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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission File Number 23346
EQUITY MARKETING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3534145
(State of or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
6330 SAN VICENTE BLVD.
LOS ANGELES, CALIFORNIA 90048
(Address of principal executive offices)
(323) 932-4300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Approximate aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 22, 2001 was $30,760,368
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Number of Shares
outstanding on
March 22, 2001
----------------
Common Stock, $0.001 par value.......................... 6,104,411
Documents Incorporated by Reference: Certain portions of the Registrant's Proxy
Statement relating to Registrant's annual meeting of stockholders scheduled to
be held on September 13, 2001 are incorporated by reference into Part III of
this Form 10-K.
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EQUITY MARKETING, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2000
ITEMS IN FORM 10-K
Page
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Part I
Item 1. Business 2
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 17
Part III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
FORWARD-LOOKING STATEMENTS
Certain expectations and projections regarding the future performance of Equity
Marketing, Inc., a Delaware corporation (the "Company"), discussed in this
document 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. Readers should not place undue reliance on any such
forward-looking statements, which speak only as of the date made. Actual results
could vary materially from those anticipated for a variety of reasons. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Cautionary
Statements and Risk Factors."
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PART I
ITEM 1. BUSINESS
($000's omitted)
GENERAL
Equity Marketing, Inc., a Delaware corporation ("Equity Marketing" or the
"Company"), is a provider of integrated custom promotional products and
marketing services that builds sales and brand awareness for domestic and
international quick service restaurant chains, oil and gas companies, packaged
goods companies and mass market retailers. The Company also designs, develops,
manufactures and promotes consumer products that complement its promotions
business and that are distributed primarily through mass market and specialty
retailers, as well as international distributors. The Company's products include
character figurines, action vehicles, drinking vessels, watches, plush toys,
play sets and a variety of other items. Programs of the promotions division of
the Company, Equity Promotions ("Equity Promotions" or "Promotions"), are
utilized primarily in promotional campaigns implemented by quick service
restaurant and consumer products customers, which include Burger King
Corporation ("Burger King"), The Coca-Cola Company and CVS/pharmacy. Equity
Consumer Products ("Equity Consumer Products" or "Consumer Products"), the
consumer products division of the Company, designs and produces niche products
based on trademarks owned by the Company such as Headliners(R) and Tub Tints(R)
or on classic, time-tested licensed properties such as Scooby-Doo(TM) for sale
to major mass market and specialty market retailers such as Toys 'R' Us, Inc.
("Toys 'R' Us"), Wal-Mart Stores, Inc. ("Wal-Mart"), Target Stores, Inc.
("Target"), Spencer Gifts, Inc., and to various international distributors
worldwide.
The Company's promotional programs are often based upon characters from
entertainment properties licensed by television and motion picture studios and
others. Licenses for characters upon which Equity Promotions' programs are based
are generally obtained directly by the Company's customers (often with the
Company's assistance) from licensors, including Warner Bros. Inc. ("Warner
Bros."), Universal Studios ("Universal"), Nickelodeon, a division of MTV
Networks, a division of Viacom, DreamWorks SKG, The Walt Disney Company, Sony
Pictures Entertainment and Twentieth Century Fox. Such licenses are typically
specific to the promotional campaign implemented by the Company's customers and
generally do not extend beyond the end of the promotional campaign. In contrast,
Equity Consumer Products generally obtains licenses directly from licensors.
These licenses generally grant the Company rights to design, manufacture and
distribute certain specific items or types of items in specific United States
and/or international markets for defined terms, typically one to three years.
The Company believes its principal competitive advantages are its extensive
brand-building and measurable sales-building experience developed over years of
serving Burger King and other customers, extensive creative capabilities, access
to a broad range of intellectual property from the worlds of entertainment,
music and sports and an infrastructure that can deliver unique, high-quality and
cost-effective products and services in a very tight time frame.
The Company is seeking to acquire other companies and is also investing in its
sales force and infrastructure to target new markets through internal growth. No
assurance can be given that the Company will find suitable acquisition
candidates or that it will be successful in consummating such transactions.
EQUITY PROMOTIONS
The Company's largest current market is the design and implementation of fully
integrated promotional marketing programs which incorporate products used as
free premiums or sold in conjunction with the purchase of meals at Burger King.
The Company also produces products and provides related marketing services for
use in promotional programs run by its consumer products and oil and gas company
customers. Premium-based promotions are used for marketing purposes by both the
companies sponsoring the promotions, typically the Company's clients, and the
licensors of the entertainment, music or sports properties on which the
promotional products are based. The use of promotional products based upon
entertainment, music or sports properties allows promotion sponsors to draw upon
the popular identity developed by the licensed characters through exposure in
various media such as television programs, motion pictures and publishing.
Promotions are designed to benefit sponsors by generating consumer loyalty,
building market share and enhancing the sponsors' images as providers of
value-added products and services. In addition, motion picture and television
studio licensors often incorporate such promotions into their own marketing
plans because of the substantial advertising expenditures made by sponsors of
promotions and because the broad exposure of the licensed property to consumers
in the sponsors' restaurants and other retail outlets supplements the marketing
of motion pictures and television programs by the studios.
Equity Promotions performs a wide range of creative design, development,
production and fulfillment services for its customers. The Company assists
customers with promotional strategy, calendar planning, and concept development;
provides an initial evaluation of intellectual properties for which licenses are
available; advises customers as to which licenses are consistent with their
marketing objectives and sometimes assists customers in procuring such licenses.
