<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 23346
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.)
6330 SAN VICENTE BLVD.
LOS ANGELES, CA 90048
(Address of principal executive offices) (Zip Code)
(323) 932-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate 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, 6,226,499 shares as of August 09, 1999.
<PAGE> 2
EQUITY MARKETING, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
JUNE 30, 1999
<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 12
PART II.
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,250 $ 2,441
Accounts receivable (net of allowances
of $3,684 and $2,586 as of December 31, 1998
and June 30, 1999, respectively) 57,071 39,881
Inventory 13,117 11,312
Prepaid expenses and other current assets 7,915 6,670
----------- ---------
Total current assets 85,353 60,304
FIXED ASSETS, net 5,892 5,306
INTANGIBLE ASSETS, net 23,442 22,881
OTHER ASSETS 793 1,225
----------- ---------
Total assets $ 115,480 $ 89,716
=========== =========
</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,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt $ 30,000 $ 16,700
Accounts payable 28,432 17,029
Accrued expenses and other current liabilities 22,653 18,857
--------- ---------
Total current liabilities 81,085 52,586
LONG-TERM LIABILITIES 1,988 1,998
--------- ---------
Total liabilities 83,073 54,584
--------- ---------
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,
6,227,718 and 6,223,665 shares outstanding
as of December 31, 1998 and June 30, 1999, respectively -- --
Additional paid-in capital 15,343 15,293
Retained earnings 19,063 21,662
--------- ---------
34,406 36,955
Less--
Treasury stock, 1,892,841 shares and 1,882,518 shares, at cost, as of
December 31, 1998 and June 30, 1999, respectively (1,279) (1,274)
Stock subscription receivable (32) (32)
Unearned compensation (688) (517)
--------- ---------
Total stockholders' equity 32,407 35,132
--------- ---------
Total liabilities and stockholders' equity $ 115,480 $ 89,716
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
<PAGE> 5
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1998 1999 1998 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 30,593 $ 56,011 $ 54,389 $ 83,468
COST OF SALES 20,572 42,992 38,298 63,537
----------- ----------- ----------- -----------
Gross profit 10,021 13,019 16,091 19,931
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Salaries, wages and benefits 3,437 3,444 6,082 6,916
Selling, general and administrative 4,128 4,986 6,691 8,645
Restructuring gain -- (401) -- (401)
----------- ----------- ----------- -----------
Total operating expenses 7,565 8,029 12,773 15,160
----------- ----------- ----------- -----------
Income from operations 2,456 4,990 3,318 4,771
INTEREST INCOME (EXPENSE), net 88 (217) 227 (439)
----------- ----------- ----------- -----------
Income before provision for
income taxes 2,544 4,773 3,545 4,332
PROVISION FOR INCOME TAXES 979 1,909 1,364 1,733
----------- ----------- ----------- -----------
Net income $ 1,565 $ 2,864 $ 2,181 $ 2,599
=========== =========== =========== ===========
BASIC NET INCOME PER SHARE $ 0.26 $ 0.46 $ 0.36 $ 0.42
=========== =========== =========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 6,035,066 6,223,099 6,022,585 6,216,607
=========== =========== =========== ===========
DILUTED NET INCOME PER SHARE $ 0.25 $ 0.45 $ 0.35 $ 0.41
=========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 6,315,415 6,340,969 6,315,159 6,314,557
=========== =========== =========== ===========
</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,
----------------------------
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,181 $ 2,599
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 830 1,371
Provision for doubtful accounts 165 179
Loss on asset disposal -- 11
Tax benefit from exercise of stock options 186 32
Issuance of treasury stock to 401(k) Tax Deferred Savings Plan -- 74
Other (3) (31)
Changes in operating assets and liabilities, excluding effects of
acquisition:
Increase (decrease) in cash and cash equivalents:
Accounts receivable (14) 17,011
Inventory (710) 1,805
Prepaid expenses and other current assets (1,603) 1,245
Other assets (115) (474)
Accounts payable 834 (11,403)
Accrued expenses and other current liabilities (801) (3,796)
Long-term liabilities (35) 10
------- -------
Net cash provided by operating activities 915 8,633
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (784) (172)
Proceeds from sale of fixed assets -- 10
Payment for purchase of Corinthian and Trademark (8,436) --
Other (68) --
------- -------
Net cash used in investing activities (9,288) (162)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 585 20
Repayment on short-term debt -- (13,300)
------- -------
Net cash provided by (used in) financing activities 585 (13,280)
------- -------
Net decrease in cash and cash equivalents (7,788) (4,809)
CASH AND CASH EQUIVALENTS, beginning of period 8,935 7,250
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,147 $ 2,441
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest $ 31 $ 615
======= =======
Income taxes $ 1,167 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
6
<PAGE> 7
EQUITY MARKETING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1 - ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation (the "Company"), is a leading
provider of custom promotional products and services, and a developer of
distinctive, branded consumer products that complement the Company's promotions
business. The Company primarily sells to customers in the United States.
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.
In April 1998, the Company purchased 100% of the common stock of Corinthian
Marketing, Inc., a Delaware corporation ("Corinthian"). Corinthian is engaged
principally in the design, manufacture, marketing and distribution of the
Headliners brand of collectible sports figurines.
In July 1998, the Company acquired substantially all of the assets of Contract
Marketing, Inc. ("CMI"), a Massachusetts corporation, and U.S. Import and
Promotions Co. ("USI"), a Florida corporation (collectively referred to herein
as "CMI/ USI"). CMI/USI focuses primarily on promotions for oil and gas and
other retailers. The Company intends to continue to use the acquired assets for
this purpose. The primary operations of CMI/USI are located in West Boylston,
Massachusetts and St. Augustine, Florida.
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, 1998.
Certain reclassifications have been made to the accompanying 1998 financial
statements to conform them to the current period presentation.
7
<PAGE> 8
NET INCOME PER SHARE
Diluted Earnings Per Share ("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 and warrants 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 280,349 at
quarter end June 30, 1998 and 117,870 at quarter end June 30, 1999, 292,574 for
the six months ended June 30, 1998 and 97,950 for the six months ended June
30,1999. Options to purchase 338,000 and 608,000 shares of common stock were
outstanding as of June 30, 1998 and 1999, respectively, which were excluded from
the computation of diluted income per share as they would have been
anti-dilutive.
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,
1998 and June 30, 1999, inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
Production-in-process $ 2,140 $ 213
Finished goods 10,977 11,099
------- -------
$13,117 $11,312
======= =======
</TABLE>
NOTE 3 - ACQUISITION
On April 24, 1998, the Company acquired 100% of the common stock of Corinthian
and certain trademarks related to its business, including the "Headliners"
trademark (the "Trademark"), from Corinthian Marketing PLC, for total cash
consideration of $7,892 plus related transaction costs of $544 at the closing.
