<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, 2000
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, 6,337,112 shares as of August 9, 2000.
<PAGE> 2
EQUITY MARKETING, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20
</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,
1999 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,131 $ 14,461
Accounts receivable (net of allowances of $5,370 and
$3,720 as of December 31, 1999 and June 30, 2000, respectively) 37,385 29,878
Note receivable, current portion 5,024 7,957
Inventory 8,742 6,682
Prepaid expenses and other current assets 5,696 6,459
------------- -------------
Total current assets 63,978 65,437
FIXED ASSETS, net 4,907 4,520
INTANGIBLE ASSETS, net 21,846 21,589
NOTE RECEIVABLE, long-term portion 5,491 4,254
OTHER ASSETS 1,022 938
------------- -------------
Total assets $ 97,244 $ 96,738
============= =============
</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 AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt $ 12,500 $ --
Accounts payable 21,726 11,304
Accrued liabilities 18,707 12,738
------------- -------------
Total current liabilities 52,933 24,042
LONG-TERM LIABILITIES 2,286 2,366
------------- -------------
Total liabilities 55,219 26,408
------------- -------------
COMMITMENTS AND CONTINGENCIES
Mandatory redeemable preferred stock, Series A senior cumulative participating
convertible, $.001 par value, 25,000 issued and outstanding, stated at
liquidation preference of $1,000 per share ($25,000), net of issuance costs -- 23,092
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value per share; 1,000,000
shares authorized, 25,000 Series A issued and outstanding -- --
Common stock, par value $.001 per share, 20,000,000
shares authorized, 6,220,100 and 6,305,612 shares outstanding
as of December 31, 1999 and June 30, 2000, respectively -- --
Additional paid-in capital 15,942 16,977
Retained earnings 28,477 32,631
------------- -------------
44,419 49,608
Less--
Treasury stock, 1,921,299 shares, at cost, as of
December 31, 1999 and June 30, 2000, respectively (2,129) (2,129)
Stock subscription receivable (21) (21)
Unearned compensation (244) (220)
------------- -------------
Total stockholders' equity 42,025 47,238
------------- -------------
Total liabilities and stockholders' equity $ 97,244 $ 96,738
============= =============
</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,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 56,011 $ 55,314 $ 83,468 $ 98,791
COST OF SALES 42,992 41,487 63,537 74,690
----------- ---------- ----------- ----------
Gross profit 13,019 13,827 19,931 24,101
----------- ---------- ----------- ----------
OPERATING EXPENSES:
Salaries, wages and benefits 3,444 3,746 6,916 7,147
Selling, general and administrative 4,986 5,242 8,645 10,061
Restructuring gain (401) -- (401) --
----------- ---------- ----------- ----------
Total operating expenses 8,029 8,988 15,160 17,208
----------- ---------- ----------- ----------
Income from operations 4,990 4,839 4,771 6,893
OTHER INCOME (EXPENSE), net (217) 270 (439) 355
----------- ---------- ----------- ----------
Income before provision for income taxes 4,773 5,109 4,332 7,248
PROVISION FOR INCOME TAXES 1,909 2,043 1,733 2,888
----------- ---------- ----------- ----------
Net income $ 2,864 $ 3,066 $ 2,599 $ 4,360
=========== ========== =========== ==========
NET INCOME $ 2,864 $ 3,066 $ 2,599 $ 4,360
PREFERRED STOCK DIVIDENDS -- 201 -- 207
----------- ---------- ----------- ----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 2,864 2,865 2,599 4,153
=========== ========== =========== ==========
BASIC NET INCOME PER SHARE $ 0.46 $ 0.46 $ 0.42 $ 0.66
=========== ========== =========== ==========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 6,233,099 6,291,180 6,216,607 6,263,949
=========== ========== =========== ==========
DILUTED NET INCOME PER SHARE $ 0.45 $ 0.41 $ 0.41 $ 0.63
=========== ========== =========== ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 6,340,969 7,412,498 6,314,557 6,956,283
=========== ========== =========== ==========
</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,
---------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,599 $ 4,360
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,371 1,316
Provision for doubtful accounts 179 674
Loss on asset disposal 11 --
Tax benefit from exercise of stock options 32 137
Issuance of treasury stock to 401(k) Tax Deferred Saving Plan 74 --
Other (31) --
Changes in operating assets and liabilities:
Increase (decrease) in cash and cash equivalents:
Accounts receivable 17,011 6,833
Note receivable -- (1,696)
Inventory 1,805 2,060
Prepaid expenses and other current assets 1,245 (763)
Other assets (474) 84
Accounts payable (11,403) (10,422)
Accrued liabilities (3,796) (7,179)
Long-term liabilities 10 80
-------- --------
Net cash provided by (used in) operating activities 8,633 (4,516)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (172) (344)
Proceeds from sale of fixed assets 10 21
Payment for purchase of USI -- (349)
-------- --------
Net cash used in investing activities (162) (672)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on line of credit (13,300) (12,500)
Proceeds from issuance of preferred stock and warrants including $1,004 of
accrued offering costs not yet paid -- 24,454
Proceeds from exercise of stock options 20 564
-------- --------
Net cash (used in) provided by financing activities (13,280) 12,518
-------- --------
Net (decrease) increase in cash and cash equivalents (4,809) 7,330
CASH AND CASH EQUIVALENTS, beginning of period 7,250 7,131
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,441 $ 14,461
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest $ 615 $ 415
======== ========
Income taxes $ -- $ 4,949
======== ========
</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, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation (the "Company"), is a leading
marketing services company, providing a wide range of custom promotional
programs that build sales and brand awareness for retailers, restaurant chains
and consumer goods companies such as Burger King Corporation, The Coca-Cola
Company, Exxon Company USA, Sunoco, Inc., CVS/pharmacy and others. The Company
is also a developer and marketer of distinctive, branded consumer products that
complement its core promotions business and are based on trademarks it owns or
classic licensed properties. 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(R) brand of collectible 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, (CMI and USI are collectively
referred to herein as "USI"). 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 USI are located in West
Boylston, Massachusetts and St. Augustine, Florida. In March 2000, the Company
paid $349 to the former stockholders of USI as additional cash consideration
related to the Company's purchase of USI. This amount was allocated to Goodwill.