The Company also proposes specific product and non-product based promotions
utilizing the properties secured by its customers; develops promotional concepts
and designs based on the property; provides the development and engineering
necessary to translate the property, which often consists of two-dimensional
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artwork, into finished products; obtains or coordinates licensor approval of
product designs, prototypes and finished products; contracts for and supervises
the manufacture of products; arranges for safety testing to customer and
regulatory specifications by an independent testing laboratory; and arranges
insurance, customs clearance and, in most instances, the shipping of finished
products to the customer. In some instances, the Company also provides
warehousing, fulfillment and billing services. The Company also provides
creative services as needed to customers for packaging and point-of-sale
advertising. In some cases, customers obtain license rights or develop
promotions concepts independently and engage the Company only to design and
produce specific products. In other cases, the Company provides the full range
of its services.
Equity Promotions' principal strategy is to be a market-driven and
customer-driven organization that seeks to be a strategic marketing partner with
its clients through recommending, executing and measuring a broad range of fully
integrated brand-building and sales-building programs that may or may not be
product-based. Equity Promotions also intends to continue to diversify its
promotions customer base outside of quick service restaurants and to continue to
expand its relationship with Burger King. In connection with these strategic
goals, in July 1998, the Company acquired substantially all of the assets of
U.S. Import & Promotions Co., Inc. ("USI") and Contract Marketing, Inc. ("CMI",
referred to collectively as "USI"), two related companies with a primary focus
on collectible toy truck promotions for oil and gas retailers (see Note 4 of the
accompanying Notes to Consolidated Financial Statements). USI provides sales and
account management services, creative and design services, management of
overseas production of promotional products and warehousing and fulfillment
services to their customers. (see "Equity Consumer Products" below)
In 1999, Equity Promotions adopted the objective of expanding beyond its
existing product-based services to include a full array of marketing services,
ranging from premiums and sweepstakes to print and Internet marketing. In
connection with this objective, the Company launched a marketing services
division and an interactive division in August 1999 and December 1999,
respectively. In 1999, the marketing services division finalized its strategic
plan, hired staff and commenced pursuing new clients. The marketing services
division's first project was a year-end promotional calendar for The Wherehouse.
In 1999, the interactive division developed a Pokemon(TM) web site for Burger
King which included a database to help enthusiasts keep track of their
collections, games, movie clips and information on Burger King's Pokemon(TM)
promotion. The site generated six times the normal level of Burger King web site
traffic. In 2000, the marketing services division was fully integrated into the
USI division to form the client services division. Significant accomplishments
for the division in 2000 included the first ever multi-tiered truck program in
Exxon's history, a Coke collectible ornament with Mobil On the Run stores and
BP/Amoco's only national merchandise promotion of the year for Endangered
Wildlife Friends. The client services division has secured three additional new
clients in early 2001. In 2000, the interactive division developed ten web sites
for Burger King, including sites relating to promotions for Chicken Run(TM),
Rugrats in Paris(TM) and Pokemon(TM). These sites typically featured original
games, activities and content designed to support the concurrent in-restaurant
promotions. For instance, the Rugrats in Paris(TM) site was created as a virtual
theme-park, a concept central to the movie and Kids Meal(TM) programs. Visitors
to the site were invited to join in a complete sensory experience that included
rides, entertainment and a variety of original activities and arcade-style
games. Traffic to the Rugrats in Paris(TM) site tripled in volume from the
previous month's promotional program, and the average amount of time spent
engaged in activities on the site more than doubled.
The Company's international promotions include unique products and programs
tailored to local markets and the use of products from promotions originally run
in the United States. American entertainment properties are generally released
in other countries subsequent to the date of their release in the United States.
Because the Company has already made its investment in the creative development
of concepts based upon such entertainment properties by the time of their
domestic release, it often has completed both creative, and in some instances,
production work in advance of their foreign release. The Company pursues
promotions opportunities worldwide. In 2000, the Company sold promotional
products internationally in the United Kingdom, Germany, Spain, Sweden, Italy,
Turkey, Australia, the Philippines, Singapore, Korea, Mexico and throughout
Latin America.
Promotions revenues for the years ended December 31, 1998, 1999 and 2000 were
$116,280, $202,195 and $208,607 or 73%, 89% and 90% of the Company's revenues,
respectively. A single promotions customer, Burger King, accounted for
approximately 63%, 80% and 80% of the Company's total revenues for the years
ended December 31, 1998, 1999 and 2000, respectively. (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Cautionary Statements and Risk Factors")
EQUITY CONSUMER PRODUCTS
Equity Consumer Products designs and manufactures toys and other consumer
products for sale to major mass market retailers such as Toys 'R' Us, Wal-Mart
and Target, specialty market retailers such as Spencer Gifts, Inc., Store of
Knowledge, Zany Brainy, and Blockbuster and to various international
distributors worldwide. These products incorporate trademarks the Company owns
such as Headliners(R) and Tub Tints(R) or licenses of classic, time-tested
properties the Company has obtained from entertainment companies such as Warner
Bros. In some cases, the products are based on the same licensed properties that
are used by Equity Promotions.
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In April 1998, the Company acquired Corinthian Marketing, Inc., a Delaware
corporation ("Corinthian"), the producer and distributor of the Headliners(R)
brand of collectible sports figurines. Headliners(R) are uniquely designed with
oversized heads to capture the look and personality of popular professional
athletes and are based on licensing relationships with Major League Baseball and
the M.L.B. Players' Association, and the National Football League, N.F.L.
Players, Inc., N.F.L. Quarterback Club and the Collegiate Licensing Corporation.
To counteract soft sales in the sports collectibles market, the Company
repositioned the Headliners(R) brand in 1999 as a personality collectible,
including figures based on licensed entertainment properties such as Austin
Powers(TM), the rock group KISS(TM) and horror film favorites. Due to continuing
declining sales in 2000 in the sports collectible market, at the end of 2000,
the Company decided to decrease the marketing of the Headliners(R) brand in the
future and decided not to pursue new Headliners(R) licenses or renew existing
licenses. As a result, in the fourth quarter of 2000, the Company wrote-off the
unamortized goodwill and other intangibles recorded in connection with the
Corinthian acquisition (see Note 3 of the accompanying Notes to Consolidated
Financial Statements).