Corinthian is engaged principally in the design, manufacture, marketing and
distribution of the Headliners brand of collectible sports figurines.
On July 23, 1998, the Company acquired substantially all of the assets of CMI
and USI, in exchange for $14,659 plus related transaction costs of $429.
Potential additional cash consideration may be paid based upon the results of
operations of CMI/USI during each calendar year through December 31, 2002 as set
forth in the respective Asset Purchase Agreements, dated July 23, 1998, by and
among the Company and each of CMI and USI.
These acquisitions have been accounted for under the purchase method of
accounting. The financial statements reflect the operating results of these
acquired entities from the date of acquisition.
The following unaudited pro-forma information presents a summary of the
consolidated results of operations of the Company as if the acquisitions of
Corinthian and CMI/USI had occurred at the beginning of 1998 and includes
pro-forma adjustments to give effect to the amortization of goodwill, decreased
interest income, increased interest expense associated with funding the
acquisitions, 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, Corinthian and CMI/USI had been a single entity
during 1998, nor is it necessary indicative of the results of operations that
may occur in the future.
8
<PAGE> 9
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, 1998
-------------------
<S> <C>
Pro forma revenues $62,005
Pro forma net income 1,456
Pro forma basic income per share .24
Pro forma diluted net income per share .23
Pro forma basic weighted average
shares outstanding 6,022,585
Pro forma diluted weighted average
Shares outstanding 6,315,159
</TABLE>
NOTE 4 - SEGMENTS
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131-"Disclosures about Segments of an
Enterprise and Related Information." The Company has identified two reportable
segments through which it conducts its continuing operations: promotions and
consumer products. The factors for determining the reportable segments were
based on the distinct nature of their operations. They are managed as separate
business units because each requires and is responsible for executing a unique
business strategy. The promotions segment produces promotional products used as
free premiums or sold in conjunction with the purchase of other items at a
retailer or quick service restaurant. Promotional products are used for
marketing purposes by both the companies sponsoring the promotions and the
licensors of the entertainment properties on which the promotional products are
based. The consumer products segment designs and contracts for the manufacture
of toys and other consumer products for sale to major mass market retailers, who
in turn sell the products to consumers.
Earnings of industry segments exclude interest income, interest expense,
depreciation and amortization expense, and other unallocated corporate expenses.
Income taxes are allocated to segments on the basis of operating results.
Identified assets are those assets used in the operations of the segments.
Corporate assets consist of cash, certain corporate receivables, fixed assets,
and intangibles.
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 1998
----------------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 19,519 $ 11,074 $ - $30,593
==========================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 4,229 $ 1,219 $(2,904) $ 2,544
==========================================================================================================
Provision (benefit) for income taxes 1,628 469 (1,118) 979
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,601 $ 750 $(1,786) $ 1,565
==========================================================================================================
Fixed asset additions, net $ - $ - $ 461 $ 461
==========================================================================================================
Depreciation and amortization $ - $ - $ 483 $ 483
==========================================================================================================
Total assets $ 16,264 $ 21,968 $26,188 $64,420
==========================================================================================================
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 1999
----------------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 50,774 $ 5,237 $ - $ 56,011
==========================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 10,110 $ (690) $(4,647) $ 4,773
==========================================================================================================
Provision (benefit) for income taxes 4,044 (276) (1,859) 1,909
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,066 $ (414) $(2,788) $ 2,864
==========================================================================================================
Fixed asset additions, net $ - $ - $ 69 $ 69
==========================================================================================================
Depreciation and amortization $ - $ - $ 690 $ 690
==========================================================================================================
Total assets $ 49,765 $ 3,664 $36,287 $ 89,716
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 39,648 $ 14,741 $ - $ 54,389
==========================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 7,873 $ 1,516 $(5,844) $ 3,545
==========================================================================================================
Provision (benefit) for income taxes 3,031 583 (2,250) 1,364
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,842 $ 933 $(3,594) $ 2,181
==========================================================================================================
Fixed asset additions, net $ - $ - $ 784 $ 784
==========================================================================================================
Depreciation and amortization $ - $ - $ 830 $ 830
==========================================================================================================
Total assets $ 16,264 $ 21,968 $26,188 $ 64,420
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
----------------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 75,072 $ 8,396 $ - $83,468
==========================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 14,458 $ (589) $(9,537) $ 4,332
==========================================================================================================
Provision (benefit) for income taxes 5,783 (235) (3,815) 1,733
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,675 $ (354) $(5,722) $ 2,599
==========================================================================================================
Fixed asset additions, net $ - $ - $ 172 $ 172
==========================================================================================================
Depreciation and amortization $ - $ - $ 1,371 1,371
==========================================================================================================
Total assets $ 49,765 $ 3,664 $36,287 $ 89,716
==========================================================================================================
</TABLE>
10
<PAGE> 11
NOTE 5 - SHORT-TERM DEBT
At December 31, 1998 and June 30, 1999, the Company was party to a revolving
credit agreement ("Credit Agreement") with two commercial banks. The agreement,
as amended on June 18, 1999 provides for a line of credit of $30,000 through
October 31, 1999 and $25,000 through June 30, 2000 with borrowing availability
determined by a formula based on qualified assets. Interest on outstanding
borrowings is based on either a fixed rate equivalent to LIBOR plus 3.00 percent
or a variable rate equivalent to the lead bank's reference rate plus .50
percent. The Company is also required to pay an unused line fee of .50 percent
per annum and certain letter of credit fees. The Credit Agreement is secured by
substantially all of the Company's assets. The Credit Agreement requires the
Company to comply with certain restrictions and financial covenants as defined
in the agreement. As of December 31, 1998 and March 31, 1999, the Company was
out of compliance with certain of these covenants, for which it has received
waivers from its banks. As of June 30, 1999, the Company was in compliance with
these covenants.
As of December 31, 1998 and June 30, 1999 there was $30,000 and $16,700,
respectively, outstanding under the Credit Agreement. Letter of credit amounts
outstanding as of December 31, 1998 and June 30, 1999 were $995 and $1,688
respectively.
