<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 22308
EQUITY MARKETING, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 13-3534145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 SOUTH RODEO DRIVE
BEVERLY HILLS, CA 90212
(Address of principal executive offices) (Zip Code)
(310) 887-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.001 Par Value, 6,056,403 shares as of August 12, 1998.
1
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EQUITY MARKETING, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,935 $ 1,147
Accounts receivable (net of allowances for doubtful
Accounts of $600 and $1,227 as of December 31, 1997
and June 30, 1998, respectively) 27,773 28,435
Inventory 8,658 9,797
Prepaid expenses and other current assets 3,749 7,335
------- -------
Total current assets 49,115 46,714
FIXED ASSETS, net 2,550 2,760
INTANGIBLE ASSETS, net 5,079 14,354
OTHER ASSETS 409 592
------- -------
Total assets $57,153 $64,420
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
<PAGE> 4
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 14,560 $ 15,698
Accrued expenses and other current liabilities 5,491 8,707
-------- --------
Total current liabilities 20,051 24,405
LONG-TERM LIABILITIES 962 927
-------- --------
Total liabilities 21,013 25,332
-------- --------
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,
6,010,103 and 6,055,103 shares outstanding
as of December 31, 1997 and June 30, 1998, respectively -- --
Additional paid-in capital 13,371 14,138
Retained earnings 25,056 27,237
-------- --------
38,427 41,375
Less--
Treasury stock, 1,892,841 shares, at cost, as of
December 31, 1997 and June 30, 1998 (1,279) (1,279)
Stock subscription receivable (43) (43)
Unearned compensation (965) (965)
-------- --------
Total stockholders' equity 36,140 39,088
-------- --------
Total liabilities and stockholders' equity $ 57,153 $ 64,420
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
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EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 46,638 $ 30,593 68,256 54,389
COST OF SALES 34,630 21,274 50,015 39,000
---------- ---------- ---------- ----------
Gross profit 12,008 9,319 18,241 15,389
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Salaries, wages and benefits 3,159 3,080 5,317 5,725
Selling, general and administrative 3,360 3,783 5,682 6,346
---------- ---------- ---------- ----------
Total operating expenses 6,519 6,863 10,999 12,071
---------- ---------- ---------- ----------
Income from operations 5,489 2,456 7,242 3,318
INTEREST INCOME, net 53 88 156 227
---------- ---------- ---------- ----------
Income before provision for income taxes 5,542 2,544 7,398 3,545
PROVISION FOR INCOME TAXES 2,134 979 2,848 1,364
---------- ---------- ---------- ----------
Net income $ 3,408 $ 1,565 $ 4,550 $ 2,181
========== ========== ========== ==========
BASIC NET INCOME PER SHARE $ 0.57 $ 0.26 $ 0.77 $ 0.36
========== ========== ========== ==========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 5,927,055 6,035,066 5,888,427 6,022,585
========== ========== ========== ==========
DILUTED NET INCOME PER SHARE $ 0.55 $ 0.25 $ 0.74 $ 0.35
========== ========== ========== ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 6,203,964 6,315,415 6,152,951 6,315,159
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
5
<PAGE> 6
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,550 $ 2,181
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 548 830
Provision for doubtful accounts 149 165
Tax benefit from exercise of stock options 337 186
Other 6 (4)
Changes in operating assets and liabilities, excluding effects of
acquisition:
Increase (decrease) in cash and cash equivalents:
Accounts receivable (10,336) (14)
Inventory (1,468) (710)
Prepaid expenses and other current assets 507 (1,603)
Other assets 231 (115)
Accounts payable 10,167 834
Accrued expenses and other current liabilities 125 (801)
Long-term liabilities (33) (35)
-------- --------
Net cash provided by operating activities 4,783 914
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (478) (784)
Payment for purchase of Corinthian and Trademark -- (8,435)
Payment for purchase of Synergy
minority interest -- (68)
-------- --------
Net cash used in investing activities (478) (9,287)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of underwriters' warrants 308 --
Proceeds from exercise of stock options 352 585
Borrowings under line of Credit 3,330 --
Repayments on line of Credit (3,330) --
-------- --------
Net cash provided by financing activities 660 585
-------- --------
Net increase (decrease) in cash and cash equivalents 4,965 (7,788)
CASH AND CASH EQUIVALENTS, beginning of period 8,502 8,935
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 13,467 $ 1,147
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest $ 15 $ 31
======== ========
Income taxes $ 418 $ 1,167
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
6
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EQUITY MARKETING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1 - ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation (the "Company"), designs,
develops, produces, and markets a broad variety of consumer products,
collectibles and promotional products incorporating licensed characters from
films, television, sports, publishing, oil and gas and other sources.
Equity Marketing Hong Kong, Ltd., a Delaware corporation("EMHK"), is a 100%
owned subsidiary of the Company. EMHK manages production of the Company's
products by third parties in the Far East and currently is responsible for
performing and/or procuring product sourcing, product engineering, quality
control inspections, independent safety testing and export/import documentation.
Synergy Promotions S.A. de C.V. ("Synergy") was incorporated in Mexico in 1996
and is 100% owned by the Company. Synergy markets the Company's consumer
products in Mexico. Prior to June 1998, the Company owned 65% of Synergy. The
Company acquired the 35% minority interest during June 1998 for $68.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management and subject to year-end audit, the accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for a full year. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made to the accompanying 1997 financial
statements to conform them to the current period presentation.
NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" ("EPS"), effective for the year ended December 31,
1997. 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 the previously used 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 276,909 at quarter end June 30, 1997 and 280,349
at quarter end June 30, 1998. The impact of including unexercised dilutive
options and warrants was to increase weighted average shares outstanding by
264,526 and 292,574 for the six months ended June 30, 1997 and 1998,
respectively. Options to purchase 70,000 and 338,000 shares of common stock were
outstanding as of June 30, 1997 and 1998, respectively, which were excluded from
the computation of diluted income per share as they would have been
anti-dilutive. Prior year EPS has been conformed to current year presentation.
7
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COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The implementation of SFAS No. 130 did
not have an impact on the Company's results of operations. There are no
adjustments to net income to arrive at comprehensive income.
INVENTORY
Inventory consists of production-in-process which represents direct costs
related to product development, raw materials and tooling which are deferred and
amortized over the life of the products and finished products held for sale to
customers, including finished products in transit to customers' distribution
centers. Inventory is stated at the lower of average cost or market. As of June
30, 1998 and December 31, 1997, inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------ -----------
(Unaudited)
<S> <C> <C>
Production-in-process $4,935 $5,308
Finished goods 3,723 4,489
------ ------
$8,658 $9,797
====== ======
</TABLE>
NOTE 3 - ACQUISITION
On April 24, 1998, the Company acquired 100% of the common stock of Corinthian
Marketing, Inc., a Delaware corporation ("Corinthian"), and certain trademarks
related to its business, including the "Headliners" trademark (the "Trademark")
from Corinthian Marketing PLC, for cash consideration of approximately $8,000
at the closing and potential contingent cash consideration of approximately $700
payable within one year after the closing upon satisfaction of certain
conditions. Corinthian is engaged principally in the design, manufacture,
marketing and distribution of the Headliners brand of collectible sports
figurines.
The acquisition has been accounted for under the purchase method of accounting.
The financial statements reflect the preliminary allocations of the purchase
price and the assumption of liabilities and include the operating results of
Corinthian from the date of acquisition. The purchase price has been
preliminarily allocated to the assets acquired and liabilities assumed based on
their estimated fair values as of the acquisition date. As of June 30, 1998, the
excess of the purchase price over the estimated fair values of the net assets
acquired was $6,512 which has been recorded as goodwill and is being amortized
on a straight-line basis over 20 years. The Trademark has been preliminarily
valued at $3,000 and is being amortized on a straight line basis over 20 years.
The Company is in the process of obtaining valuations of the individual assets.
The allocation of the excess purchase price may change based upon these
valuations.
8
<PAGE> 9
The following unaudited pro-forma information presents a summary of the
consolidated results of operations of the Company and Corinthian as if the
acquisition had occurred at the beginning of 1997 and includes pro-forma
adjustments to give effect to the amortization of goodwill, decreased interest
income associated with funding the acquisition, and certain other adjustments,
together with the related income tax effects. The pro-forma financial
information is presented for informational purposes only and may not be
indicative of the results of operations as they would have been if the Company
and Corinthian had been a single entity during 1997 and during the six months
ended June 30, 1998, nor is it necessarily indicative of the results of
operations that may occur in the future.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------
1997 1998
---------- ----------
<S> <C> <C>
Revenues $ 74,999 $ 55,827
Income from operations 6,897 2,817
Net income 4,250 1,761
Diluted net income per share .69 .28
Diluted Weighted average
shares outstanding 6,152,951 6,315,159
</TABLE>
NOTE 4 - INFORMATION SYSTEMS
Based on a recent strategic and operational assessment, the Company decided to
replace its existing information systems. The new enterprise systems are
designed to enhance management information, financial reporting, inventory
management, order entry and cost evaluation and control. The conversion to the
new systems and related projects are scheduled to be completed in the first half
of 1999 and are expected to cost approximately $5,000, of which approximately
$300 has been spent as of June 30, 1998.
The "Year 2000 Issue" is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The new enterprise systems
discussed above have the added benefit of addressing Year 2000 systems issues.
The Company is also communicating with suppliers, distributors, financial
institutions and others with which it does business to evaluate and coordinate
Year 2000 requirements. There can be no assurance that the systems of other
companies on which the Company's systems rely will also be timely converted or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems. Failure to complete the system conversion in a
timely manner or any significant disruption of the Company's ability to
communicate electronically with its business partners could negatively impact
the Company's business, financial condition and results of operations. The
statements set forth herein are forward looking; and actual results may differ
materially (see Cautionary Statement below).
9
<PAGE> 10
NOTE 5 - SUBSEQUENT EVENTS
On July 23, 1998, the Company acquired substantially all of the assets of
Contract Marketing, Inc., a Massachusetts corporation, and U.S. Import and
Promotions Co., a Florida Corporation, (the "Acquired Businesses") in exchange
for $15,000 in cash plus potential additional cash consideration based upon the
results of operations of the Acquired Businesses during each calendar year
through December 31, 2002. The Acquired Businesses focus primarily on promotions
for oil and gas and other retailers. The acquisition will be accounted for as a
purchase and was financed through bank borrowings from the Company's existing
credit facility with Sanwa Bank California and Imperial Bank.
On July 23, 1998, the credit agreement was amended to reflect the impact of the
acquisition of the Acquired Businesses on certain of the agreement's covenants
relating to the maintenance of financial ratios, to amend the maturity date to
December 31, 1999 and to amend the rate of interest on bank borrowings to a
fixed rate equivalent to the Eurodollar rate plus 2.25% or a variable rate
equivalent to the Bank's reference rate plus .25%.