In June 1998, the Company obtained a three-year licensing agreement with Warner
Bros. to design, manufacture, market and distribute toys based on characters
from Scooby-Doo(TM), one of the longest-running children's cartoon shows in
television history. In September 2000, the Company renewed through the end of
2003 its licensing agreement with Warner Bros. to design, manufacture, market
and distribute toys based on characters from Scooby-Doo(TM). In July 1998, the
Company acquired the worldwide rights to manufacture, market and distribute Tub
Tints(R), a children's bath product consisting of effervescent tablets which
dissolve in the bath and currently come in three colors: red, yellow and blue.
Depending on which color tablets are mixed, a wide variety of colors can be
created. In 2000, the Company introduced Tub Tints(R) toys, color tablets
co-packed with either a wand, submarine or bath book.
Equity Consumer Products' principal strategy is to focus on distinctive, niche
products that compliment the Company's promotions business and are based on
trademarks owned by the Company or on classic, time-tested licensed properties
that are likely to produce revenue for several years, thus increasing the
predictability of the Company's revenues. The Company intends to implement this
strategy through internal growth. No assurance can be given that the Company
will be successful in obtaining or renewing licenses under satisfactory terms.
Consistent with its strategy, the Company has terminated the majority of
existing master toy licenses utilized by Equity Consumer Products. In June 1999,
the Company terminated a three-year licensing agreement with Universal to
design, manufacture, market and distribute toys for Babe, Curious George and
Woody Woodpecker & Friends. In December 1999, the Company terminated a
three-year licensing and distribution agreement with NASCAR, the governing body
of U.S. stock car racing to design, produce and distribute NASCAR-related
collectible pins. The estimated costs associated with the termination of these
licenses were included in the Company's 1998 year-end restructuring charges.
(see Notes 2 and 3 in the accompanying Notes to Consolidated Financial
Statements)
Equity Consumer Products' revenues were $42,856, $24,868 and $23,680 or 27%, 11%
and 10% of the Company's total revenues, for the years ended December 31, 1998,
1999 and 2000, respectively.
BACKLOG
Order backlog at March 22, 2000 and 2001 was approximately $96,666 and $66,108,
respectively. The Company expects the 2000 order backlog to be filled by
December 31, 2001.
MANUFACTURING
The Company's products are manufactured according to Company and customer
specifications by unaffiliated contract manufacturers. Equity Marketing Hong
Kong, Ltd., a wholly owned subsidiary of the Company ("Equity Marketing HK"),
manages production of the Company's products by third parties in the Far East
and currently is responsible for performing and/or procuring product sourcing,
product engineering, quality control inspections, independent safety testing and
export/import documentation. The Company believes that the presence of a
dedicated staff in Hong Kong results in lower net costs, increased ability to
respond rapidly to customer orders and maintenance of more effective quality
control standards. The Company's products are also manufactured by third parties
in the United States. Equity Marketing generally retains, for itself or on
behalf of its customers, ownership of the molds and tooling required for the
manufacture of its products. The Company is not a party to any long-term
contractual arrangements with any manufacturer. During 2000, approximately 92%
of the Company's products were manufactured in China. China currently enjoys
"normal trade relations" ("NTR") status under US tariff laws, which provides a
favorable category of US import duties. As a result of continuing concerns in
the US Congress regarding China's human rights policies, and disputes regarding
Chinese trade policies, including the country's inadequate protection of US
intellectual property rights, there has been, and may be in the future,
opposition to the annual extension of NTR status for China. In 2000, the US
Congress passed legislation that will make permanent China's NTR status once
China joins the World Trade Organization. The loss of NTR status for China would
result in a substantial increase in the import duty for the Company's products
manufactured in China and imported into the US and would result in increased
costs for the Company. The impact of such an event on the Company could be
somewhat mitigated by the Company's ability to source product for the US market
from countries other than China. (see "Cautionary Statements and Risk Factors")
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Virtually all of the Company's raw materials are available from numerous
suppliers. The Company does not have long-term supply contracts in place with
its suppliers. Accordingly, continued 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.
TRADEMARKS AND COPYRIGHTS
The Company does not own trademarks or copyrights on properties on which most of
its current products are based. These rights are typically owned or controlled
by the creator of the property or by the entity which develops or promotes a
property, such as a motion picture or television producer. Equity Marketing is
the owner of the Headliners(R) trademark.
COMPETITION
The domestic and international promotions and consumer products businesses are
highly competitive. In its core domestic promotions business, Equity Marketing
competes with several other companies, the most significant of which is Alcone
Marketing Group, a subsidiary of the Omnicom Group, Inc. Other competitors in
promotions include the Marketing Store Worldwide, Promotional Partners
International and Simon Marketing, Inc., a division of Cyrk, Inc. Competition in
the international promotions industry includes local companies in each market
and a small number of emerging international promotions companies. The Company
expects that in 2001, the principal competitors to the Company's consumer
products business will be smaller toy companies like Play By Play Toys &
Novelties, Inc., Trendmasters, Inc. and JAKKS Pacific, Inc. However, the toy
industry includes major toy and game manufacturers such as Hasbro, Inc. and
Mattel, Inc. that compete in some of the same product categories as Equity
Consumer Products. The Company believes the principal competitive factors
affecting its business are development of client promotional strategy, creative
execution, license selection, price, product quality and speed of production.
The Company's consumer products competitors include companies which have far
more extensive sales and development staffs and significantly greater financial
resources than does the Company. There can be no assurance that the Company will
be able to compete effectively against such companies in the future.