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 accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by accounting principles generally accepted
in the United States 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, 1999.
Certain reclassifications have been made to the accompanying 1999 financial
statements to conform them to the current period presentation.
NET INCOME PER SHARE
Basic net income per share ("EPS") is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during each period. Net income available to common stockholders
represent reported net income less preferred stock dividend requirements.
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. Diluted EPS includes in-the-money options and warrants using the treasury
stock method and also includes the assumed conversion of preferred stock using
the if-converted method. Options and warrants to purchase 608,000 and 1,481,666
shares of common stock, $.001 par value per share (the "Common Stock"), as of
June 30, 1999, and 2000, respectively were excluded from the computation of
diluted EPS as they would have been anti-dilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "income available to common stockholders"
and other disclosures required by Statement of Financial Accounting Standards
No. 128, "Earnings per Share":
7
<PAGE> 8
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
--------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Income Shares Per Share Income Share Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common $ 2,865 6,291,180 $ .46 $ 2,864 6,223,099 $ .46
stockholders ========== ==========
Preferred stock dividends 201 -- -- --
Effect of Dilutive Securities:
Options and warrants -- 216,941 -- 117,870
Convertible preferred stock -- 904,377 -- --
-------------- --------- -------------- ---------
Dilutive EPS:
Income available to common
stockholders and assumed conversion $ 3,066 7,412,498 $ .41 $ 2,864 6,340,969 $ .45
============== ========= ========== ============== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
--------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Income Shares Per Share Income Share Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common $ 4,153 6,263,949 $ .66 $ 2,599 6,216,607 $ .42
stockholders ========= =========
Preferred stock dividends 207 -- -- --
Effect of Dilutive Securities:
Options and warrants -- 226,847 -- 97,950
Convertible preferred stock -- 465,487 -- --
--------- --------- ----------- ---------
Dilutive EPS:
Income available to common
stockholders and assumed conversion $ 4,360 6,956,283 $ .63 $ 2,599 6,314,557 $ .41
========= ========= ========= =========== ========= ==========
</TABLE>
INVENTORY
Inventory consists of production-in-process which primarily represents tooling
costs which are deferred and amortized over the life of the products and
purchased finished goods held for sale to customers and purchased finished goods
in transit to customers' distribution centers. Inventory is stated at the lower
of average cost or market. As of December 31, 1999 and June 30, 2000, inventory
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- -------------
<S> <C> <C>
Production-in-process $ 1,088 $ 1,928
Finished goods 7,654 4,754
------------- -------------
$ 8,742 $ 6,682
============= =============
</TABLE>
NOTE 3 -- SHORT-TERM DEBT
At December 31, 1999 and June 30, 2000, the Company was party to a revolving
credit agreement ("Credit Agreement") with two commercial banks. The agreement,
as amended on July 27, 2000, provides for a line of credit of $25,000 through
June 30, 2001 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 an applicable spread of between 2.00 and 3.00
percent or a variable rate equivalent to the lead bank's reference rate plus an
applicable spread of between zero and 0.50 percent. The Company is also required
to pay an unused line fee of between zero and 0.50 percent per annum and certain
letter of credit fees. The applicable spread is based on the achievement of
certain financial ratios. 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 June 30, 2000, the Company was in compliance with these requirements.
As of December 31, 1999, there was $12,500 outstanding under the Credit
Agreement. There were no amounts outstanding under the Credit Agreement at June
30, 2000. Letters of credit outstanding as of December 31, 1999 and June 30,
2000 totaled $401.