NOTE 6 - RESTRUCTURING RESERVE
In December 1998, the Company announced its decision to exit the
event-based-license consumer products business along with its retail pin
business. In connection with this decision, the Company recorded a restructuring
charge of $4,121. Details of the restructuring charge are as follows:
<TABLE>
<CAPTION>
Utilized
Six Months
Original Utilized Ended To Be
Charge 1998 June 30, 1999 Reversed Utilized
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for projected minimum royalty
guarantee shortfalls $2,187 $ - $ (267) $ (401) $1,519
Employee severance and termination benefits 738 (127) (358) - 253
Outstanding inventory purchase commitments 800 - (25) - 775
Lease commitment for warehouse facility 396 - (8) - 388
- -----------------------------------------------------------------------------------------------------------
$4,121 $ (127) $ (658) $ (401) $2,935
===========================================================================================================
</TABLE>
For the three months ended June 30, 1999 the Company reversed a portion of the
restructuring reserves for projected minimum royalty guarantee shortfalls as a
result of negotiated settlements with certain licensors. This reversal totaled
$401 and is reflected as a restructuring gain in the accompanying condensed
consolidated statements of income.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
Certain expectations and projections regarding the future performance of Equity
Marketing, Inc. (the "Company") discussed in this quarterly report are
forward-looking and are made under the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These expectations and projections are
based on currently available competitive, financial and economic data along with
the Company's operating plans and are subject to future events and
uncertainties. 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. Management
cautions you that the following factors, among others, could cause the Company's
actual consolidated results of operations and financial position in 1999 and
thereafter to differ significantly from those expressed in forward-looking
statements:
MARKETPLACE RISKS
o Dependence on a single customer, Burger King, which may adversely affect
the Company's financial condition and results of operations
o Significant quarter-to-quarter variability in the Company's revenues and
net income, which may result in operating results below the expectations of
securities analysts and investors
o Dependence on the popularity of licensed entertainment properties, which
may adversely affect the Company's financial condition and results of
operations
o Dependence on the ability to license, develop and market new products,
which may adversely affect the Company's financial condition and results of
operations
o Increased competitive pressure, which may affect the sales of the Company's
products
o Dependence on foreign manufacturers, which may increase the costs of the
Company's products and affect the demand for such products
FINANCING RISKS
o Currency fluctuations, which may affect the Company's suppliers and the
Company's reportable income
o Need for additional working capital to fund the Company's business, which
may not be available at all or on favorable terms when required
OTHER RISKS
o Potential negative impact of future acquisitions, which may disrupt the
Company's ongoing business, distract senior management and increase
expenses
o Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal
business operations of the Company
o Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products or environmental activities or
trade restrictions, which may lead to increased costs
o Potential inability of computer systems or software products used by the
Company and\or its customers and suppliers to properly recognize and
process date-sensitive information beyond January 1, 2000, which may result
in an interruption in normal business operations of the Company, its
suppliers and customers
The Company undertakes no obligation to publicly release the results of any
revisions to forward-looking statements, which may be made to reflect events or
circumstances 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 10-K for the year ended December 31, 1998, under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements and Risk Factors."
12
<PAGE> 13
ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation (the "Company"), is a leading
provider of custom promotional products and services, and a developer of
distinctive, branded consumer products that complement the Company's promotions
business. The Company primarily sells to customers in the United States.
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.
In April 1998, the Company purchased 100% of the common stock of Corinthian
Marketing, Inc., a Delaware corporation ("Corinthian"). Corinthian is engaged
principally in the design, manufacture, marketing and distribution of the
Headliners brand of collectible sports figurines.
In July 1998, the Company acquired substantially all of the assets of Contract
Marketing, Inc. ("CMI"), a Massachusetts corporation, and U.S. Import and
Promotions Co. ("USI"), a Florida corporation (collectively referred to herein
as "CMI/ USI"). CMI/USI focuses primarily on promotions for oil and gas and
other retailers. The Company intends to continue to use the acquired assets for
this purpose. The primary operations of CMI/USI are located in West Boylston,
Massachusetts and St. Augustine, Florida.
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,
------------------ ---------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 67.2 76.8 70.4 76.1
------ ------ ------ -----
Gross profit 32.8 23.2 29.6 23.9
------ ------ ------ -----
Operating Expenses:
Salaries, wages and benefits 11.3 6.1 11.2 8.3
Selling, general and administrative 13.5 8.9 12.3 10.4
Restructuring gain - (0.7) - (0.5)
------ ------ ------ -----
Total operating expenses 24.8 14.3 23.5 18.2
------ ------ ------ -----
Income from operations 8.0 8.9 6.1 5.7
Interest income (expense), net 0.3 (0.4) 0.4 (0.5)
------ ------ ------ -----
Income before provision for income taxes 8.3 8.5 6.5 5.2
Provision for income taxes 3.2 3.4 2.5 2.1
------ ------ ------ -----
Net income 5.1% 5.1% 4.0% 3.1%
====== ====== ====== =====
</TABLE>
13
<PAGE> 14
EBITDA
While many in the financial community consider earnings before interest, taxes,
depreciation and amortization and restructuring charges ("EBITDA") to be an
important measure of comparative operating performance, it should be considered
in addition to, but not as a substitute for or superior to, operating income,
net earnings, cash flow and other measures of financial performance prepared in
accordance with generally accepted accounting principles. EBITDA does not
reflect cash available to fund cash requirements, and the items excluded from
EBITDA, such as depreciation and amortization, are significant components in
assessing the Company's financial performance. Other significant uses of cash
flows are required before cash will be available to the Company, including debt
service, taxes and cash expenditures for various long-term assets. The Company's
calculation of EBITDA may be different from the calculation used by other
companies and, therefore, comparability may be limited.
The following table sets forth EBITDA for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- --------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $1,565 $2,864 $2,181 $2,599
Less: Interest income (expense) 88 (217) 227 (439)
Restructuring gain -- 401 -- 401
Add: Depreciation and amortization 483 690 830 1,371
Provision for income taxes 979 1,909 1,364 1,733
------ ------ ------ ------
EBITDA $2,939 $5,279 $4,148 $5,741
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS):
Revenues for the three months ended June 30, 1999 increased $25,418 or 83% to
$56,011 from $30,593 in the comparable period in 1998. Promotions revenues
increased $31,255 to $50,774 primarily as a result of sales associated with
Burger King promotions related to The Itsy Bitsy Entertainment Company's
Teletubbies and Warner Bros. Wild Wild West movie in 1999 compared to a
smaller promotion in 1998 related to DreamWorks SKG's Small Soldiers movie.
Promotions revenue also increased as a result of the addition of oil and gas
promotion revenue generated by CMI/USI which was acquired in the third quarter
of 1998. Consumer products revenues decreased $5,837 to $5,237 primarily due to
lower sales under event-based-licensed consumer products which the Company
decided to exit in December 1998.
Cost of sales increased $22,420 to $42,992 (76.8% of revenues) for the three
months ended June 30, 1999 from $20,572 (67.2% of revenues) in the comparable
period in 1998 due primarily to higher sales in 1999. The gross margin
percentage for the period decreased to 23.2% for the three months ended June 30,
1999 from 32.8% in the comparable period in 1998 due to the planned shift in the
company's revenue mix, which was 91% promotions and 9% consumer products,
compared to 64% and 36% for promotions and consumer products, respectively, one
year ago. In addition, the Company's planned liquidation of discontinued
licensed consumer product lines was a factor in the decreased gross margin.