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING CAUTIONARY STATEMENT IS INCLUDED IN THIS QUARTERLY REPORT
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995:
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, INCLUDING, WITHOUT LIMITATION, THE POTENTIAL
CANCELLATION AND/OR DELAY OF PROMOTIONS DUE TO DELAYS IN RELEASE OF THE
THEATRICAL MOTION PICTURES, THE FAILURE OF THE COMPANY TO OBTAIN PROMOTIONS
PROJECTS BASED ON THESE MOTION PICTURES AT ANTICIPATED LEVELS, THE SUCCESS
OR FAILURE OF A SPECIFIC MOTION PICTURE OR TELEVISION PROPERTY, THE LOSS OF
EXISTING LICENSES OR THE INABILITY TO RENEW OR EXTEND LICENSES UNDER
FAVORABLE TERMS, CONSUMER DEMAND FOR ITS PRODUCTS, THE COMPANY'S DEPENDENCE
ON A SINGLE CUSTOMER, QUARTERLY FLUCTUATIONS IN FINANCIAL RESULTS,
DIFFICULTIES IN CONSUMMATING AND INTEGRATING ACQUISITIONS, AND INCREASES IN
INTERNATIONAL TARIFF RATES, WHICH WOULD INCREASE THE COMPANY'S COST OF
SALES. FORWARD LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL," "SHOULD," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "CONTINUE," "PLANS," "INTENDS," OR OTHER SIMILAR
TERMINOLOGY.
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 circumstance after the date hereof or to reflect the occurrence of
unanticipated events. The risks highlighted herein should not be assumed to be
the only items that could affect future performance of the Company. In addition
to the information contained in this document, readers are advised to review the
Company's Form-10K for the year ended December 31, 1997, under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements and Risk Factors."
Equity Marketing, Inc., a Delaware corporation (the "Company"), designs,
develops, produces, and markets a broad variety of consumer products,
collectibles and promotional products incorporating licensed characters from
films, television, sports, publishing, oil and gas and other sources.
Equity Marketing Hong Kong, Ltd., a Delaware corporation ("EMHK"), is a 100%
owned subsidiary of the Company. EMHK manages production of the Company's
products by third parties in the Far East and currently is responsible for
performing and/or procuring product sourcing, product engineering, quality
control inspections, independent safety testing and export/import documentation.
Synergy Promotions S.A. de C.V. ("Synergy") was incorporated in Mexico in 1996
and is 100% owned by the Company. Synergy markets the Company's consumer
products in Mexico. Prior to June 1998, the Company owned 65% of Synergy. The
Company acquired the 35% minority interest during June 1998 for $68.
11
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
operating results as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 74.2 69.5 73.3 71.7
------ ------ ------ ------
Gross profit 25.8 30.5 26.7 28.3
------ ------ ------ ------
Operating Expenses:
Salaries, wages and benefits 6.8 10.1 7.8 10.5
Selling, general and administrative 7.2 12.4 8.3 11.7
------ ------ ------ ------
Total operating expenses 14.0 22.5 16.1 22.2
------ ------ ------ ------
Income from operations 11.8 8.0 10.6 6.1
Interest income, net 0.1 0.3 0.2 0.4
------ ------ ------ ------
Income before provision for income taxes 11.9 8.3 10.8 6.5
Provision for income taxes 4.6 3.2 4.2 2.5
------ ------ ------ ------
Net income 7.3% 5.1% 6.6% 4.0%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS):
Revenues for the three months ended June 30, 1998 decreased $16,045 or 34% to
$30,593 from $46,638 in the comparable period in 1997. Promotions revenues
decreased $17,888 to $19,534 primarily as a result of lower sales on a Burger
King promotion related to the release of DreamWorks SKG's Small Soldiers movie
in 1998 in contrast to two promotions associated with the release of Universal
Studio's The Lost World: Jurassic Park and a video release of The Land Before
Time in 1997. In addition, the Small Soldiers promotion started late in the
quarter and ran into the third quarter of 1998. Consumer products revenues
increased $318 to $9,534 primarily due to sales related to Columbia/Tri-Star
Pictures' release of Godzilla and sales of Headliners products subsequent to the
Company's acquisition of Corinthian Marketing, Inc. ("Corinthian"), offset by
lower sales under the Company's Warner Bros. international Looney Tunes license
which terminates at the end of 1998.
Cost of sales decreased $13,356 to $21,274 (69.5% of revenues) for the three
months ended June 30, 1998 from $34,630 (74.2% of revenues) in the comparable
period in 1997 due primarily to lower sales in 1998. The gross margin percentage
for the period increased because of a more profitable mix of revenues in 1998.
Consumer product programs, which typically have higher margins compared to
promotional programs, accounted for 36% of revenues in 1998 compared to 20% in
1997.
Operating expenses increased $344 (5.3%) to $6,863 (22.5% of revenues) from
$6,519 (14.0% of revenues) in the comparable period in 1997 primarily due to
increased occupancy costs for facilities to support a higher number of employees
in 1998, higher depreciation and amortization expense due to higher fixed asset
levels and amortization of intangibles related to the acquisition of Corinthian
in April 1998 and higher marketing costs associated with the Company's consumer
products lines in 1998.
The effective tax rate for the three months ended June 30, 1998 is 38.5%, which
is consistent with the prior year.