8
<PAGE> 9
NOTE 4 -- RESTRUCTURING RESERVE
On December 21, 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 in 1998. The restructuring charge includes a provision for
projected minimum royalty guarantee shortfalls associated with long-term
licenses which the Company has decided to discontinue, severance for workforce
reductions of 30 employees, a provision for outstanding inventory purchase
commitments on purchase orders the Company cancelled, and a provision for costs
associated with the planned closure of the Company's warehouse facility. Details
of the restructuring charge are as follows:
<TABLE>
<CAPTION>
Utilized Six
Original Utilized Utilized Reversed Charged Months Ended To Be
Charge 1998 1999 1999 1999 June 30, 2000 Utilized
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Provision for projected minimum royalty
guarantee shortfalls $ 2,187 $ -- $ (267) $(641) $ -- $(1,062) $217
Employee severance and termination benefits 738 (127) (648) -- 37 -- --
Outstanding inventory purchase commitments 800 -- (716) -- -- -- 84
Lease commitment for warehouse facility 396 -- (31) -- -- (22) 343
------------------------------------------------------------------------------------------------------------------------------------
$ 4,121 $ (127) $(1,662) $(641) $ 37 $(1,084) $644
====================================================================================================================================
</TABLE>
NOTE 5 - MANDATORY REDEEMABLE PREFERRED STOCK
On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability
company ("Crown"), invested $11,900 in the Company in exchange for preferred
stock and warrants to purchase additional preferred stock. Under the terms of
the investment, Crown acquired 11,900 shares of Series A senior cumulative
participating convertible preferred stock, par value $.001 per share, of the
Company (the "Series A Stock") with a conversion price of $14.75 per share. In
connection with such purchase, the Company granted to Crown five year warrants
(collectively, the "Warrants") to purchase 5,712 shares of Series B senior
cumulative participating convertible preferred stock, par value $.001 per share,
of the Company (the "Series B Stock") at an exercise price of $1,000 per share,
and 1,428 shares of Series C senior cumulative participating convertible
preferred stock, par value $.001 per share, of the Company (the "Series C
Stock") at an exercise price of $1,000 per share. The Warrants are immediately
exercisable. The conversion prices of the Series B Stock and the Series C Stock
are $16.00 and $18.00, respectively. On June 20, 2000, Crown paid an additional
$13,100 to the Company in exchange for an additional 13,100 shares of Series A
Stock with a conversion price of $14.75 per share. In connection with such
purchase, the Company granted to Crown Warrants to purchase an additional 6,288
shares of Series B Stock and an additional 1,572 shares of Series C Stock. Each
share of Series A Stock is convertible into 67.7966 shares of Common Stock,
representing 1,694,915 shares of Common Stock. Each share of Series B Stock and
Series C Stock is convertible into 62.5 and 55.5556 shares of Common Stock,
respectively, representing 916,666 shares of Common Stock in the aggregate. Also
in connection with such purchase, the Company agreed to pay Crown a commitment
fee in the aggregate amount of $1,250, paid in equal quarterly installments of
$62.5 commencing on June 30, 2000 and ending on March 31, 2005. A payment of
$62.5 was made for the quarter ended June 30, 2000.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, Crown, as holder of the preferred stock, will be
entitled to payment out of the assets of the Company available for distribution
of an amount equal to the greater of (a) the liquidation preference of $1,000
per share (the "Liquidation Preference") plus all accrued and unpaid dividends
or (b) the aggregate amount of payment that the outstanding preferred stock
holder would have received assuming conversion to Common Stock immediately prior
to the date of liquidation of capital stock, before any payment is made to other
stockholders.
The Series A Stock, Series B Stock and Series C Stock are subject to mandatory
redemption at 101% of the aggregate Liquidation Preference plus accrued and
unpaid dividends if a change in control of the Company occurs.
Crown has voting rights equivalent to the number of shares of Common Stock into
which their preferred stock is convertible on the relevant record date. Crown is
also entitled to receive a quarterly dividend equal to 6% of the Liquidation
Preference per share outstanding, payable in cash. A cash dividend of $207 was
paid to Crown on June 30, 2000.
Crown currently holds 100% of the outstanding shares of Series A Stock, and
consequently, has designated two individuals to the Board of Directors of the
Company.
The Series A Stock is recorded in the accompanying condensed consolidated
balance sheets at its Liquidation Preference net of issuance costs. The issuance
costs total approximately $1,900 and include an accrual of approximately $1,000
for the present value of the commitment fee discussed above.
9
<PAGE> 10
NOTE 6 - LEGAL PROCEEDINGS
POKEMON RECALL AND RELATED MATTERS
On January 21, 2000, a purported class action lawsuit entitled Domingo
Quintinilla v. Tex-Best Travel Centers, Inc., Burger King Corporation, and
Equity Marketing, Inc. was filed in the District Court of Hidalgo County, Texas.
The lawsuit was filed by an individual purporting to represent all individuals
in the United States that had received a Pokemon(TM) ball from a Burger King(R)
restaurant. On May 26, 2000, the case was dismissed without prejudice by the
plaintiff.
In addition to the information regarding the Pokemon(TM) recall and related
matters contained in this document, readers are advised to review the Company's
Form 10-K for the year ended December 31, 1999, under the heading "Item 3. Legal
Proceedings." and the Company's Form 10-Q for the quarter ended March 31, 2000,
under the heading "Item 1. Legal Proceedings."
NOTE 7 - SEGMENTS
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 and geographic areas exclude interest income,
interest expense, depreciation, 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 and include
accounts receivable, note receivable, inventory, goodwill and the Headliners(R)
trademark. Corporate assets consist of cash, certain corporate receivables,
fixed assets, and certain trademarks.