GOVERNMENT REGULATION
In the United States, the Company is subject to the provisions of, among other
laws, the Federal Consumer Product Safety Act and the Federal Hazardous
Substances Act (the "Acts"). The Acts empower the Consumer Product Safety
Commission (the "CPSC") to protect the public against unreasonable risks of
injury associated with consumer products, including toys and other articles. The
CPSC has the authority to exclude from the market articles which are found to be
hazardous and can require a manufacturer to repair or repurchase such toys under
certain circumstances. Any such determination by the CPSC is subject to court
review. Violations of the Acts may also result in civil and criminal penalties.
Similar laws exist in some states and cities in the United States and in many
jurisdictions throughout the world. The Company performs quality control
procedures (including the inspection of goods at factories and the retention of
independent testing laboratories) to ensure compliance with applicable laws.
Notwithstanding the foregoing, there can be no assurance that all of the
Company's products are or will be hazard-free. Any material product recall could
have a material adverse effect on the Company's results of operations and
financial condition and could also negatively effect the Company's reputation
and the sales of its other products. (see "Legal Proceedings" below)
EMPLOYEES
As of December 31, 2000, Equity Marketing employed 172 individuals, including 43
individuals employed by and located at Equity Marketing HK. In addition, the
Company utilizes, on an ongoing basis, the services of freelance artists and
other temporary staff. Equity Marketing believes it maintains satisfactory
relations with its employees.
ITEM 2. PROPERTIES
On January 4, 1999, Equity Marketing occupied its corporate offices and studio
facilities of approximately 54,000 square feet of leased space in Los Angeles,
California. The lease expires July 31, 2005. Equity Marketing Hong Kong, Ltd.
occupies approximately 6,000 square feet of leased space in Hong Kong, under a
lease which expires August 31, 2002.
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ITEM 3. LEGAL PROCEEDINGS
POKEMON RECALL AND RELATED MATTERS
On December 27, 1999, Burger King announced that in cooperation with the CPSC it
would conduct a voluntary recall of Pokemon(TM) balls included with Burger King
kids meals. The recall resulted primarily from the death of a 13-month-old child
in Sonora, California on December 11, 1999. Subsequent to the announcement of
the recall, on January 25, 2000, a 4-month-old child in Indianapolis, Indiana
also reportedly suffocated when one half of a Pokemon(TM) ball covered his nose
and mouth. The Company designed and manufactured 151 trading cards and 57
gift-with-purchase products based on Pokemon(TM) for Burger King. The Company
believes that these products met or exceeded federal safety guidelines and
underwent rigorous safety testing by an independent, third party laboratory
during and after production.
On May 4, 2000, a lawsuit entitled Estate of Kira Alexis Murphy, Madelyne Ariana
Alto, Netanya Noel Alto and Jill Ann Alto v. Burger King Corporation, Fast Food
Enterprise of California, Inc., Equity Marketing, Inc., and Specialized
Technology Resources, Inc., Case No. B C229358, was filed in the Superior Court
of the State of California for the County of Los Angeles. The lawsuit was filed
by plaintiffs who alleged that the Pokemon(TM) ball caused the death of Kira
Alexis Murphy. The lawsuit asserted causes of action for product liability,
breach of warranty, wrongful death and negligent infliction of emotional
distress, and sought an unspecified amount of damages and attorneys' fees. This
lawsuit was settled in the fourth quarter of 2000. The settlement was not
material to the Company's results of operations.
On August 11, 2000, two lawsuits entitled Ashley L. Jones v. Burger King
Corporation, Southdown Corporation, Equity Marketing, Inc., and Specialized
Technology Resources, Inc., Case No. 49D130008CT001170, and Sheila Jones v.
Burger King Corporation, Southdown Corporation, Equity Marketing, Inc., and
Specialized Technology Resources, Inc., Case No. 49D050008CT001154, were filed
in the Superior Court of the State of Indiana for the County of Marion. The
lawsuits were filed by plaintiffs who alleged that the Pokemon(TM) ball caused
the death of Zachary B. Jones. The lawsuits asserted causes of action for
negligence, product liability, breach of warranty, wrongful death and negligent
infliction of emotional distress, and sought an unspecified amount of
compensatory and punitive damages and attorneys' fees. On September 7, 2000, the
lawsuits were removed to the United States District Court for the Southern
District of Indiana, Indianapolis Division (Case No. IP00-1400 C Y/G and Case
No. IP00-1401 C B/S, respectively). These lawsuits were settled in the first
quarter of 2001. The settlements were not material to the Company's results of
operations.
On February 28, 2000, a class action lawsuit entitled Scott Pace and Diane
Mitchell Bubonic v. Burger King Corporation, Case No. 310285, was filed in the
Superior Court of the State of California for the City and County of San
Francisco. The lawsuit was filed by individuals purporting to represent all
individuals in the State of California that received a Pokemon(TM) ball from a
Burger King restaurant. The lawsuit alleged that the Pokemon(TM) ball was unsafe
and asserted causes of action for breach of implied warranty and fraud in the
sale of consumer goods, and sought an unspecified amount of damages and
attorneys' fees. This lawsuit was dismissed without prejudice by the plaintiffs
in the first quarter of 2001.
Burger King and its franchisees incurred substantial costs in the conduct of the
Pokemon(TM) ball recall, including costs for legal expenses, advertising,
collection and destruction of Pokemon (TM) balls, and free goods. Although the
Company strongly believes it met all of its contractual obligations with respect
to the Pokemon (TM) ball, the Company may be contractually required to indemnify
Burger King and its affiliates, including its franchisees, for some or all of
these costs. While the Company cannot currently estimate the amount of such
costs, management believes that the payment by the Company of the costs incurred
in the conduct of the Pokemon(TM) ball recall could have a material adverse
effect on the Company's business, financial condition and results of operations.
As of the date hereof, Burger King has not requested indemnification for such
costs.