Excluding the effect of this liquidation, the gross margin percentage would
have been 24.7% for the three months ended June 30, 1999.
Salaries, wages and benefits increased $7, or 0.2% to $3,444 (6.1% of revenues).
This increase was primarily attributable to the addition of employees from the
acquisitions of Corinthian, and CMI/USI. This increase was partially offset by
staffing reductions resulting from the Company's decision to exit the
event-based-licensed consumer products business.
14
<PAGE> 15
Selling, general and administrative expenses increased $858, or 20.8% to $4,986
(8.9% of revenues). This increase is due to increased depreciation and
amortization expense associated with higher fixed asset levels in 1998 and
amortization of intangibles related to the acquisitions of Corinthian in April
1998 and CMI/USI in July 1998. The increase is also attributable to increased
support costs associated with the Company's new enterprise resource planning
system (see "Information Systems"), and increased occupancy costs for facilities
to support the higher number of employees. Selling, general and administrative
expenses decreased as a percentage of revenues from 13.5% to 8.9% as a result of
revenues which increased at a greater rate.
The effective tax rate for the three months ended June 30, 1999 increased to
40.0% from 38.5% for the three months ended June 30, 1998. This increase was
attributable to the addition of non-deductible goodwill from the purchase of
Corinthian.
Net income increased $1,299 or 83.0% to $2,864 (5.1% of revenues) from $1,565
(5.1% of revenues) in 1998 primarily due to greater gross profit earned on
increased revenues in 1999 and the restructuring gain of $401. The increase
in net income was partially offset by interest expense of $217 on the Company's
short-term debt borrowing for the three months ended June 30, 1999, compared to
interest income of $88 for the same period in 1998. Excluding the impact of the
restructuring gain, the Company would have reported net income of $2,623 or
$0.41 per diluted share for the three months ended June 30, 1999.
EBITDA increased $2,340 or 79.6% primarily due to greater gross profit earned on
increased revenues in 1999. This increase was partially offset by increases in
selling, general and administrative expenses attributable to higher support and
occupancy costs.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS):
Revenues for the six months ended June 30, 1999 increased $29,079 or 53.5% to
$83,468 from $54,389 in the comparable period in 1998. Promotions revenues
increased $35,424 to $75,072 primarily as a result of increased sales on three
Burger King promotions related to Mr. Potato Head, The Itsy Bitsy Entertainment
Company's Teletubbies, and Warner Bros. Wild Wild West movie in 1999
compared to two promotions associated with the release of DreamWorks SKG's Small
Soldiers movie and Nickelodeon's Rugrats for the same period in 1998. Promotions
revenue also increased as a result of the addition of oil and gas promotion
revenue generated by CMI/USI which was acquired in the third quarter of 1998.
Consumer products revenues decreased $6,345 to $8,396 primarily due to decreased
sales under event-based-licensed consumer products which the Company decided to
exit in December 1998. This decrease was partially offset by sales of Headliners
subsequent to the acquisition of Corinthian, which was acquired in the second
quarter of 1998.
Cost of sales increased $25,239 to $63,537 (76.1% of revenues) for the six
months ended June 30, 1999 from $38,298 (70.4% of revenues) in the comparable
period in 1998 due primarily to higher sales in 1999. The gross margin
percentage for the period decreased to 23.9% for the six months ended June 30,
1999 from 29.6% in the comparable period in 1998 due primarily to the planned
shift in the company's revenue mix, which was 90% promotions and 10% consumer
products, compared to 73% and 27% for promotions and consumer products,
respectively, one year ago. In addition, the Company's planned liquidation of
discontinued licensed consumer product lines was a factor in the decreased gross
margin. Excluding the effect of this liquidation, the gross margin percentage
would have been 25.1% for the six months ended June 30, 1999.
Salaries, wages and benefits increased $834, or 13.7% to $6,916 (8.3% of
revenues). This increase was primarily attributable to the addition of employees
from the acquisitions of Corinthian, and CMI/USI. This increase was partially
offset by staffing reductions resulting from the Company's decision to exit the
event-based-licensed consumer products business.
Selling, general and administrative expenses increased $1,954, or 29.2% to
$8,645 (10.4% of revenues). This increase is due to increased depreciation and
amortization expense associated with higher fixed asset levels in 1998 and
amortization of intangibles related to the acquisitions of Corinthian in April
1998 and CMI/USI in July 1998. The increase is also attributable to increased
support costs associated with the Company's new enterprise resource planning
system (see "Information Systems"), and increased occupancy costs for facilities
to support the higher number of employees. Selling, general and administrative
expenses decreased as a percentage of revenues from 12.3% to 10.4% as a result
of revenues which increased at a greater rate.
15
<PAGE> 16
The effective tax rate for the six months ended June 30, 1999 increased to 40.0%
from 38.5% for the six months ended June 30, 1998. This increase was
attributable to the addition of non-deductible goodwill from the purchase of
Corinthian.
Net income increased $418 or 19.2% to $2,599 (3.1% of revenues) from $2,181
(4.0% of revenues) in 1998 primarily due to greater gross profit earned on the
increased revenues in 1999 and the restructuring gain of $401. The increase in
net income was partially offset by interest expense of $439 on the Company's
short-term debt borrowing for the six months ended June 30, 1999, compared to
interest income of $227 for the same period in 1998. Excluding the impact of the
restructuring gain, the Company would have reported net income of $2,358 or
$0.37 per diluted share for the six months ended June 30, 1999.
EBITDA increased $1,593 or 38.4% primarily due to greater gross profit earned on
increased revenues in 1999. This increase was partially offset by both the
increases in salaries, wages and benefits and in selling, general and
administrative expenses attributable to higher support and occupancy costs for
the six months ended June 30, 1999, compared to the same period in 1998.
FINANCIAL CONDITION AND LIQUIDITY
As of June 30, 1999, the Company's investment in accounts receivable decreased
$17,190 from the balance at December 31, 1998. This decrease was attributable to
collections of substantially all of the receivables related to sales shipped
late in the 1998 fourth quarter. As of June 30, 1999, inventory decreased
approximately $1,805 from December 31, 1998 primarily as a result of consumer
product and promotional program inventory which was shipped during the six
months ended June 30, 1999.
As of June 30, 1999, accounts payable decreased $11,403 compared to December 31,
1998. This decrease is primarily attributable to payments to vendors associated
with the manufacturing related to the large fourth quarter 1998 promotional
programs.