INDUSTRY SEGMENTS
<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 $ 10,058 $ (1,006) $ (4,279) $ 4,773
Provision (benefit) for income taxes 4,023 (402) (1,712) 1,909
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,035 $ (604) $ (2,567) $ 2,864
================================================================================================================================
Fixed asset additions, net $ -- $ -- $ 69 $ 69
================================================================================================================================
Depreciation and amortization $ 143 $ 173 $ 374 $ 690
================================================================================================================================
Total assets $ 49,765 $ 3,664 $ 36,287 $ 89,716
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2000
--------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 50,628 $ 4,686 $ -- $ 55,314
================================================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 8,673 $ 510 $ (4,074) $ 5,109
Provision (benefit) for income taxes 3,469 204 (1,630) 2,043
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,204 $ 306 $ (2,444) $ 3,066
================================================================================================================================
Fixed asset additions, net $ -- $ -- $ 207 $ 207
================================================================================================================================
Depreciation and amortization $ 183 $ 119 $ 355 $ 657
================================================================================================================================
Total assets $ 55,640 $ 14,678 $ 26,420 $ 96,738
================================================================================================================================
</TABLE>
10
<PAGE> 11
<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 $ 14,355 $ (1,217) $ (8,806) $ 4,332
Provision (benefit) for income taxes 5,742 (487) (3,522) 1,733
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,613 $ (730) $ (5,284) $ 2,599
================================================================================================================================
Fixed asset additions, net $ -- $ -- $ 172 $ 172
================================================================================================================================
Depreciation and amortization $ 375 $ 257 $ 739 $ 1,371
================================================================================================================================
Total assets $ 49,765 $ 3,664 $ 36,287 $ 89,716
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 90,830 $ 7,961 $ -- $ 98,791
================================================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 14,336 $ 767 $ (7,855) $ 7,248
Provision (benefit) for income taxes 5,713 305 (3,130) 2,888
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,623 $ 462 $ (4,725) $ 4,360
================================================================================================================================
Fixed asset additions, net $ -- $ -- $ 344 $ 344
================================================================================================================================
Depreciation and amortization $ 365 $ 237 $ 714 $ 1,316
================================================================================================================================
Total assets $ 55,640 $ 14,678 $ 26,420 $ 96,738
================================================================================================================================
</TABLE>
NOTE 8 - AMERISERVE BANKRUPTCY
The Company regularly extends credit to several distribution companies in
connection with its business with Burger King. One of these distribution
companies, AmeriServe Food Distribution, Inc. together with certain of its
affiliates (including its affiliates, "AmeriServe") accounted for more than 50
percent of the products purchased from the Company by the Burger King system in
1999. AmeriServe filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code on January 31, 2000. As of January 31, 2000, AmeriServe
owed the Company approximately $28,800 million in trade receivables. AmeriServe
was able to secure temporary debtor in possession funding to enable it to
continue operating in the short-term post bankruptcy.
Restaurant Services, Inc. ("RSI"), a not-for-profit purchasing cooperative that
has as its members Burger King franchisees and Burger King, is the exclusive
purchasing agent for the Burger King system of franchisee-owned and
company-owned restaurants located in the United States. Subsequent to January
31, 2000, the Company reached an agreement with RSI in which RSI purchased all
pre-petition trade receivables owed to the Company by AmeriServe in exchange for
a two-year non-interest-bearing note valued at approximately $16,000 and the
satisfaction of certain contractual obligations owed by the Company to RSI. This
agreement resulted in a net pre-tax charge of approximately $1,000 for the year
ended December 31, 1999. A note receivable of approximately $10,500 has been
recorded on the accompanying condensed consolidated balance sheet as of December
31, 1999. Approximately $6,600 of the $28,800 pre-petition trade receivables
relate to sales made in January 2000. Accordingly, the remaining $5,500 portion
of the note receivable was recorded in January 2000, and resulted in a net
pre-tax charge of approximately $500 for the quarter ended March 31, 2000. This
charge was partially offset by approximately $600 of imputed interest income
recorded on the note receivable for the six months ended June 30, 2000. The
balance of the note receivable as of June 30, 2000 was approximately $12,200,
$4,300 of which was classified as long-term.
In a press release issued on April 12, 2000, Burger King announced that "it
plans an orderly transition of distribution services as the Burger King(R)
system leaves its relationship with AmeriServe Food Distribution, Inc." The
press release stated that Burger King had arranged for alternative distribution
services for the Burger King restaurants currently served by AmeriServe. The
press release further stated that Burger King expects to complete the transition
to alternative distributors by July, 2000 and that the debtor-in-possession
financing provided by Burger King to AmeriServe would remain in effect until
August, 2000. As of July 2000, the transition to alternative distributors was
completed. Following such transition, the largest distribution company accounted
for approximately 20% of the products purchased from the Company by the
Burger King system.
11
<PAGE> 12
NOTE 9 - STOCK REPURCHASE
The Company's Board of Directors has authorized up to $10,000 for the repurchase
of the Company's common stock over the next twelve months. The repurchase
program commenced on July 21, 2000. Purchases will be conducted in the open
market at prevailing prices, based on market conditions. The Company may also
transact purchases effected as block trades, as well as certain negotiated,
off-exchange purchases not in the open market. This repurchase program will be
funded through a combination of working capital and bank debt. As of the date
hereof, the Company has purchased an aggregate of 20,500 shares at an average
price of $12.34 per share.