GENERAL LITIGATION
The Company is involved in various other legal proceedings generally incidental
to its business. While the result of any litigation contains an element of
uncertainty, management presently believes that the outcome of any other known,
pending or threatened legal proceeding or claim, individually or combined, will
not have a material adverse effect on the Company's financial position or
results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol EMAK.
As of March 22, 2001 there were approximately 1,700 beneficial holders of the
Company's Common Stock.
The Company currently has no plans to pay dividends on its Common Stock. The
Company intends to retain all earnings for use in its business. Under the
Company's current credit facility, the Company cannot pay dividends on its
Common Stock without the prior consent of the lenders. (see Note 7 of the
accompanying Notes to Consolidated Financial Statements)
The following table sets forth the high and low sales prices on the Nasdaq
National Market for the calendar periods indicated:
PRICE RANGE OF COMMON STOCK
-----------------------------------------
1999 2000
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HIGH LOW HIGH LOW
---------------------------------------------------------------------
First Quarter 9 11/16 5 1/4 13 1/2 7
Second Quarter 10 7/8 5 1/2 12 1/4 8 7/8
Third Quarter 15 11/16 10 1/16 14 3/8 10 3/8
Fourth Quarter 19 7/16 11 5/8 14 11 3/4
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain selected consolidated financial data for
the Company as of and for each of the years in the five-year period ended
December 31, 2000. The selected consolidated financial and operating data in the
tables should be read in conjunction with the Company's Consolidated Financial
Statements and the notes thereto, which have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports included
elsewhere herein and in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31, 1996 1997 1998 1999 2000
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(in thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS AND PER SHARE DATA:
Revenues $ 111,687 $ 146,328 $ 159,136 $ 227,063 $ 232,287
Cost of sales 79,295 105,310 112,153 170,416 172,270
Provision for production-in-process losses -- -- 2,666 -- --
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Gross Profit 32,392 41,018 44,317 56,647 60,017
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 9,617 11,563 14,550 17,350 17,610
Selling, general and administrative 11,360 14,330 22,127 22,829 23,075
AmeriServe bankruptcy bad debt expense -- -- -- 1,014 482
Impairment of assets -- -- 6,712 -- 8,504
Business process reengineering -- -- 2,220 -- --
Restructuring loss (gain) -- -- 4,121 (604) (418)
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 20,977 25,893 49,730 40,589 49,253
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 11,415 15,125 (5,413) 16,058 10,764
Other income (expense), net 259 522 (511) (510) 1,375
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 11,674 15,647 (5,924) 15,548 12,139
Provision for income taxes 4,231 6,024 69 6,134 6,797
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 7,443 $ 9,623 $ (5,993) $ 9,414 $ 5,342
=========================================================================================================================
Preferred stock dividends -- -- -- -- 956
- -------------------------------------------------------------------------------------------------------------------------
Net income available to common
stockholders $ 7,443 $ 9,623 $ (5,993) $ 9,414 $ 4,386
=========================================================================================================================
Basic Income (Loss) Per Share:
Income (loss) per share $ 1.33 $ 1.63 $ (0.98) $ 1.51 $ 0.70
=========================================================================================================================
Basic weighted average shares
outstanding 5,598,268 5,913,313 6,089,618 6,227,842 6,275,590
=========================================================================================================================
Diluted Income (Loss) Per Share:
Income (loss) per share $ 1.26 $ 1.55 $ (0.98) $ 1.46 $ 0.68
=========================================================================================================================
Diluted weighted average shares
outstanding 5,891,357 6,216,794 6,089,618 6,440,738 6,460,557
=========================================================================================================================
AS OF DECEMBER 31, 1996 1997 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------------------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 17,952 $ 28,128 $ 4,268 $ 11,045 $ 52,140
Total assets 37,193 57,153 115,480 97,244 110,542
Long-term debt -- -- -- -- --
Stockholders' equity 25,033 36,140 32,407 42,025 45,241
8
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the Company's operating
expenses as a percentage of its total revenues:
YEAR ENDED DECEMBER 31, 1998 1999 2000
- ----------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of sales 70.5% 75.1% 74.2%
Provision for production-in-process losses 1.7% --% --%
- ----------------------------------------------------------------------------------
Gross Profit 27.8% 24.9% 25.8%
- ----------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 9.1% 7.6% 7.6%
Selling, general and administrative 13.9% 10.1% 9.9%
AmeriServe bankruptcy bad debt expense --% 0.4% 0.2%
Impairment of assets 4.2% --% 3.7%
Business process reengineering 1.4% --% --%
Restructuring loss (gain) 2.6% (0.3)% (0.2)%
- ----------------------------------------------------------------------------------
Total operating expenses 31.2% 17.8% 21.2%
- ----------------------------------------------------------------------------------
Income (loss) from operations (3.4)% 7.1% 4.6%
Other income (expense), net (0.4)% (0.2)% 0.6%
- ----------------------------------------------------------------------------------
Income (loss) before provision for
income taxes (3.8)% 6.9% 5.2%
Provision for income taxes --% 2.7% 2.9%
- ----------------------------------------------------------------------------------
Net income (loss) (3.8)% 4.2% 2.3%
==================================================================================
EBITDA
While many in the financial community consider earnings before interest, taxes,
depreciation and amortization, other income, business process reengineering,
impairment of assets, restructuring charges, and provision for
production-in-process losses ("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:
YEAR ENDED DECEMBER 31, 1998 1999 2000
- --------------------------------------------------------------------------------------------
Net income (loss) $ (5,993) $ 9,414 $ 5,342
Less: Interest income (272) (138) (1,892)
Other income -- (233) --
Restructuring gain -- (604) (418)
Add: Depreciation and amortization 2,022 2,708 2,655
Interest expense 783 881 405
Other expense -- -- 112
Provision for production-in-process losses 2,666 -- --
Business process reengineering 2,220 -- --
Restructuring charge 4,121 -- --
Impairment of assets 6,712 -- 8,504
Provision for income taxes 69 6,134 6,797
- --------------------------------------------------------------------------------------------
EBITDA $ 12,328 $ 18,162 $ 21,505
============================================================================================
9
11
Year ended December 31, 2000 compared to year ended December 31, 1999
Revenues in 2000 increased $5,224, or 2.3%, to $232,287 from $227,063 in 1999.