As of June 30, 1999, working capital was $7,718 compared to $4,268 at December
31, 1998. The increase in working capital was primarily due to the cash
generated by operating activities in the six months ended June 30, 1999. The
Company did not have any significant investing activities in the quarter. The
Company believes that its cash from operations, cash on hand at June 30, 1999
and its credit facility will be sufficient to fund its working capital needs for
at least the next twelve months. The statements set forth herein are
forward-looking and actual results may differ materially.
CREDIT FACILITIES
The Company maintains and periodically amends or replaces a credit agreement
with two commercial banks that is utilized to finance the seasonal working
capital requirements of its operations. The credit facility is secured by
substantially all of the Company's assets. The agreement, as amended on June 18,
1999 provides for a line of credit of $30,000 through October 31, 1999 and
$25,000 through June 30, 2000 with borrowing availability determined by a
formula based on qualified assets. As of June 30, 1999, $16,700 was outstanding
under the credit facility. Letters of credit outstanding as of June 30, 1999
were $1,688. The credit agreement requires the Company to comply with certain
financial covenants, including minimum tangible net worth, minimum current
ratio, ratio of total liabilities to tangible net worth, maximum funded debt
coverage ratio, minimum fixed charge coverage ratio and net profit after taxes.
The credit agreement also places restrictions on, among other things, the
Company's capital expenditures, payment of dividends, stock repurchases,
acquisitions, investments and transactions with affiliates. As of June 30, 1999,
the Company was in compliance with these covenants.
INFORMATION SYSTEMS
IMPACT OF THE YEAR 2000 ISSUE INTRODUCTION
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from the dates in the "1900's." These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that makes use of the date field.
16
<PAGE> 17
STATE OF READINESS
The Company's primary focus has been on its own internal systems. To date, the
Company has completed the Year 2000 conversion with respect to its most critical
computer systems and applications, including its enterprise resource planning
system, computer networks and desktop applications. Based on strategic and
operational assessments, the Company decided to replace its existing information
systems in 1998. The new enterprise resource planning system is designed to
enhance management information, financial reporting, inventory management, order
entry and cost evaluation and control and has the added benefit of addressing
the Year 2000 issues. The new enterprise system went into operation in January
1999.
The Company is also communicating with suppliers, distributors, financial
institutions and others with which it does business to evaluate their Year 2000
compliance plans and state of readiness and to determine the extent to which the
Company will be affected by the failure of others to remediate their own Year
2000 issues. 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.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
The projects associated with the replacement of the enterprise resource planning
system are expected to cost approximately $4,400. To date the Company has spent
a total of approximately $4,300 on the conversion to the new enterprise resource
planning system, of which approximately $2,220 was spent on business process
reengineering. In accordance with Emerging Issues Task Force Issue No. 97-13,
such business process reengineering costs were expensed as incurred.
Approximately $2,085 of these costs have been capitalized and are reflected in
fixed assets in the accompanying condensed consolidated balance sheet.
Costs to address the Year 2000 issue affecting all other information systems are
relatively insignificant, with the majority of the work being performed by
Company employees.
CONTINGENCY PLANS
Because the Company's Year 2000 conversion is expected to be completed prior to
any potential disruption to the Company's business, the Company has not yet
completed the development of a comprehensive Year 2000 specific contingency
plan. However, as part of its Year 2000 contingency effort, information received
from external sources is examined for date integrity before being brought into
the Company's internal systems. If the Company determines that its business or a
segment thereof is at a material risk of disruption due to the Year 2000 issue,
the Company will work to enhance its contingency plan.
17
<PAGE> 18
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 26,
1999. Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, 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 Abstentions and
or Withheld Broker Non-Votes
--------------- ----------------- --------------------
<S> <C> <C> <C>
1. Election of Directors
Lawrence Elins 6,101,711 -- 30,610
Sanford R. Climan 6,101,761 -- 30,560
Donald A. Kurz 6,112,361 -- 19,960
Mitchell H. Kurz 6,112,411 -- 19,910
Bruce Raben 6,101,611 -- 30,710
Stephen P. Robeck 6,112,211 -- 20,110
2. Ratification of Arthur Anderson LLP 6,127,326 4,249 746
as the Company's Independent Auditor
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Second Amendment to Amended and Restated Credit Agreement dated
June 18, 1999 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 April 16, 1999. (Item 7)
Report on Form 8-K filed with the Securities and Exchange
Commission on April 29, 1999. (Item 5)
18
<PAGE> 19
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 Los Angeles
and State of California on the 16th day of August, 1999.
EQUITY MARKETING, INC.
/s/ TERESA P. COVINGTON
------------------------------
Teresa P. Covington
Vice President, Finance
(Principal Financial and
Accounting Officer)
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT
10.1 Second Amendment to Amended and Restated Credit Agreement
dated June 18, 1999 between the Company and Sanwa Bank
California and Imperial Bank.
27.0 Financial Data Schedule
20
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO AMENDED AND RESTATED
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(the "Amendment") is made and dated as of the 18th day of June, 1999, 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 Amended and Restated Credit
Agreement dated as of December 10, 1998, 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. Modification of Credit Limit. To reflect the agreement of the
parties to modify the aggregate dollar amount of Loans and Letters of Credit
which may be outstanding under the Loan Documents, the parties hereto hereby
agree that effective as of the Effective Date (as such term is defined in
Paragraph 10 below) the definition of the term "Credit Limit" set forth in
Paragraph 12 of the Credit Agreement is hereby amended to read in its entirety
as follows:
"'Credit Limit' shall mean: (a) to but not including November 1, 1999,
$30,000,000, or (b) from and including November 1, 1999 to and
including the Maturity Date, $25,000,000, provided that the then
current Credit Limit may at any date be decreased by written agreement
of the Company, the Agent and one hundred percent (100%) of the
Lenders."
2. Modification of Maturity Date. To reflect the agreement of the
parties to modify the Maturity Date of the Credit Agreement, the parties hereto
hereby agree that effective as of the Effective Date the definition of the term
"Maturity Date" 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."
21
<PAGE> 2
3. Collateral Coverage Requirements. To reflect the agreement of the
parties to incorporate certain restrictions on availability of Loans under the
Loan Documents based upon the designated "Collateral Value" of certain assets
supporting such credit extensions, the parties hereto hereby agree that
effective as of the Effective Date:
(a) Paragraph 1(a) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"1(a) Credit Limit. On the terms and subject to the
conditions set forth herein, the Lenders severally agree that they
shall from time to time to but not including the Maturity Date make
Loans (the "Loans" or a "Loan"), pro rata in accordance with their
respective Percentage Shares, in aggregate amounts not to exceed at any
one time outstanding the lesser of:
(1) The Credit Limit, less the aggregate
amount of all Outstanding Letters of Credit and all unpaid L/C
Drawings, or
(2) The Collateral Value of the Borrowing
Base, less the aggregate amount of all unpaid L/C Drawings."