12
<PAGE> 13
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 2000 and
thereafter to differ significantly from those expressed in forward-looking
statements:
MARKETPLACE RISKS
- Dependence on a single customer, Burger King, which may adversely affect
the Company's financial condition and results of operations
- Availability and pricing of raw materials. Virtually all of the Company's
raw materials are available from numerous suppliers. However, a worldwide
shortage of electronic components could impact our ability to meet customer
demand. In addition, prices for plastics, a major component of the
Company's products, began rising in late 1999 as a result of the increase
in petroleum prices. This trend is continuing in 2000. The Company does not
have long-term supply contracts in place with its suppliers. Accordingly,
continued shortages of electronic components or petroleum price increases
could result in higher prices for the Company's products which the Company
may not be able to pass on to its customers. Any such failure could
negatively impact the Company's business, financial condition or results of
operations
- 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
- Dependence on the popularity of licensed entertainment properties, which
may adversely affect the Company's financial condition and results of
operations
- Dependence on the ability to license, develop and market new products,
which may adversely affect the Company's financial condition and results of
operations
- Increased competitive pressure, which may affect the sales of the Company's
products
- Dependence on foreign manufacturers, which may increase the costs of the
Company's products and affect the demand for such products
- Concentration risk associated with accounts receivable. The Company
regularly extends credit to several distribution companies in connection
with its business with Burger King. One of these distribution companies,
AmeriServe Food Distribution, Inc. ("AmeriServe"), accounted for more than
50% of the products purchased from the Company by the Burger King system in
1999. AmeriServe filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code on January 31, 2000 (see "AmeriServe Bankruptcy").
Transition from AmeriServe to other distributors was completed during July
2000. Following such transition, the largest distribution company currently
accounts for approximately 20% of the products purchased from the Company
by the Burger King system.
FINANCING RISKS
- Currency fluctuations, which may affect the Company's suppliers and the
Company's reportable income
- 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
- Potential negative impact of past or future acquisitions, which may disrupt
the Company's ongoing business, distract senior management and increase
expenses
- Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal
business operations of the Company
- 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
- Exposure to liability for the costs related to product recalls. These costs
can include legal expenses, advertising, collection and destruction of
product, and free goods. The Company's product liability insurance coverage
generally excludes such costs and damages resulting from product recall
13
<PAGE> 14
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
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 10-K for the year ended December 31, 1999, under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements and Risk Factors."
ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation (the "Company"), is a leading
marketing services company, providing a wide range of custom promotional
programs that build sales and brand awareness for retailers, restaurant chains
and consumer goods companies such as Burger King Corporation, The Coca-Cola
Company, Exxon Company USA, Sunoco, Inc., CVS/pharmacy and others. The Company
is also a developer and marketer of distinctive, branded consumer products that
complement its core promotions business and are based on trademarks it owns or
classic licensed properties. 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 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, (CMI and USI are collectively
referred to as "USI"). 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 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,
-------------- --------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.8 75.0 76.1 75.6
------ ------ ------ ------
Gross profit 23.2 25.0 23.9 24.4
------ ------ ------ ------
Operating Expenses:
Salaries, wages and benefits 6.1 6.8 8.3 7.2
Selling, general and administrative 8.9 9.5 10.4 10.2
Restructuring gain (0.7) -- (.5) --
------ ------ ------ ------
Total operating expenses 14.3 16.3 18.2 17.4
------ ------ ------ ------
Income from operations 8.9 8.7 5.7 7.0
Interest income (expense), net (0.4) 0.5 (.5) 0.3
------ ------ ------ ------
Income before provision for income taxes 8.5 9.2 5.2 7.3
Provision for income taxes 3.4 3.7 2.1 2.9
------ ------ ------ ------
Net income 5.1% 5.5% 3.1% 4.4%
====== ====== ====== ======
</TABLE>
14
<PAGE> 15
EBITDA
While many in the financial community consider earnings before interest, taxes,
depreciation and amortization ("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
accounting principles generally accepted in the United States. 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 years indicated:
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED JUNE 30, FOR SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
1999 2000 1999 2000
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 2,864 $ 3,066 $ 2,599 $ 4,360
Less: Restructuring gain (401) -- (401) --
Add: Depreciation and amortization 690 657 1,371 1,316
Interest (income) expense, net 217 (270) 439 (355)
Provision for income taxes 1,909 2,043 1,733 2,888
----------------------------------------------------------------------------------------------------------------
EBITDA $ 5,279 $ 5,496 $ 5,741 $ 8,209
================================================================================================================
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
(000'S OMITTED):
Revenues for the three months ended June 30, 2000 decreased $697 or 1.2% to
$55,314 from $56,011 in the comparable period in 1999. Promotions revenues
decreased $146 to $50,628 primarily due to the timing of promotional programs
for Burger King Corporation. Consumer Product revenues decreased $551 to $4,686
from $5,237. Excluding liquidation sales of discontinued Consumer Product lines
of $1,924 in 1999 related to the Company's decision to exit the event-based
license consumer product business, sales increased $1,373 primarily due to
higher sales in Scooby-Doo and Tub Tints product, partially offset by reduced
sales of Headliners(R).