Promotions revenues increased $6,412, or 3.2%, to $208,607 primarily as a result
of increased revenues in 2000 associated with several large international Burger
King promotions based on Nintendo's Pokemon(TM) property. This increase was
partially offset by a decrease in revenues from domestic Burger King promotions
compared to 1999, which included an extraordinarily large Pokemon(TM) promotion
in the fourth quarter. The increase in promotional revenue was also the result
of growth in the non-Burger King promotions business, which grew 13% compared to
1999. Consumer products revenues decreased $1,188, or 4.8%, to $23,680 from
$24,868 in 1999. Excluding liquidation sales of discontinued consumer product
lines of $2,875 in 1999 related to the Company's decision to exit the
event-based-license consumer product business, sales in 2000 increased $1,687,
or 7.7%, primarily due to increased sales in Scooby-Doo(TM) and Tub Tints(R)
product, partially offset by reduced sales of Headliners(R).
Cost of sales increased $1,854 to $172,270 (74.2% of revenues) from $170,416
(75.1% of revenues) in 1999 due primarily to higher revenues in 2000. The gross
margin percentage for the year increased to 25.8% from 24.9% in 1999. This
increase is partially a result of lower than expected returns and better than
expected sales from a promotional program, which was closed in the prior year.
The increase was also due to improved margins in the Company's Consumer Products
and non-Burger King promotion businesses.
Salaries, wages and benefits increased $260, or 1.5%, to $17,610 (7.6% of
revenues). This increase was primarily due to staffing additions resulting from
the Company's growth initiatives in 2000.
Selling, general and administrative expenses increased $246, or 1.1%, to $23,075
(9.9% of revenues) due primarily to increased warehousing costs and higher
creative design and development costs associated with several large 2000
promotional programs. These increases were partially offset by reduced shipping
and commission expenses. Selling, general and administrative expenses decreased
as a percentage of revenues from 10.1% to 9.9% as a result of revenues which
increased at a greater rate.
The AmeriServe bad debt expense represents a charge resulting from the
bankruptcy of AmeriServe. (see "AmeriServe Bankruptcy" below)
The Company recorded a charge for impairment of assets of $8,504 for the
write-off associated with the impairment of the goodwill and the Headliners(R)
trademark acquired in the Company's purchase in 1998 of Corinthian. The
impairment is a result of the Company's decision at the end of 2000 to decrease
the marketing of the Headliners(R) brand in the future and of its decision not
to pursue new Headliners(R) licenses or renew expiring licenses. This decision
was pursuant to a continued slowdown in sales in the sports collectible market.
The restructuring gain primarily represents a reversal of a portion of the 1998
restructuring charge related to outstanding inventory purchase commitments and
the lease commitment for a warehouse facility. (see Note 2, "Restructuring
Charge" in the accompanying Notes to Consolidated Financial Statements)
Other income is composed primarily of net interest income of $1,487 and a loss
on disposal of fixed assets of $112. Net interest income increased $2,230 from
net expense of $743 in 1999 as a result of $1,084 of imputed interest income
recorded on a note receivable (see "AmeriServe Bankruptcy") and to additional
interest income earned on the cash proceeds received from the issuance of
preferred stock (see "Issuance of Preferred Stock").
The effective tax rate changed in 2000 to 56.0% from 39.5% in 1999. This
increase was due to the write-off of non-deductible goodwill related to
Corinthian. The Company expects the effective tax rate for 2001 to return to
levels consistent with years prior to 2000. The statement set forth herein is
forward looking and actual results could differ materially.
Net income decreased $4,072, or 43.3%, to $5,342 in 2000 (2.3% of revenues) from
$9,414 (4.2% of revenues) primarily due to the $8,504 write-off of unamortized
goodwill and other intangibles recorded in connection with the 1998 acquisition
of Corinthian and the AmeriServe bankruptcy bad debt expense, partially offset
by greater gross profits earned on increased revenues in 2000. Excluding the
impact of the restructuring gain, AmeriServe bad debt expense and the impairment
of assets, the Company would have reported net income of approximately $12,828
or $1.69 per diluted share in 2000.
EBITDA in 2000 increased $3,343, or 18.4%, to $21,505 from $18,162 in 1999
primarily due to greater gross profits earned on increased revenues in 2000,
partially offset by the increase in salaries, wages and benefits and selling,
general and administrative for the year ended December 31, 2000.
10
12
Although the Company believes that its share of Burger King's custom
promotional products business in 2001 will remain consistent with 2000 levels,
based on program awards received to date, the Company anticipates that the
dollar volume of custom promotional product purchases by Burger King from the
Company will decline in 2001 by approximately 30% to 40%. Based on its
understanding of the factors contributing to the decline, management believes it
is likely that the dollar volume of purchases by Burger King of custom
promotional product in 2002 will return to levels consistent with periods prior
to 2001 and that its relationship with Burger King and its purchasing
cooperative, RSI, remains strong. Management further believes that the decline
in 2001 Burger King revenue will be partially offset by new business development
efforts and strategic growth initiatives. The statements set forth herein are
forward looking and actual results could differ materially.
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenues in 1999 increased $67,927, or 43%, to $227,063 from $159,136 in 1998.
Promotions revenues increased $85,915, or 73.9%, to $202,195 primarily as a
result of large Burger King promotions in 1999 associated with Warner Bros.'