Net income decreased $1,843 or 54.1% to $1,565 (5.1% of revenues) from $3,408
(7.3% of revenues) in 1997 primarily due to lower revenues combined with
increased operating expenses partially offset by a higher gross margin
percentage in 1998.
12
<PAGE> 13
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS):
Revenues for the six months ended June 30, 1998 decreased $13,867 or 20.3% to
$54,389 from $68,256 in the comparable period in 1997. Promotions revenues
decreased $12,823 to $39,664 primarily as a result of lower sales on a Burger
King promotion related to the release of DreamWorks SKG's Small Soldiers movie
in 1998 in contrast to two promotions associated with the release of Universal
Studio's The Lost World: Jurassic Park and a video release of The Land Before
Time in 1997. In addition, the Small Soldiers promotion started late in the
second quarter and ran into the third quarter of 1998. Consumer products
revenues decreased $2,569 to $13,200 primarily due to lower sales under the
Company's Warner Bros. international Looney Tunes license which terminates at
the end of 1998 partially offset by sales related to Columbia/Tri-Star Pictures'
release of Godzilla and sales of Headliners products subsequent to the Company's
acquisition of Corinthian.
Cost of sales decreased $11,015 to $39,000 (71.7% of revenues) for the six
months ended June 30, 1998 from $50,015 (73.3% of revenues) in the comparable
period in 1997 due primarily to lower sales in 1998. The gross margin percentage
for the period increased because of a more profitable mix of revenues in 1998.
Consumer product programs, which typically have higher margins compared to
promotional programs, accounted for 27% of revenues in 1998 compared to 23% in
1997.
Operating expenses increased $1,072 (9.7%) to $12,071 (22.2% of revenues) from
$10,999 (16.1% of revenues) in the comparable period in 1997 primarily due to
the addition of 23 employees anticipated over the June 30, 1997 level due to the
acquisition of Corinthian and more employees to support anticipated higher sales
volumes in the second half of 1998, increased occupancy costs for facilities to
support the higher number of employees in 1998, higher depreciation and
amortization expense due to higher fixed asset levels and amortization of
intangibles related to the acquisition of Corinthian in April 1998 and higher
marketing costs associated with the Company's consumer products lines in 1998.
The effective tax rate for the six months ended June 30, 1998 is 38.5%, which is
consistent with the prior year.
Net income decreased $2,369 or 52.1% to $2,181 (4.0% of revenues) from $4,550
(6.6% of revenues) in 1997 primarily due to lower revenues earned in addition to
increases in operating expenses partially offset by a higher gross margin
percentage in 1998.
FINANCIAL CONDITION AND LIQUIDITY
As of June 30, 1998, the Company's investment in cash and cash equivalents
decreased $7,788 from the balance at December 31, 1997. This decrease was
primarily due to cash paid in the acquisition of Corinthian in April 1998.
As of June 30, 1998, the Company's investment in accounts receivable increased
$1,289 from the balance at December 31, 1997. This increase is primarily due to
accounts receivable acquired in the acquisition of Corinthian and due to
promotions program shipments late in the quarter ended June 30, 1998. As of June
30, 1998, inventory increased approximately $1,139 from December 31, 1997,
primarily as a result of production-in-process related to Toys and Promotions
programs which are scheduled to ship in the third and fourth quarters of 1998.
The increase in inventory is also attributable to inventory acquired in the
acquisition of Corinthian.
As of June 30, 1998, accounts payable and accrued expenses and other current
liabilities increased $4,354 compared to December 31, 1997. This increase is
primarily attributable to liabilities acquired in the Corinthian acquisition and
to increases in accounts payable resulting from manufacturing costs associated
with product shipments made late in the quarter.
13
<PAGE> 14
As of June 30, 1998, working capital was $22,309 compared to $29,064 at December
31, 1997. The decrease in working capital was primarily a result of cash used in
the acquisition of Corinthian, partially offset by profits earned for the six
months ended June 30, 1998. On July 23, 1998, the Company acquired substantially
all of the assets of Contract Marketing, Inc. and U.S. Imports and Promotions
Co. in exchange for $15,000 in cash plus additional contingent cash
consideration based upon the results of operations of the acquired businesses
during each calendar year through December 31, 2002. This acquisition was
financed through bank borrowings under the Company's existing credit facility.
In addition, the Company is currently in the process of implementing a new
computer system which is expected to cost approximately $5,000. As a result of
these items, together with potential growth in the Company's business and other
potential acquisitions, the Company will likely require additional financing. It
is anticipated that such financing would be obtained depending on availability
and market conditions, through bank financing, the issuance of additional equity
or debt securities, or a combination of these sources. The Company is currently
in negotiations with its banks to increase the credit facility to approximately
$40 million. There can be no assurance, however, that such negotiations will be
successful or that sufficient funding from other sources will be available at
terms considered favorable by the Company. Any failure by the Company to timely
obtain sufficient funding on favorable terms or otherwise could negatively
impact the Company's business, financial condition and results of operations.
The statements set forth herein are forward-looking, and actual results may
differ materially (see the Cautionary Statement above).
CREDIT FACILITIES
The Company maintains a credit agreement with two commercial banks which makes
available to the Company a line of credit of up to $25 million. The credit
facility is secured by substantially all of the Company's assets. As of June 30,
1998, there were no amounts outstanding under this credit facility. Letters of
credit amounts outstanding as of December 31, 1997 and June 30, 1998 were $4,156
and $2,763, respectively. As of August 12, 1998 there was a total of
approximately $13,000 outstanding under this credit facility.