(b) A new Paragraph 4(d) is hereby added to the Credit
Agreement to read in its entirety as follows:
"4(d) Borrowing Base Conformity. In support of its
obligation to repay Loans and L/C Drawings, the Company shall cause the
Collateral Value of the Borrowing Base to be not less than, at any
date, the aggregate principal amount of all outstanding Loans and
unpaid L/C Drawings. The Company shall immediately repay Loans and
unpaid L/C Drawings to the Agent on behalf of the Lenders, upon
telephonic demand by the Agent, in the amount by which the aggregate
principal amount of outstanding Loans and unpaid L/C Drawings exceeds
the limitation set forth above."
(c) Paragraph 7(b) of the Credit Agreement is hereby amended
to delete the word "and" appearing immediately after the semi-colon at the end
of subparagraph (3) thereof, to renumber subparagraph (4) as subparagraph (6)
and to insert new subparagraphs (4) and (5) to read in their entirety as
follows:
"(4) No later than ten (10) Business Days after the
last day of each month, a Borrowing Base Certificate which shall be
accompanied by an inventory certificate in form satisfactory to the
Agent;
(5) During the period beginning May 1, 1999 and
ending September 30, 1999, no later than the close of business of the
Agent on the second Business Day of each week, as of the close of
business of the Company on the last Business Day of the immediately
preceding week, an Abbreviated Borrowing Base Certificate; and"
(d) Paragraph 12 of the Credit Agreement is hereby amended to
add, in correct alphabetical order, the following definitions:
"'Abbreviated Borrowing Base Certificate' shall mean a
certificate in substantially the form of that attached hereto as
Exhibit L.'
"'Borrowing Base' shall mean at any date all Eligible Accounts
and all Eligible Inventory included in the calculation of the
Collateral Value of the Borrowing Base at such date."
"'Borrowing Base Certificate' shall mean a certificate in
substantially the form of that attached hereto as Exhibit M.'
22
<PAGE> 3
"'Collateral Value of the Borrowing Base' shall mean at any
date the aggregate amount calculated with respect to each Eligible
Account and each item of Eligible Inventory included in the Borrowing
Base at such date as follows:
(a) During the period from May 1, 1999 to and
including September 30, 1999, the sum of:
(1) Eighty percent (80%) of the outstanding
principal balance of such Eligible Accounts, plus
(2) The lesser of: (i) sixty-five percent
(65%) of the Inventory Value of such Eligible Inventory, or
(ii) $4,500,000.00, and
(b) At all other times, eighty percent (80%) of the
outstanding principal balance of such Eligible Accounts included in the
Borrowing Base, it being agreed and understood that from and after
September 30, 1999 Eligible Inventory shall not be included in the
calculation of the Collateral Value of the Borrowing Base."
"'Core Products' shall mean: (a) all promotional products
acquired by the Company or any of its Subsidiaries for delivery under
existing legally binding and enforceable purchase contracts or purchase
orders with domestic and foreign buyers, or (b) consumer products in
the nature of collectibles and toys, including those manufactured
pursuant to ever-green toy licenses, acquired by the Company or any of
its Subsidiaries for sale to third parties, which products are not
manufactured primarily in connection with specific movie or other
entertainment media releases."
"'Eligible Account' shall mean an account receivable of the
Company or any of its Subsidiaries (net of any credit balance, trade
discount, or unbilled amount or retention) for which each of the
following statements is accurate and complete (and the Company by
including such account receivable in any computation of the Collateral
Value of the Borrowing Base shall be deemed to represent and warrant to
the Agent and the Lenders that such statements are accurate and
complete in all material respects):
(a) Said account receivable is a binding and valid
obligation of the obligor thereon, in full force and effect and
enforceable in accordance with its terms;
(b) Said account receivable is genuine, in all
respects as appearing on its face or as represented in the books and
records of the Company and its Subsidiaries, and all information set
forth therein is true and correct;
(c) Said account receivable is free of all default of
any party thereto (other than as permitted pursuant to subparagraph (d)
below), counterclaims, offsets and defenses and from any rescission,
cancellation or avoidance, and all right thereof, whether by operation
of law or otherwise;
(d) The payment of said account receivable is not
more than ninety (90) days past due the invoice date thereof;
(e) Said account receivable is free of concessions or
understandings with the obligor thereon of any kind not disclosed to
the Agent in writing;
(f) Said account receivable is, and at all times will
be, free and clear of all liens, encumbrances, charges, rights and
interests of any kind, except in favor of the Agent on behalf of the
Lenders;
(g) Said account receivable is derived from sales
made or services rendered to the obligor in the ordinary course of the
business of the Company or such Subsidiary;
23
<PAGE> 4
(h) The obligor on said account receivable: (1) is
located within the United Sates of America, the District of Columbia or
Canada; (2) is not the subject of any bankruptcy or insolvency
proceeding, nor has a trustee or receiver been appointed for all or a
substantial part of its property, nor has said obligor made an
assignment for the benefit of creditors, admitted its inability to pay
its debts as they mature or suspended its business; (3) is not
affiliated, directly or indirectly, with the Company, as a Subsidiary
or other Affiliate or employee, officer, shareholder, or director of
the Company; and (4) is not a state or federal governmental department,
commission, board, bureau or agency (a "Governmental Receivable"),
unless either: (i) the Agent receives such evidence as it may require
that such state or federal governmental department, commission, board,
bureau or agency has acknowledged the perfection and priority of the
Agent's security interest in said Governmental Receivable, including,
without limitation, evidence of compliance with the Assignment of
Claims Act of 1940, as amended, if applicable, or (ii) the dollar
amount of said Governmental Receivable when added to the dollar amount
of all other Governmental Receivables included in the calculation of
the Collateral Value of the Borrowing Base which do not meet the
requirements of subparagraph (i) above does not exceed $200,000.00;
(i) Said account receivable did not arise from sales
to an obligor whose total accounts receivable owing to the Company and
its Subsidiaries constitutes more than fifteen percent (15%) of all of
the outstanding accounts receivable of the Company and its
Subsidiaries; provided, however, that if the statement set forth in the
preceding sentence is untrue with respect to said account receivable
but said account receivable arose from sales to a Burger King
Distribution Center, then said account receivable may be included in
the Borrowing Base, and, provided further, that nothing contained
herein shall exclude accounts receivables of such obligor from
inclusion in the calculation of the Collateral Value of the Borrowing
Base in a dollar amount up to fifteen percent (15%) of all outstanding
accounts receivables of the Company and its Subsidiaries;
(j) Said account receivable did not arise from sales
to an Obligor as to whom the payments of more than twenty percent (20%)
or more of the total accounts receivable owing by such Obligor to the
Company and its Subsidiaries are more than ninety (90) days past due
the invoice dates thereof; provided, however, that if the statement set
forth in the preceding sentence is untrue with respect to said account
receivable but said account receivable arose from sales to a Burger
King Distribution Center, then said account receivable may be included
in the Borrowing Base;
(k) The Agent holds for the benefit of the Lenders a
first priority perfected security interest in said account receivable;
and
(l) Said account receivable is not otherwise
unsatisfactory to the Agent in its reasonable business judgment (it
being agreed and understood that if said account receivable meets the
requirements of subparagraphs (a) through (k) hereof, it will only be
rejected under this subparagraph (l) for an unrelated reason)."
