements File Nos.
33-84592, 33-84594, 33-15493 and 33-15499.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,935
<SECURITIES> 0
<RECEIVABLES> 28,373
<ALLOWANCES> 600
<INVENTORY> 8,658
<CURRENT-ASSETS> 49,115
<PP&E> 4,324
<DEPRECIATION> 1,774
<TOTAL-ASSETS> 57,153
<CURRENT-LIABILITIES> 20,051
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 36,140
<TOTAL-LIABILITY-AND-EQUITY> 57,153
<SALES> 146,508
<TOTAL-REVENUES> 146,508
<CGS> 110,508
<TOTAL-COSTS> 110,508
<OTHER-EXPENSES> 20,875
<LOSS-PROVISION> 92
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 15,647
<INCOME-TAX> 6,024
<INCOME-CONTINUING> 9,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,623
<EPS-PRIMARY> 1.63<F1>
<EPS-DILUTED> 1.55<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128
AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 8,502
<SECURITIES> 0
<RECEIVABLES> 13,647
<ALLOWANCES> 555
<INVENTORY> 4,715
<CURRENT-ASSETS> 29,106
<PP&E> 3,286
<DEPRECIATION> 1,001
<TOTAL-ASSETS> 37,193
<CURRENT-LIABILITIES> 11,154
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 25,033
<TOTAL-LIABILITY-AND-EQUITY> 37,193
<SALES> 111,747
<TOTAL-REVENUES> 111,747
<CGS> 83,598
<TOTAL-COSTS> 83,598
<OTHER-EXPENSES> 16,734
<LOSS-PROVISION> 361
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 11,674
<INCOME-TAX> 4,231
<INCOME-CONTINUING> 7,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,443
<EPS-PRIMARY> 1.33<F1>
<EPS-DILUTED> 1.26<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128
AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 3,940
<SECURITIES> 11,935
<RECEIVABLES> 1,949
<ALLOWANCES> 200
<INVENTORY> 3,296
<CURRENT-ASSETS> 23,039
<PP&E> 2,374
<DEPRECIATION> 394
<TOTAL-ASSETS> 26,262
<CURRENT-LIABILITIES> 10,593
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,882
<TOTAL-LIABILITY-AND-EQUITY> 26,262
<SALES> 84,015
<TOTAL-REVENUES> 84,015
<CGS> 65,096
<TOTAL-COSTS> 65,096
<OTHER-EXPENSES> 11,967
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 7,401
<INCOME-TAX> 2,812
<INCOME-CONTINUING> 4,589
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,589
<EPS-PRIMARY> 0.83<F1>
<EPS-DILUTED> 0.80<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128
AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,723
<SECURITIES> 0
<RECEIVABLES> 18,362
<ALLOWANCES> 569
<INVENTORY> 6,386
<CURRENT-ASSETS> 35,418
<PP&E> 3,382
<DEPRECIATION> 1,112
<TOTAL-ASSETS> 43,142
<CURRENT-LIABILITIES> 15,823
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 26,320
<TOTAL-LIABILITY-AND-EQUITY> 43,142
<SALES> 21,650
<TOTAL-REVENUES> 21,650
<CGS> 15,847
<TOTAL-COSTS> 15,847
<OTHER-EXPENSES> 4,049
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 1,857
<INCOME-TAX> 715
<INCOME-CONTINUING> 1,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,142
<EPS-PRIMARY> 0.20<F1>
<EPS-DILUTED> 0.19<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128
AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,467
<SECURITIES> 0
<RECEIVABLES> 23,965
<ALLOWANCES> 686
<INVENTORY> 6,183
<CURRENT-ASSETS> 45,165
<PP&E> 3,707
<DEPRECIATION> 1,287
<TOTAL-ASSETS> 52,999
<CURRENT-LIABILITIES> 21,446
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 30,580
<TOTAL-LIABILITY-AND-EQUITY> 52,999
<SALES> 68,315
<TOTAL-REVENUES> 68,315
<CGS> 51,264
<TOTAL-COSTS> 51,264
<OTHER-EXPENSES> 9,809
<LOSS-PROVISION> 149
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 7,398
<INCOME-TAX> 2,848
<INCOME-CONTINUING> 4,550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,550
<EPS-PRIMARY> 0.77<F1>
<EPS-DILUTED> 0.74<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128
AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,679
<SECURITIES> 0
<RECEIVABLES> 23,593
<ALLOWANCES> 749
<INVENTORY> 7,761
<CURRENT-ASSETS> 46,046
<PP&E> 4,143
<DEPRECIATION> 1,523
<TOTAL-ASSETS> 54,050
<CURRENT-LIABILITIES> 20,764
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 32,319
<TOTAL-LIABILITY-AND-EQUITY> 54,050
<SALES> 95,913
<TOTAL-REVENUES> 95,913
<CGS> 71,392
<TOTAL-COSTS> 71,392
<OTHER-EXPENSES> 15,165
<LOSS-PROVISION> 240
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> 9,753
<INCOME-TAX> 3,755
<INCOME-CONTINUING> 5,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,998
<EPS-PRIMARY> 1.01<F1>
<EPS-DILUTED> 0.97<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS
NO. 128 AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND
FULLY DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT MARCH 31, 1996 AND THE 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>
<RESTATED>
<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> 0.19<F1>
<EPS-DILUTED> 0.18<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128
AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT JUNE 30, 1996 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE SIX
MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 444
<SECURITIES> 0
<RECEIVABLES> 37,104
<ALLOWANCES> 352
<INVENTORY> 3,317
<CURRENT-ASSETS> 41,846
<PP&E> 2,764
<DEPRECIATION> 670
<TOTAL-ASSETS> 44,922
<CURRENT-LIABILITIES> 24,805
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19,105
<TOTAL-LIABILITY-AND-EQUITY> 44,922
<SALES> 56,615
<TOTAL-REVENUES> 56,615
<CGS> 42,647
<TOTAL-COSTS> 42,647
<OTHER-EXPENSES> 8,099
<LOSS-PROVISION> 160
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> 6,026
<INCOME-TAX> 2,169
<INCOME-CONTINUING> 3,857
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,857
<EPS-PRIMARY> 0.69<F1>
<EPS-DILUTED> 0.66<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128
AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT SEPTEMBER 30, 1996 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,470
<SECURITIES> 0
<RECEIVABLES> 17,038
<ALLOWANCES> 443
<INVENTORY> 11,023
<CURRENT-ASSETS> 34,285
<PP&E> 3,006
<DEPRECIATION> 823
<TOTAL-ASSETS> 42,856
<CURRENT-LIABILITIES> 21,587
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 20,263
<TOTAL-LIABILITY-AND-EQUITY> 42,856
<SALES> 76,714
<TOTAL-REVENUES> 76,714
<CGS> 56,926
<TOTAL-COSTS> 56,926
<OTHER-EXPENSES> 12,161
<LOSS-PROVISION> 243
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> 7,851
<INCOME-TAX> 2,836
<INCOME-CONTINUING> 5,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,015
<EPS-PRIMARY> 0.90<F1>
<EPS-DILUTED> 0.85<F1>
<FN>
<F1>THE FIGURES PRESENTED ABOVE HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128
AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