Subsequent to June 30, 1998 the credit agreement was amended to reflect the
impact of the acquisitions of Contract Marketing, Inc. and U.S. Imports and
Promotions Co. on certain of the agreement's covenants relating to the
maintenance of financial ratios, to amend the maturity date to December 31, 1999
and to amend the rate of interest on bank borrowings to a fixed rate equivalent
to the Eurodollar rate plus 2.25% or a variable rate equivalent to the Bank's
reference rate plus .25%.
RELIANCE ON FOREIGN MANUFACTURERS
The Company's products are 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, foreign currency instability, the imposition of tariffs, quotas and
other import or export controls, and changes in governmental policies.
FOREIGN CURRENCY RISK
As part of the Company's business, the Company enters into contracts for the
purchase and sale of its products with entities in foreign countries. While the
vast majority of the Company's contracts are denominated in U.S. dollars,
significant fluctuations in the local currencies of the entities with whom the
Company transacts business may adversely affect these entities abilities to
fulfill their obligations under their contracts.
INFORMATION SYSTEMS
Based on a recent strategic and operational assessment, the Company decided to
replace its existing information systems. The new enterprise systems are
designed to enhance management information, financial reporting, inventory
management, order entry and cost evaluation and control. The conversion to the
new systems and related projects are scheduled to be completed in the first half
of 1999 and are expected to cost approximately $5,000, of which approximately
$300 has been spent as of June 30, 1998.
14
<PAGE> 15
The "Year 2000 Issue" is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The new enterprise systems
discussed above have the added benefit of addressing Year 2000 systems issues.
The Company is also communicating with suppliers, distributors, financial
institutions and others with which it does business to evaluate and coordinate
Year 2000 requirements. There can be no assurance that the systems of other
companies on which the Company's systems rely will also be timely converted or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems. Failure to complete the system conversion in a
timely manner or any significant disruption of the Company's ability to
communicate electronically with its business partners could negatively impact
the Company's business, financial condition and results of operations. The
statements set forth herein are forward looking, actual results may differ
materially (see Cautionary Statement above).
15
<PAGE> 16
PART II.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 28, 1998.
Proxies for the Annual Meeting were solicited pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
there was no solicitation in opposition to that of management. All of
management's nominees for directors as listed in the proxy statement were
elected. At the Annual Meeting, the following matters were approved by the
Stockholders:
<TABLE>
<CAPTION>
Votes For Votes Against or Abstentions and
Withheld Broker Non-Votes
------------------- ------------------- -----------------------
<S> <C> <C> <C>
1. Election of Directors
Lawrence Elins 4,991,020 128,700 --
Sanford R. Climan 4,990,820 128,900 --
Donald A. Kurz 4,991,020 128,700 --
Bruce Raben 4,990,820 128,900 --
Stephen P. Robeck 4,991,020 128,700 --
2. Ratification of Arthur Andersen LLP as the 5,117,040 595 2,085
Company's Independent Auditor
3. Amendment of the Equity Marketing, Inc. 3,656,674 290,248 1,172,798
Stock Option Plan
4. Amendment of the Non-Employee Director Stock 3,771,936 152,870 1,194,914
Option Plan
</TABLE>
ITEM 5. OTHER INFORMATION
If a stockholder proposal is introduced at the 1999 Annual Meeting of
Stockholders without any discussion of the proposal in the proxy statement,
and if the proponent does not notify the Company on or before March 14,
1999, as required by Rule 14a-4(c)(1) promulgated under the Exchange Act,
of the intent to raise such proposal at the Annual Meeting, then proxies
received by the Company for the 1999 Annual Meeting will be voted by the
persons named as proxies in their discretion in regard to such proposal.
Notice is to be given to the Company in writing at its principal office,
131 South Rodeo Drive, Beverly Hills, California, 90212-2428, directed to
the attention of Leland P. Smith, Secretary.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment dated June 30, 1998 to Credit Agreement between the
Company and Sanwa Bank California and Imperial Bank.
10.2 Amendment dated July 23, 1998 to Credit Agreement between the
Company and Sanwa Bank California and Imperial Bank.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K:
Report on Form 8-K filed with the Securities and Exchange Commission
on May 8, 1998. (Item 2)
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUITY MARKETING, INC.
------------------------------------
(Registrant)
Date: As of August 14, 1998 /s/ DONALD A. KURZ
------------------------------------
Donald A. Kurz
President, Co-Chief Executive
Officer
/s/ MICHAEL J. WELCH
------------------------------------
Michael J. Welch
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
10.1 Amendment dated June 30, 1998 to Credit Agreement between the Company and
Sanwa Bank California and Imperial Bank.
10.2 Amendment dated July 23, 1998 to Credit Agreement between the Company and
Sanwa Bank California and Imperial Bank
27.0 Financial Data Schedule
18
<PAGE> 1
EXHIBIT 10.1
SIXTH AMENDMENT TO CREDIT AGREEMENT
THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made and
dated as of the 30th day of June, 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, Agent and the Lenders desire 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 Financial Covenant. To reflect the agreement of the
parties hereto to modify one of the financial covenants contained in the Credit
Agreement, 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 March 31,
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 March 31, 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 March 31, 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 March 31, 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."
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
19
<PAGE> 2
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.