"'Eligible Inventory' shall mean all domestic finished goods
inventories and finished goods inventories on vessels destined for
delivery within the United States of America or Canada owned by the
Company or any of its Subsidiaries for which each of the following
statements is accurate and complete (and the Company by including such
inventories in any computation of the Collateral Value of the Borrowing
Base shall be deemed to represent and warrant to the Agent and the
Lenders that such statements are accurate and complete in all materials
respects):
(a) Said inventories have been identified for
delivery under a legally binding and enforceable purchase order or
other contract;
(b) Said inventories consist of or are components
of Core Products;
(c) Said inventories are free and clear of all liens,
encumbrances, charges, rights and interests of any kind, except in
favor of the Agent on behalf of the Lenders, minus all related returns,
24
<PAGE> 5
allowances, reserves, and accruals, liquidation inventory, suboptimal
and uneconomical quantities, and parts;
(d) Said inventories are supported by: (1) a written
approval in form reasonably acceptable to the Agent, a copy of which
has been provided to the Agent, executed by the buyer of said
inventories prior to the date such inventories were shipped, pursuant
to which said buyer certifies that it has tested to its satisfaction
and accepted such inventories for delivery; (2) evidence that the goods
were shipped by the vendor to the Company or its Subsidiaries in time
for the Company to meet such buyer's delivery date; and (3) evidence
that said inventories (i) were purchased on open account or (ii) if the
purchase price of such inventories were supported by a Letter of
Credit, such Letter of Credit has been drawn upon and the proceeds of
the Loan made against that portion of the Collateral Value of the
Borrowing Base representing such inventories will be used to repay the
related L/C Drawing;
(e) Unless said inventories are in transit to the
United States of America or Canada, in which case such inventories are
covered by, and the Agent is named as loss payee with respect to,
marine loss insurance policies reasonably satisfactory to the Agent,
the Agent holds for the benefit of the Lenders a first priority
perfected security interest in said inventories; and
(f) Said inventories do not constitute: (1) packaging
and parts; (2) obsolete inventory; or (c) inventories otherwise
unacceptable to the Agent in its reasonable business judgment (it being
agreed and understood that if said inventories meet the requirements of
subparagraphs (a) through (e) hereof, they will only be rejected under
this subparagraph (f) for an unrelated reason)."
"'Inventory Value' shall mean with respect to any item of
Eligible Inventory the lower of cost or market determined in accordance
with GAAP."
4. Modification of Interest Rates. To reflect the agreement of the
parties to modify the interest rates applicable to COF Rate Loans and Reference
Rate Loans, the parties hereto hereby agree that effective as of the Effective
Date Paragraph 1(b) of the Credit Agreement is hereby amended in its entirety to
read as follows:
"1(b) Calculation of Interest. The Company shall pay interest
on Loans outstanding hereunder from the date disbursed to but not
including the date of payment at a rate per annum equal to, at the
option of and as selected by the Company from time to time (subject to
the provisions of Paragraphs 1(e) and 3(j) below): (1) with respect to
each Loan which is a COF Loan, at the COF Rate for the applicable
Interest Period plus three percent (3.00%), and (2) with respect to
each Loan which is a Reference Rate Loan, at the Reference Rate during
the applicable computation period plus one-half of one percent
(0.50%)."
5. Modification of Letter of Credit Facility. To reflect the agreement
of the parties to modify the conditions under which Letters of Credit may be
issued and renewed under the Credit Agreement, the parties hereto hereby agree
that effective as of the Effective Date:
"2(b) Issuance of New Letters of Credit. On the terms and
subject to the conditions set forth herein, Sanwa shall from time to
time from and after the Effective Date, issue its letters of credit (a
"New Letter of Credit" and, collectively, the "New Letters of Credit")
for the account of the Company in an amount which when added to the
aggregate amount of Loans outstanding hereunder and the aggregate
amount of other Outstanding New Letters of Credit, Pre-Existing Letters
of Credit and unpaid L/C Drawings will not exceed the Credit Limit.
Each New Letter of Credit shall be requested by the Company at least
one Business Day prior to the proposed issuance date by delivery to
Sanwa of a duly executed Letter of Credit Application, with a copy to
the Agent, accompanied by all other documents, instruments and
agreements as Sanwa may require (the "L/C Documents"). New Letters of
Credit shall be issued pursuant to the following additional terms and
conditions:
(1) No New Letter of Credit (and no Pre-Existing
Letter of Credit upon any renewal thereof) shall have a stated
expiration date (or provide for the extension of such
25
<PAGE> 6
stated expiration date or the issuance of any replacement
therefor) later than the earlier of: (1) the 180 days
following the issuance (or renewal) date thereof, and (2)
the Maturity Date;
(2) All New Letters of Credit which are in the nature
of commercial/documentary (as opposed to standby) letters of
credit shall be issued for the purpose of facilitating the
importation of Eligible Inventory; provided, however, that New
Letters of Credit in an aggregate amount not to exceed
$2,500,000.00 Outstanding may be issued for the purpose of
facilitating the importation of Core Products which do not
constitute Eligible Inventory; and
(3) Outstanding Letters of Credit, including New
Letters of Credit and Pre-Existing Letters of Credit, which
are in the nature of standby (as opposed to
commercial/documentary) may not exceed $450,000.00 in the
aggregate."
6. Modification of Non-Usage Fee. To reflect the agreement of the
parties to modify the amount of the non-usage fee payable by the Company to the
Lenders, the parties hereto hereby agree that effective as of the Effective Date
Paragraph 3(i)(1)(i) of the Credit Agreement is hereby amended in its entirety
to read as follows:
"(i) On the first Business Day of the first month of each
calendar quarter (and on the Maturity Date) for the immediately
preceding calendar quarter (or portion thereof) a non-usage fee in the
amount set forth in a fee billing delivered by the Agent to the
Company, which non-usage fee shall be computed at the per annum rate of
one-half of one percent (0.50%) against: a. the average daily Credit
Limit in effect during the immediately preceding calendar quarter (or
portion thereof), minus b. the daily average amount of Loans
outstanding and Outstanding Letters of Credit during the immediately
preceding calendar quarter (or portion thereof);"
7. Modification of Financial Covenants. To reflect the agreement of the
parties to modify certain of the financial covenants set forth in the Credit
Agreement, the parties hereto hereby agree that effective as of the Effective
Date:
(a) Paragraph 8(i) is hereby amended to read in its entirety
as follows:
"8(i) Minimum Tangible Net Worth. Permit the
Company's consolidated Tangible Net Worth to be less than (i) as of
March 31, 1999, $8,000,000, (ii) as of June 30, 1999, $10,600,000,
(iii) as of September 30, 1999, $13,100,000, (iv) as of December 31,
1999, $15,000,000, and (v) as of March 31, 2000, $14,400,000."