Cost of sales decreased $1,505 to $41,487 (75.0% of revenues) for the three
months ended June 30, 2000 from $42,992 (76.8% of revenues). This decrease is
due to lower sales and higher gross margins in 2000 compared to 1999. The gross
margin percentage for the period increased to 25.0% for the three months ended
June 30, 2000 from 23.2% in the comparable period for 1999. The increased margin
percentage is attributable to lower than expected returns and better than
expected sales from a promotional program which was closed in a prior period.
Salaries, wages and benefits increased $302, or 8.8% to $3,746 (6.8% of
revenues). This increase was primarily attributable to staffing additions
resulting from the Company's current growth initiatives in 2000.
Selling, general and administrative expenses increased $256, or 5.1% to $5,242
(9.5% of revenues). This increase is due primarily to increased freight out and
warehousing costs associated with several large promotional programs.
Net interest income was $270 for the three months ended June 30, 2000 compared
to net interest expense of $217 for the three months ended June 30, 1999. The
net interest income in 2000 was attributable to approximately $300 of imputed
interest income recorded on a note receivable (see "AmeriServe Bankruptcy") and
to the paydown of all outstanding short-term debt during the second quarter of
2000 as a result of the cash proceed received from the issuance of preferred
stock (see "Issuance of Preferred Stock").
The effective tax rate for the three months ended June 30, 2000 was 40.0% which
is consistent with the effective tax rate for the same period in 1999.
Net income increased $202 or 7.1% to $3,066 (5.5% of revenues) from $2,864 (5.1%
of revenues) in 1999 primarily due to greater gross profit earned in 2000
partially offset by increased salaries, wages and benefits and selling, general
and administrative expenses.
In 2000, EBITDA increased $217 or 4.1% to $5,496 from $5,279 in 1999 primarily
due to greater gross profit earned in 2000. This increase was partially offset
by the increase in salaries, wages and benefits and selling, general and
administrative expenses for the three months ended June 30, 2000.
15
<PAGE> 16
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 (000'S
OMITTED):
Revenues for the six months ended June 30, 2000 increased $15,323 or 18.4% to
$98,791 from $83,468 in the comparable period in 1999. Promotions revenues
increased $15,758 to $90,830 primarily as a result of increased revenues
associated with several Burger King promotions. Consumer Products revenues
decreased $435 to $7,961. Excluding liquidation sales of discontinued consumer
product lines of $2,415 in 1999 related to the Company's decision to exit the
event-based license consumer product business, sales increased $1,980 primarily
due to increased sales in Scooby-Doo and Tub Tints product, partially offset by
reduced sales of Headliners(R).
Cost of sales increased $11,153 to $74,690 (75.6% of revenues) for the six
months ended June 30, 2000 from $63,537 (76.1% of revenues) in the comparable
period in 1999 due to higher sales in 2000. The gross margin percentage for the
period increased to 24.4% for the six months ended June 30, 2000 from 23.9% in
the comparable period for 1999. The increased margin percentage is attributable
to lower than expected returns and better than expected sales from a promotional
program which was closed in a prior period.
Salaries, wages and benefits increased $231, or 3.3% to $7,147 (7.2% of
revenues). This increase was primarily attributable to staffing additions
resulting from the Company's growth initiatives in 2000.
Selling, general and administrative expenses increased $1,416, or 16.4% to
$10,061 (10.2% of revenues). This increase is due primarily to increased freight
out and warehousing costs resulting from the increase in sales volume.
Approximately $500 of this increase resulted from additional bad debt expense
recorded for the bankruptcy of AmeriServe (see "AmeriServe Bankruptcy").
Selling, general and administrative expenses decreased as a percentage of
revenues from 10.4% to 10.2% as a result of revenues which increased at a
greater rate.
Net interest income was $355 for the six months ended June 30, 2000 compared to
net interest expense of $439 for the six months ended June 30, 1999. The net
interest income in 2000 was attributable to approximately $600 of imputed
interest income recorded on a note receivable (see "AmeriServe Bankruptcy") and
to the paydown of short-term debt during 2000 as a result of the cash proceed
received from the issuance of preferred stock (see "Issuance of Preferred
Stock").
The effective tax rate for the six months ended June 30, 2000 was 39.85% which
is consistent with the 40.0% tax rate recorded for the six months ended June 30,
1999.
Net income increased $1,761 or 67.8% to $4,360 (4.4% of revenues) from $2,599
(3.1% of revenues) in 1999 primarily due to greater gross profit earned on the
increased revenues in 2000 partially offset by increased salaries, wages and
benefits and selling, general and administrative expenses.
In 2000, EBITDA increased $2,468 or 43.0% to $8,209 from $5,741 in 1999
primarily due to greater gross profit earned on increased revenues in 2000. This
increase was partially offset by the increase in salaries, wages and benefits
and selling, general and administrative expenses for the six months ended June
30, 2000.
FINANCIAL CONDITION AND LIQUIDITY
As of June 30, 2000, the Company's investment in accounts receivable decreased
$7,507 from the balance at December 31, 1999. This decrease was attributable to
the sale of the AmeriServe trade receivables to Restaurant Services, Inc.
("RSI") (see "AmeriServe Bankruptcy") and to collections of substantially all of
the receivables related to sales shipped late in the 1999 fourth quarter. As of
June 30, 2000, inventory decreased approximately $2,060 from December 31, 1999
primarily due to the timing of Burger King and other client promotions.