3. Reaffirmation of Guaranty. By executing this Amendment as provided
below, Corinthian Marketing, Inc. ("Corinthian") 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 Corinthian or the rights of the Agent and
the Lenders under that certain Continuing Guaranty and under that certain
Subsidiary Security Agreement, each dated as of April 24, 1998, executed by
Corinthian or any other document or instrument made or given by the Corinthian
in connection therewith, (b) the term "Obligations" as used in the Loan
Documents includes, without limitation, the Obligations of the Company under the
Credit Agreement as amended hereby and (c) such Continuing Guaranty and
Subsidiary Security Agreement remain in full force and effect.
4. Effective Date. This Amendment shall be effective as of the date
first set forth above at such time as the Agent receives a copy of this
Amendment, which may be a counterpart copy, duly executed by 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 Amendment and has taken all
necessary corporate action to authorize such execution, delivery and
performance.
(b) This Amendment has been duly executed and delivered on behalf
of the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its respective
terms.
(c) At and as of the date of execution hereof and both prior to
and after giving effect hereto: (1) 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 (2) 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 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.
20
<PAGE> 3
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/ S.P. Robeck
----------------------------------
Name S.P. Robeck
--------------------------------
Title Chairman, Co-CEO
-------------------------------
SANWA BANK CALIFORNIA, as Agent
and as a Lender
By /s/ S.L. Skelton
----------------------------------
Name S.L. Skelton
--------------------------------
Title VP
-------------------------------
IMPERIAL BANK, as a Lender
By /s/ Jeff Colvin
----------------------------------
Name Jeff Colvin
--------------------------------
Title SVP
-------------------------------
21
<PAGE> 4
ACKNOWLEDGED AND AGREED TO
as of the day and year first above written:
CORINTHIAN MARKETING, INC.
a Delaware corporation
By /s/ S.P. Robeck
----------------------------------
Name S.P. Robeck
--------------------------------
Title Chairman, Co-CEO
-------------------------------
22
<PAGE> 1
EXHIBIT 10.2
SEVENTH AMENDMENT TO
CREDIT AGREEMENT AND CONSENT TO ACQUISITION
THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT AND CONSENT TO ACQUISITION
(the "Amendment and Consent") is made and dated as of the 23rd day of July,
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 desires to acquire substantially all of the assets of
Contract Marketing, Inc., a Massachusetts corporation ("CMI"), and U.S. Import &
Promotions Co., a Florida corporation ("USIP"), used in the operation of each
such corporation's promotional products business (the "CMI/USIP Acquisitions")
on the terms and subject to the conditions set forth in those certain Asset
Purchase Agreements, each dated as of July 23, 1998 by and among the Company and
the respective seller and the sole shareholders of each of CMI and USIP (the
"Acquisition Agreements") and has requested the Agent and the Lenders to consent
to the Acquisitions as required pursuant to the Credit Agreement.
C.The Agent and the Lenders desire to set forth herein the terms and
conditions of such consent and, with the agreement of the Company, 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. Consent to CMI/USIP Acquisitions. On the terms and subject to the
conditions set forth herein, effective as of the Effective Date (as defined in
Paragraph 8 below) the Agent and each of the Lenders hereby consent to the
CMI/USIP Acquisitions on the terms set forth in the Acquisition Agreements.
2. Modification of Maturity Date. To reflect the agreement of the
parties hereto to modify the current Maturity Date, effective as of the
Effective Date the definition of "Maturity Date" set forth in Paragraph 12 of
the Credit Agreement is hereby amended to read in its entirety as follows:
23
<PAGE> 2
"'Maturity Date' shall mean the earlier of: (a) December 31, 1999, and
(b) the date the Lenders terminate their obligation to make further Loans
hereunder pursuant to Paragraph 9 above."
3. Pricing Modification. To reflect the agreement of the parties to
modify the pricing applicable to Loans outstanding under the Credit Agreement,
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
for any COF Loan, the COF Rate for such Interest Period plus the Applicable COF
Spread."
(b) Subparagraph (2) of Paragraph 1(b) of the Credit Agreement is
hereby amended to read in its entirety as follows:
"(2) with respect to each Loan which is a Reference Rate Loan, at
the Applicable Reference Rate during the applicable computation period."
(c) The following new definitions are hereby added, in correct
alphabetical order, to Paragraph 12 of the Credit Agreement to read in their
entirety as follows:
"'Applicable Reference Rate' shall mean for any interest
calculation period for any Reference Rate Loan, the daily average Reference Rate
in effect during such calculation period plus the Applicable Reference Rate
Spread."
"'Applicable COF Spread' shall mean: (a) to but not
including July 23, 1998, one and three quarters percent (1.75%),
(b) from and including July 23, 1998 to and including the date of
receipt by the Agent of the covenant compliance certificate
required to be delivered pursuant to Paragraph 7(a)(3) above in
connection with the delivery of the Company's annual financial
statements pursuant to Paragraph 7(a)(1) above for the fiscal
year ending December 31, 1998, two and one quarter of one percent
(2.25%), and (c) thereafter, two percent (2.00%)."
"'Applicable Reference Rate Spread' shall mean: (a) to but
not including July 23, 1998, zero percent (0.00%), (b) from and
including July 23, 1998 to and including the date of receipt by
the Agent of the covenant compliance certificate required to be
delivered pursuant to Paragraph 7(a)(3) above in connection with
the delivery of the Company's annual financial statements
pursuant to Paragraph 7(a)(1) above for the fiscal year ending
December 31, 1998, one quarter of one percent (0.25%), and (c)
thereafter, zero percent (0.00%)."