Wild Wild West movie and Pokemon: The First Movie. Promotions revenue also
increased as a result of the addition of oil and gas promotion revenue generated
by USI which was acquired in the third quarter of 1998. Consumer products
revenues decreased $17,988, or 42%, to $24,868 from $42,856 in 1998 primarily
due to decreased sales under event-based-license consumer products which the
Company decided to exit in December 1998.
Cost of sales, excluding the provision for production-in-process losses in 1998,
increased $58,263 to $170,416 (75.1% of revenues) from $112,153 (70.5% of
revenues) in 1998 due primarily to higher sales in 1999. The provision for
production-in-process losses of $2,666 recorded in 1998 represents a write-off
of tooling and development costs of consumer product lines which the Company has
decided to exit. The gross margin percentage for the year decreased to 24.9%
from 27.8% in 1998 due primarily to the planned shift in the Company's revenue
mix, which was 89% promotions and 11% consumer products, compared to 73% and 27%
for promotions and consumer products, respectively, in 1998.
Salaries, wages and benefits increased $2,800, or 19.2%, to $17,350 (7.6% of
revenues). This increase was primarily attributable to the accrual of bonuses
for employees in 1999 and the full year impact of the addition of employees from
the acquisitions of Corinthian and USI. This increase was partially offset by
staffing reductions resulting from the Company's decision to exit the
event-based-license consumer products business in December 1998.
Selling, general and administrative expenses increased $702, or 3.2%, to $22,829
(10.1% of revenues). This increase is due to increased depreciation and
amortization expense associated with higher fixed asset levels in 1999 and
amortization of intangibles related to the acquisitions of Corinthian in April
1998 and USI in July 1998. The increase is also attributable to increased
freight out and warehousing costs resulting from the increase in sales volume,
increased support costs associated with the Company's new enterprise resource
planning system (see "Information Systems"), and increased occupancy costs
partially offset by a decrease in advertising expense and development costs.
Selling, general and administrative expenses decreased as a percentage of
revenues from 13.9% to 10.1% as a result of revenues which increased at a
greater rate.
The AmeriServe bad debt expense represents a charge resulting from the
bankruptcy of AmeriServe. (see "AmeriServe Bankruptcy" below)
The restructuring gain primarily represents a reversal of the 1998 restructuring
charge related to projected minimum royalty guarantee shortfalls as a result of
negotiated settlements with certain licensors.
Other expense is composed primarily of net interest expense of $743 and gains on
sales of fixed assets of $233. Net interest expense increased $232 from $511 in
1998 as a result of the Company's short-term debt borrowing throughout 1999
compared to borrowings primarily in the second half of 1998.
The effective tax rate changed in 1999 to 39.5% from 1.1% in 1998. The 1998 tax
rate was a result of taxable income generated despite a book loss being recorded
for 1998. Taxable income in 1998 was due to the writedown of non-deductible
goodwill related to EPI and amortization of other non-deductible goodwill.
Net income (loss) increased $15,407, or 257%, to $9,414 in 1999 (4.2% of
revenues) from $(5,993) ((3.8%) of revenues) primarily due to greater gross
profit earned on the increased revenues in 1999 and the restructuring gain of
$604. The 1998 net loss resulted from charges for restructuring, business
process reengineering, and impairment of assets. Net income for 1999 was
partially offset by increases in salaries, wages and benefits, selling, general
and administrative expenses, and the AmeriServe bankruptcy bad debt expense.
Excluding the impact of the restructuring gain and the AmeriServe bad debt
expense, the Company would have reported net income of approximately $9,700 or
$1.50 per diluted share in 1999.
11
13
EBITDA in 1999 increased $5,834, or 47.3%, to $18,162 from $12,328 in 1998
primarily due to greater gross profit earned on increased revenues in 1999. This
increase was partially offset by the increase in salaries, wages and benefits
and selling, general and administrative expenses for the year ended December 31,
1999.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial position remained strong in 2000 primarily due to its
profitable operating results. At December 31, 2000, the Company had no debt and
its cash and cash equivalents and marketable securities were $37,505, compared
to $7,131 as of the prior year.
As of December 31, 2000, the Company's net accounts receivable decreased $7,248
to $30,137 from $37,385 in 1999. This decrease was primarily attributable to the
collections of substantially all of the receivables related to a very large
Pokemon(TM) promotion which shipped late in the fourth quarter of 1999. At
December 31, 2000, inventory increased $3,002 to $11,744 from $8,742 in 1999
primarily due to the timing of promotional programs for Burger King and other
clients, which are to be delivered in the first quarter of 2001.
At December 31, 2000, accounts payable decreased $3,305 to $18,421 from $21,726
in 1999 and due to customer increased $7,301 to $11,725 from $4,424 in 1999. At
December 31, 2000, accrued liabilities, including accrued payroll and payroll
related costs, decreased $4,033 to $10,250 from $14,283 in 1999. The decrease in
accounts payable was primarily attributable to payments to vendors associated
with the manufacturing related to the large fourth quarter 1999 Pokemon(TM)
promotional programs. The increase in due to customer was primarily due to
royalty and administrative fees collected from distribution companies in the
fourth quarter of 2000 on behalf of promotional customers. The decrease in
accrued liabilities, including accrued payroll and payroll related costs, was
primarily attributable to the payment of royalty guarantees associated with the
restructuring charge recorded in 1998, the payment of royalties associated with
fourth quarter 1999 Consumer Products revenues, and the payment of federal and
state taxes related to 1999 net income.