As of June 30, 2000, accounts payable decreased $10,422 compared to December 31,
1999. This decrease is attributable to payments to vendors associated with the
manufacturing related to large fourth quarter 1999 promotional programs.
As of June 30, 2000, accrued liabilities decreased $5,969 compared to December
31, 1999. This decrease is primarily attributable to the payment of employee
bonuses related to 1999, the payment of royalty guarantees associated with the
restructuring charge recorded in 1998, the payment of royalties associated with
fourth quarter 1999 Consumer Products revenue, and the payment of federal and
state income taxes related to 1999 net income.
16
<PAGE> 17
As of June 30, 2000, working capital was $41,395 compared to $11,045 at December
31, 1999. The increase in working capital was primarily due to the cash received
from the issuances of senior cumulative participating convertible preferred
stock on March 29, 2000 and on June 20, 2000 (see "Issuance of Preferred
Stock"). 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, 2000 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 July 27,
2000, provides for a line of credit of $25,000 through June 30, 2001 with
borrowing availability determined by a formula based on qualified assets. There
were no amounts outstanding under the credit facility as of June 30, 2000.
Letters of credit outstanding as of June 30, 2000 totaled $401. The Credit
Agreement requires the Company to comply with certain restrictions and financial
covenants as defined in the agreement. As of June 30, 2000, the Company was in
compliance with these covenants.
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.
ISSUANCE OF PREFERRED STOCK
On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability
company ("Crown"), invested $11,900 in the Company in exchange for preferred
stock and warrants to purchase additional preferred stock. Under the terms of
the investment, Crown acquired 11,900 shares of Series A senior cumulative
participating convertible preferred stock, par value $.001 per share, of the
Company (the "Series A Stock") with a conversion price of $14.75 per share. In
connection with such purchase, the Company granted to Crown five year warrants
(collectively, the "Warrants") to purchase 5,712 shares of Series B senior
cumulative participating convertible preferred stock, par value $.001 per share,
of the Company (the "Series B Stock") at an exercise price of $1,000 per share,
and 1,428 shares of Series C senior cumulative participating convertible
preferred stock, par value $.001 per share, of the Company (the "Series C
Stock") at an exercise price of $1,000 per share. The Warrants are immediately
exercisable. The conversion prices of the Series B Stock and the Series C Stock
are $16.00 and $18.00, respectively. On June 20, 2000, Crown paid an additional
$13,100 to the Company in exchange for an additional 13,100 shares of Series A
Stock with a conversion price of $14.75 per share. In connection with such
purchase, the Company granted to Crown Warrants to purchase an additional 6,288
shares of Series B Stock and an additional 1,572 shares of Series C Stock. Each
share of Series A Stock is convertible into 67.7966 shares of Common Stock,
representing 1,694,915 shares of Common Stock in aggregate. Each share of Series
B Stock and Series C Stock is convertible into 62.5 and 55.5556 shares of Common
Stock, respectively, representing 916,666 shares of Common Stock in aggregate.
Also in connection with such purchase, the Company agreed to pay Crown a
commitment fee in the aggregate amount of $1,250, paid in equal quarterly
installments of $62.5 commencing on June 30, 2000 and ending on March 31, 2005.
A payment of $62.5 was made for the quarter ended June 30, 2000.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, Crown, as holder of the preferred stock, will be
entitled to payment out of the assets of the Company available for distribution
of an amount equal to the greater of (a) the liquidation preference of $1,000
per share (the "Liquidation Preference") plus all accrued and unpaid dividends
or (b) the aggregate amount of payment that the outstanding preferred stock
holder would have received assuming conversion to Common Stock immediately prior
to the date of liquidation of capital stock, before any payment is made to other
stockholders.
The Series A Stock, Series B Stock and Series C Stock are subject to mandatory
redemption at 101% of the aggregate Liquidation Preference plus accrued and
unpaid dividends if a change in control of the Company occurs.
Crown has voting rights equivalent to the number of shares of Common Stock into
which their preferred stock is convertible on the relevant record date. Crown is
also entitled to receive a quarterly dividend equal to 6% of the Liquidation
Preference per share outstanding, payable in cash. A cash dividend of $207 was
paid to Crown on June 30, 2000.
Crown currently holds 100% of the outstanding shares of Series A Stock, and
consequently, has designated two individuals to the Board of Directors of the
Company.
17
<PAGE> 18
The Series A Stock is recorded in the accompanying condensed consolidated
balance sheets at its Liquidation Preference net of issuance costs. The issuance
costs total approximately $1,900 and include an accrual of approximately $1,000
for the present value of the commitment fee discussed above.
STOCK REPURCHASE
The Company's Board of Directors has authorized up to $10,000 for the repurchase
of the Company's common stock over the next twelve months. The repurchase
program commenced on July 21, 2000. Purchases will be conducted in the open
market at prevailing prices, based on market conditions. The Company may also
transact purchases effected as block trades, as well as certain negotiated,
off-exchange purchases not in the open market. This repurchase program will be
funded through a combination of working capital and bank debt. As of the date
hereof, the Company has purchased an aggregate of 20,500 shares at an average
price of $12.34 per share.