4. New Leased Premises. To reflect the agreement of the Agent and the
Lenders to permit the Company to enter into a new lease and to consolidate its
existing facilities, effective as of the Effective Date:
24
<PAGE> 3
(a) Paragraph 6(b) is hereby amended to add the phrase "and
subsequent replacement leases entered into consistent with the terms of this
Agreement" immediately prior to the period at the end thereof.
(b) Subparagraph (8) of Paragraph 8(b) is hereby amended to read
in its entirety as follows:
"(8) Indebtedness incurred in connection with occupancy
leases requiring rental and other payments in an amount not to exceed
$2,500,000.00 in the aggregate during any fiscal year;"
5. Financial Covenants. To reflect the agreement of the parties to
modify certain of the financial covenants contained in the Credit Agreement and
to add an additional financial covenant thereto, 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 to be less than the sum
of: (i) for each calendar quarter ending prior to the consummation of the
CMI/USIP Acquisitions, $20,000,000.00 and for each calendar quarter
thereafter $9,700,000.00, plus, in each case (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 to be less than the sum of (i)
for each calendar quarter ending prior to the consummation of the CMI/USIP
Acquisitions, $20,000,000.00 and for each calendar quarter thereafter
$9,700,000.00, plus, in each case (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 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 the Company's
ratio of total liabilities (including outstanding letters of credit) to
tangible net worth or the Company's ratio of consolidated total liabilities
(including outstanding letters of credit) to consolidated tangible net
worth to be more than: (i) as of the last day of each calendar quarter
ending prior to the consummation of the CMI/USIP Acquisitions, 3.00:1.00,
(ii) if the consummation of the CMI/USIP Acquisitions shall have occurred
prior to such date, as of September 30, 1998, 6.50:1.00, (iii) if the
Consummation of the CMI/USIP Acquisitions shall have occurred prior to such
date, as of December 31, 1998, 3.70:1.00, and (iv) if the consummation of
the CMI/USIP Acquisition shall have occurred, as of the last day of each
calendar quarter commencing March 31, 1999, 3.00:1.00; or
(2) permit the Company's ratio of total liabilities (excluding outstanding
letters of credit) to tangible net worth or the Company's ratio of
consolidated total liabilities (excluding outstanding letters of credit) to
consolidated tangible net worth to be more than: (i) as
25
<PAGE> 4
of the last day of each calendar quarter ending prior to the consummation
of the CMI/USIP Acquisitions, 2.25:1.00, (ii) if the consummation of the
CMI/USIP acquisitions shall have occurred prior to such date, as of
September 30, 1998, 6.20:1.00, (iii) if the consummation of the CMI/USIP
Acquisitions shall have occurred prior to such date, as of December 31,
1998, 3.50:1.00, and (iv) if the consummation of the CMI/USIP Acquisition
shall have occurred, as of the last day of each calendar quarter commencing
March 31, 1999, 2.75:1.00."
(c) Paragraph 8(k) is hereby amended to read in its entirety as
follows:
"8(k) Minimum Current Ratio. Permit the Company's ratio of current assets
to current liabilities (excluding indebtedness permitted under paragraph
8(b)(7) above), or 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) as of the last day of each
calendar quarter ending prior to the consummation of the CMI/USIP
Acquisitions, 1.25:1.00, (2) if the consummation of the CMI/USIP
Acquisitions shall have occurred prior to such date, as of September 30,
1998, 1.00:1.00, (3) if the consummation of the CMI/USIP Acquisitions shall
have occurred prior to such date, as of December 31, 1998, 1.00:1.00, and
(4) if the consummation of the CMI/USIP Acquisition shall have occurred, as
of the last day of each calendar quarter commencing March 31, 1999,l
1.15:1.00."
(d) Paragraph 8(l) is hereby amended to read in its entirety as
follows:
"8(l) Minimum Coverage Ratios. Permit as of the last day of any
calendar quarter:
(1) The ratio of: (i) EBITDA of the Company during such
quarter and the immediately preceding three calendar quarters to
(ii) interest expense of the Company during such four calendar
quarters, to be less than 3.00:1.00, or
(2) The ratio of (i) EBITDA of the Company and its
consolidated subsidiaries during such quarter and the immediately
preceding three calendar quarters to (ii) interest expense of the
Company and its consolidated subsidiaries during such four
calendar quarters to be less than 3.00:1.00, or
(3) The ratio of (i) funded debt of the Company during such
quarter to (ii) EBITDA of the Company during such quarter and the
immediately preceding three calendar quarters to be less than (y)
2.00:1.00 for the calendar quarter ending September 30, 1998, or
(z) 1.75:1.00 for any calendar quarter thereafter, or
(4) The ratio of (i) funded debt of the Company and its
consolidated subsidiaries during such quarter to (ii) EBITDA of
the Company and its consolidated subsidiaries during such quarter
and the immediately preceding three calendar quarters to be less
than (y) 2.00:1.00 for the calendar quarter ending September 30,
1998, or (z) 1.75:1.00 for any calendar quarter thereafter."
(e) The following new definitions are hereby added, in correct
alphabetical order, to Paragraph 12 of the Credit Agreement to read in their
entirety as follows:
"'CMI/USIP Acquisitions' shall mean the acquisition by the
Company of substantially of the assets of Contract Marketing, Inc., a
Massachusetts corporation, and U.S. Import & Promotions Co., a Florida
corporation, used in the operation of each such corporation's promotional
products business on the terms and subject to the conditions set forth in those
certain asset purchase agreements, each dated as of July 23, 1998 by and among
the Company and the respective seller and the sole shareholders of each of the
sellers."