(b) Paragraph 8(j) is hereby amended to read in its entirety
as follows:
"8(j) Ratio of Total Liabilities to Tangible Net
Worth. Permit the Company's ratio of consolidated Total Liabilities to
consolidated Tangible Net Worth to be more than (i) as of March 31,
1999, 4.00:1.00, (ii) as of June 30, 1999, 6.20:1.00, (iii) as of
September 30, 1999, 3.50:1.00, (iv) as of December 31, 1999, 2.75:1.00,
and (v) as of March 31, 2000, 2.25:1.00."
(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 consolidated Current Assets to consolidated Current
Liabilities for any calendar quarter to be less than 1.00:1.00."
(d) Paragraph 8(l) is hereby amended to read in its entirety
as follows:
"8(l) Maximum Funded Debt Coverage Ratio. Permit as
of the last day of any calendar quarter the ratio of (i) Funded Debt of
the Company and its consolidated Subsidiaries during such quarter
26
<PAGE> 7
to (ii) EBITDA of the Company and its consolidated Subsidiaries during
such quarter and the immediately preceding three calendar quarters to
exceed (x) as of the last day of the calendar quarter ending March 31,
1999, 1.50:1.00, (y) as of the last day of the calendar quarter ending
June 30, 1999, 3.00:1.00, and (z) as of the last day of any calendar
quarter thereafter, 2.00:1.00."
(e) Paragraph 8(m) is hereby amended to read in its entirety
as follows:
"8(m) Minimum Fixed Charge Coverage Ratio. Permit as
of the last day of any calendar quarter 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 plus Taxes paid by the Company and its consolidated
Subsidiaries for such four calendar quarters to be less than (w) as of
the last day of the calendar quarter ending March 31, 1999, 3.10:1.00,
(x) as of the last day of the calendar quarter ending June 30, 1999,
2.95:1.00, (y) as of the last day of the calendar quarter ending
September 30, 1999, 2.50:1.00, and (z) as of the last day of any
calendar quarter thereafter, 2.00:1.00."
(f) Paragraph 8(n) is hereby amended to read in its entirety
as follows:
"8(n) Net Profit After Taxes; Quarterly Net Income.
Permit: (1) the Company's consolidated Net Profit After Taxes for any
fiscal year to be less than $1.00; or (2) commencing with the fiscal
quarter ending June 30, 1999, the Company's consolidated net income (as
shown on the quarterly financial statements delivered pursuant to
Paragraph 7(a) above) to be less than $0.00 for any two consecutive
quarters."
(g) Paragraph 8(o) is hereby amended to read in its entirety
as follows:
"8(o) 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 for any fiscal year."
8. Modification of Definitions. To reflect the agreement of the parties
to modify certain definitions set forth in the Credit Agreement, the parties
hereto hereby that effective as of the Effective Date Paragraph 12 of the Credit
Agreement is hereby amended as follows:
(a) The definitions of the terms "Annual Commitment Reduction
Amount," "Applicable COF Rate," "Applicable COF Spread," "Applicable Reference
Rate" and "Applicable Reference Rate Spread," are hereby deleted in their
entirety.
(b) The definition of the term "EBITDA" is hereby amended to
read in its entirety as follows:
"'EBITDA' shall mean for any period the sum of (a)
net income (or net loss) plus (b) all amounts treated as expenses for
interest, amortization, depreciation, taxes (to the extent included in
the determination of net income (or net loss), and other non-cash
charges for such period, and, for the calendar quarters ending March
31, 1999, June 30, 1999 and September 30, 1999, (c) the sum of (i)
business processing re-engineering expenses of $2,220,000.00 at
December 31, 1998, (ii) restructuring expenses of $4,121,000.00 at
December 31, 1998, and (iii) impairment of asset charges of
$6,712,000.00 at December 31, 1998."
9. 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
27
<PAGE> 8
Obligations of the Company under the Credit Agreement as amended hereby and (c)
the Security Agreement remains in full force and effect.
10. Effective Date. This Amendment shall be effective as of the date
(the "Effective Date") that the Agent receives the following:
(a) Duly executed signature pages for this Amendment from
each party hereto;
(b) An amendment and waiver fee payable to the Agent for the
pro rata benefit of the Lenders in an amount equal to $75,000.00; and
(c) Such other resolutions, incumbency certificates, good
standing certificates or other documents as the Agent may reasonably request.
11. 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 its terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the rights of creditors generally and the effect of
equitable principles whether applied in an action at law or a suit in equity.
(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
material respects, and (ii) there has not occurred an Event of Default or
Potential Default.
12. No Other Amendment. Except as expressly amended hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
13. 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\ TERESA P. COVINGTON
---------------------------
Name Teresa P. Covington
-------------------------
Title Vice President, Finance
------------------------
28
<PAGE> 9
SANWA BANK CALIFORNIA, as Agent and as a Lender
By \s\ JUDY TU
--------------------------------
Name Judy Tu
------------------------------
Title Commercial Banking Officer
-----------------------------
IMPERIAL BANK, as a Lender
By \s\ JENNIFER HUANG
--------------------------------
Name Jennifer Huang
------------------------------
Title Commercial Loan Officer
-----------------------------
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,441
<SECURITIES> 0
<RECEIVABLES> 42,467
<ALLOWANCES> 2,586
<INVENTORY> 11,312
<CURRENT-ASSETS> 60,304
<PP&E> 8,850
<DEPRECIATION> 3,544
<TOTAL-ASSETS> 89,716
<CURRENT-LIABILITIES> 52,586
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 35,132
<TOTAL-LIABILITY-AND-EQUITY> 89,716
<SALES> 83,468
<TOTAL-REVENUES> 83,468
<CGS> 65,537
<TOTAL-COSTS> 65,537
<OTHER-EXPENSES> 15,160
<LOSS-PROVISION> 179
<INTEREST-EXPENSE> 439
<INCOME-PRETAX> 4,332
<INCOME-TAX> 1,733
<INCOME-CONTINUING> 2,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,599
<EPS-BASIC> .42
<EPS-DILUTED> .41
</TABLE>