INFORMATION SYSTEMS
YEAR 2000 UPDATE
To address the year 2000 issue the Company established and implemented a plan to
remediate and test its most critical computer systems and applications,
including its enterprise resource planning system, computer networks and desktop
applications. The plan also included steps to verify that all key third-party
suppliers and customers were taking measures to ensure their own readiness.
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 issue. The new enterprise resource
planning system went into operation in January 1999. All phases of the year 2000
readiness plan were completed as scheduled. To date, the Company has not
experienced any material year 2000 issues with its internal systems or with its
third party customers and suppliers. In addition, the Company did not experience
any loss of revenues due to the year 2000 issue. The Company will continue to
monitor its critical computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any latent year 2000 matters
that may arise are promptly addressed.
Although unlikely given that the Company has not experienced any year 2000
issues to date, there can be no assurance that any future unforeseen year 2000
issues will not materially adversely affect the Company's results of operations,
liquidity and financial position or adversely affect the Company's relationships
with customers, vendors or others.
AMERISERVE BANKRUPTCY
The Company regularly extends credit to several distribution companies in
connection with its business with Burger King. One of these distribution
companies, AmeriServe, accounted for more than 50 percent of the products
purchased from the Company by the Burger King system in 1999. AmeriServe filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code on
January 31, 2000. As of January 31, 2000, AmeriServe owed the Company
approximately $28,800 in trade receivables. AmeriServe was able to secure
temporary debtor in possession funding to enable it to continue operating in the
short-term post bankruptcy.
RSI, a not-for-profit purchasing cooperative that has as its members Burger King
franchisees and Burger King, is the exclusive purchasing agent for the Burger
King system of franchisee-owned and company-owned restaurants located in the
United States. Subsequent to January 31, 2000, the Company reached an agreement
with RSI in which RSI purchased all pre-petition trade receivables owed to the
Company by AmeriServe in exchange for a two-year non-interest-bearing note
valued at approximately $16,000 and satisfaction of certain contractual
obligations owed by the Company to RSI. This agreement resulted in a net pre-tax
charge of approximately $1,000 for the quarter ended December 31, 1999. A note
receivable of approximately $10,500 has been recorded on the accompanying
condensed consolidated balance sheet as of December 31, 1999. Approximately
$6,600 of the $28,800 pre-petition trade receivables relate to sales made in
January 2000. Accordingly, the remaining $5,500 portion of the note receivable
was recorded in January 2000, and resulted in a net pre-tax charge of
approximately $500 for the quarter ending March 31, 2000. This charge was
partially offset by approximately $600 of imputed interest income recorded on
the note receivable for the six months ended June 30, 2000. The balance of the
note receivable as of June 30, 2000 was approximately $12,200, $4,300 of
which was classified as long-term.
18
<PAGE> 19
In a press release issued on April 12, 2000, Burger King announced that "it
plans an orderly transition of distribution services as the Burger King(R)
system leaves its relationship with AmeriServe Food Distribution, Inc." The
press release stated that Burger King had arranged for alternative distribution
services for the Burger King restaurants currently served by AmeriServe. The
press release further stated that Burger King expects to complete the transition
to alternative distributors by July, 2000 and that the debtor-in-possession
financing provided by Burger King to AmeriServe would remain in effect until
August, 2000. As of July 2000, the transition to alternative distributors was
completed. Following such transition, the largest distribution company accounted
for approximately 20% of the products purchased from the Company by the
Burger King system.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
POKEMON RECALL AND RELATED MATTERS
On January 21, 2000, a purported class action lawsuit entitled Domingo
Quintinilla v. Tex-Best Travel Centers, Inc., Burger King Corporation, and
Equity Marketing, Inc. was filed in the District Court of Hidalgo County, Texas.
The lawsuit was filed by an individual purporting to represent all individuals
in the United States that had received a Pokemon(TM) ball from a Burger King(R)
restaurant. On May 26, 2000, the case was dismissed without prejudice by the
plaintiff.
In addition to the information regarding the Pokemon(TM) recall and related
matters contained in this document, readers are advised to review the Company's
Form 10-K for the year ended December 31, 1999, under the heading "Item 3. Legal
Proceedings." and the Company's Form 10-Q for the quarter ended March 31, 2000,
under the heading "Item 1. Legal Proceedings."
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 29, 2000 and June 20, 2000, the Company sold to Crown an aggregate of
25,000 shares of Series A Stock and warrants to purchase 12,000 shares of Series
B Stock and 3,000 shares of Series C Stock (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Issuance of
Preferred Stock"). The sales and issuances of such securities were deemed to be
exempt from registration under the Securities Act of 1933 by virtue of
Regulation D promulgated thereunder. Appropriate legends are affixed to the
securities issued in the aforementioned transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Seventh Amendment to Amended and Restated Credit
Agreement dated July 27, 2000 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 July 20, 2000
20
<PAGE> 21
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 14th day of August, 2000.
EQUITY MARKETING, INC.
/s/ TERESA P. COVINGTON
-------------------------
Teresa P. Covington
Vice President, Finance
(Principal Financial and Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
<S> <C>
10.1 Seventh Amendment to Amended and Restated Credit Agreement
dated July 27, 2000 between the Company and Sanwa Bank
California and Imperial Bank
27.0 Financial Data Schedule
</TABLE>
22