"'Funded Debt' shall mean for any person for any period all
indebtedness for borrowed money outstanding during such period.
6. Reaffirmation of Security Agreement. The Company hereby affirms and
26
<PAGE> 5
agrees that (a) the execution and delivery by the Company of and the performance
of its obligations under this Amendment and Consent 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.
7. Reaffirmation of Guaranty. By executing this Amendment and Consent
as provided below, Corinthian Marketing, Inc. ("Corinthian") affirms and agrees
that (a) the execution and delivery by the Company of and the performance of its
obligations under this Amendment and Consent shall not in any way amend, impair,
invalidate or otherwise affect any of the obligations of the Corinthian or the
rights of the Agent and the Lenders under that certain Continuing Guaranty and
under that certain Subsidiary Security Agreement, each dated as of April 24,
1998, executed by Corinthian or any other document or instrument made or given
by the Corinthian in connection therewith, (b) the term "Obligations" as used in
the Loan Documents includes, without limitation, the Obligations of the Company
under the Credit Agreement as amended hereby and (c) such Continuing Guaranty
and Subsidiary Security Agreement remain in full force and effect.
8. Effective Date. This Amendment and Consent shall be effective as of
the date (the "Effective Date") that the Agent receives each of the following:
(a) A duly executed copy of this Amendment and Consent, which may
be a counterpart copy, from each party hereto;
(b) A copy of each of the final form of the Acquisition
Agreements, certified by an Approved Financial Officer as complete and correct;
(c) From the Company, such corporate resolutions, incumbency
certificates and other authorizations as the Agent may request; and
(d) For distribution to the Lenders in accordance with their
respective Percentage Shares, in immediately available funds, an amendment fee
of $25,000.00.
If the CMI/USIP Acquisitions shall not have been consummated and the Effective
Date occurred on or before August 15, 1998, then this Amendment and Consent
shall, at the option of the Agent and the Lenders as evidenced by a notice to
such effect given by the Agent to the Company, terminate and be of no further
force or effect.
9. Representations and Warranties. Each of the Company and Corinthian,
as to itself, hereby represents and warrants to the Agent and the Lenders as
follows:
(a) Such Person has the corporate power and authority and the
legal right to execute, deliver and perform this Amendment and Consent and has
taken all necessary corporate action to authorize such execution, delivery and
performance.
27
<PAGE> 6
(b) This Amendment and Consent has been duly executed and
delivered on behalf of such Person and constitutes the legal, valid and binding
obligation of such Person, enforceable against such Person in accordance with
its respective terms.
(c) At and as of the date of execution hereof and at and as of
the Effective Date and both prior to and after giving effect hereto: (1) the
representations and warranties of such Person contained in the Credit Agreement
and the other Loan Documents to which such Person is party are accurate and
complete in all respects, and (2) there has not occurred an Event of Default or
Potential Default.
(d) Upon consummation of the closing of the CMI/USIP
Acquisitions, the Company will have acquired and will own free and clear of any
right, title, claim or interest, by way of security interest or otherwise all
registered patents, trademarks and copyrights included in the "Intellectual
Property" (as defined n the Acquisition Agreements), which registered patents,
trademarks and copyrights are accurately and completely described on Exhibit A
attached hereto (the "Registered Intellectual Property") and, with respect to
all Registered Intellectual Property registered in the United States and such
other Registered Intellectual Property as the Lenders may request, will promptly
take such actions as are necessary to: (1) reflect such ownership interest in
all applicable filing offices, including, without limitation, the U.S. Patent
and Trademark Office, and (2) record in such offices such documents, instruments
and agreements as are necessary to reflect the first priority, perfected
security interest of the Agent for the benefit of the Lenders therein.
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 and Consent 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 and
Consent to be executed as of the day and year first above written.
EQUITY MARKETING, INC.,
a Delaware corporation
By /s/ S.P. Robeck
-------------------------
Name S.P. Robeck
-------------------------
Title Chairman, Co-CEO
-------------------------
28
<PAGE> 7
SANWA BANK CALIFORNIA, as Agent and
as a Lender
By /s/ S.L. Skelton
_________________________________
Name S.L. Skelton
_______________________________
Title VP
______________________________
IMPERIAL BANK, as a Lender
By /s/ Jeff Colvin
_________________________________
Name Jeff Colvin
_______________________________
Title SVP
______________________________
29
<PAGE> 8
ACKNOWLEDGED AND AGREED TO as of the day and year first above written:
CORINTHIAN MARKETING, INC.
a Delaware corporation
By /s/ S.P. Robeck
_______________________________
Name S.P. Robeck
_____________________________
Title Chairman, Co-CEO
____________________________
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,147
<SECURITIES> 0
<RECEIVABLES> 29,662
<ALLOWANCES> 1,227
<INVENTORY> 9,797
<CURRENT-ASSETS> 46,714
<PP&E> 5,108
<DEPRECIATION> 2,348
<TOTAL-ASSETS> 64,420
<CURRENT-LIABILITIES> 24,405
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 41,375
<TOTAL-LIABILITY-AND-EQUITY> 64,420
<SALES> 54,389
<TOTAL-REVENUES> 54,389
<CGS> 39,000
<TOTAL-COSTS> 39,000
<OTHER-EXPENSES> 12,071
<LOSS-PROVISION> 165
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 3,545
<INCOME-TAX> 1,364
<INCOME-CONTINUING> 2,181
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,181
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