At December 31, 2000, working capital was $52,140 compared to $11,045 at
December 31, 1999. The increase in working capital was primarily due to the cash
received from the issuance of mandatory redeemable senior cumulative
participating convertible preferred stock on March 29, 2000 and on June 20, 2000
(see "Issuance of Preferred Stock" below) and cash generated by operating
activities in 2000. The Company believes that its cash from operations, cash on
hand at December 31, 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. (see
"Credit Facilities" and Note 7 of the accompanying Notes to Consolidated
Financial Statements)
At December 31, 2000, the Company has commitments for guaranteed royalty and
advertising payments totaling $3,046 through 2003. The Company had no material
commitments for capital expenditures at December 31, 2000. (see Note 11 of the
accompanying Notes to Consolidated Financial Statements)
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 December 31, 2000.
Letters of credit outstanding as of December 31, 2000 were $414. The Credit
Agreement requires the Company to comply with certain restrictions and financial
covenants as defined in the agreement. As of December 31, 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.
On December 17, 2000, the Company signed a non-binding term sheet with Bank of
America to commit to terms and conditions for a new senior credit facility. The
proposed credit facility will replace the Company's existing credit facility
discussed above. Under the terms of the proposed agreement, the new credit
facility will be secured by substantially all of the Company's assets and will
provide for a line of credit of up to $35,000 for three years from the date of
closing with borrowing availability determined by a formula based on qualified
assets. The final terms and conditions under the proposed agreement are
currently under negotiation. The credit facility is expected to be in place in
the second quarter of 2001.
12
14
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 mandatory redeemable
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. The Company paid $187.5 in fees for the year ended December 31,
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. Total dividend payments for
the year ended December 31, 2000 amounted to $956, of which $375 was paid in
January 2001 and was recorded in accounts payable in the accompanying
consolidated balance sheets.
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 consolidated balance sheets
at its Liquidation Preference net of issuance costs. The issuance costs total
approximately $1,951 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 a twelve month period. The repurchase program
commenced on July 21, 2000. Purchases will be conducted in the open market at
prevailing prices, based on market conditions when the Company is not in a quiet
period. 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 December 31, 2000, the Company has purchased an aggregate of
285,784 shares at an average price of $12.76 per share including commissions.
INFLATION
The effect of inflation on the Company's operations during 2000 was
insignificant. The Company will continue its policy of controlling costs and
adjusting prices to the extent permitted by competitive factors.
13
15
INFORMATION SYSTEMS
Based on strategic and operational assessments, the Company replaced its
information systems in 1999. The Company spent a total of $4,302, of which
$2,220 was spent on business process reengineering in 1998. In accordance with
Emerging Issues Task Force Issue No. 97-13, such business process reengineering
costs were expensed as incurred. These expenses are presented as business
process reengineering expenses in the accompanying consolidated statements of
operations for the year ended December 31, 1998.
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 $28,774 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 $15,970 and satisfaction of
certain contractual obligations owed by the Company to RSI. This agreement
resulted in a net pre-tax charge of $1,014 for the quarter ended December 31,
1999. A note receivable of $10,515 was recorded on the accompanying consolidated
balance sheet as of December 31, 1999. $6,642 of the $28,774 pre-petition trade
receivables related to sales made in January 2000. Accordingly, the remaining
$5,455 portion of the note receivable was recorded in January 2000, and resulted
in a net pre-tax charge of $482 for the year ended December 31, 2000. This
charge was offset by $1,084 of imputed interest income, at 9% per annum,
recorded on the note receivable for 2000. The balance of the note receivable as
of December 31, 2000 was $8,322, which was recorded as a current asset as the
note is due in December 2001.
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 expected 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 18.4% of the products purchased
from the Company by the Burger King system.
CAUTIONARY STATEMENTS AND RISK FACTORS
This section is written to be responsive to the Securities and Exchange
Commission's "Plain English" guidelines. In this section the words "we", "our",
"ours" and "us" refer only to Equity Marketing, Inc. and its subsidiaries and
not any other person. Set forth below and elsewhere in this Form 10-K and in
other documents we file with the Securities and Exchange Commission are
important risks and uncertainties that could cause our actual results of
operations, business and financial condition to differ materially from the
results contemplated by the forward looking statements contained in this Form
10-K.
We Depend Significantly on One Key Customer
Our success is largely dependent on a single customer, Burger King, which
accounted for approximately 63%, 80% and 80% of our revenues for the years ended
December 31, 1998, 1999 and 2000, respectively. Burger King has no contractual
commitment to do business with us. There can be no assurance that Burger King
will do business with us in the future. The termination or a significant
reduction by Burger King of its business with us would adversely affect our
business. The success of our business with Burger King is also partially
dependent on the overall success of the Burger King system, which sales could be
negatively impacted by such factors as increased competition, product recalls or
bovine spongiform encephalopathy, commonly know as "mad cow" disease. (see
"Business--Equity Promotions" and Note 12 of Notes to Consolidated Financial
Statements)
We Face Credit Risk
We regularly extend credit to several distribution companies in connection with
our business with Burger King. Failure by one or more distribution companies to
honor their payment obligations to us could have a material adverse effect on
our operations.
14
16
Our Future Operating Results are Difficult to Predict
We experience significant quarter-to-quarter variability in our revenues and net
income. The promotions business tends to include larger promotions in the summer
and during the winter holiday season. Major movie and television release
schedules also vary year-to-year, influencing the promotional schedules of our
customers, as well as the particular promotions for which we are retained. The
motion picture or television characters on which the promotions business is
based may only be popular for short periods of time or not at all. There may not
be comparable popular characters or similar promotional campaigns in the future.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It is
likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our Common Stock may fall significantly.
The Success of Our Products Depends on the Popularity of Licensed Materials
Our promotional and consumer products are typically based on entertainment
properties, such as characters from current motion pictures or television
programs. The success of these products depends on the popularity of the
entertainment properties on which they are based. Each motion picture and
television program is an individual artistic work, and its commercial success is
dependent on unpredictable consumer preferences. Often we spend substantial
resources in securing licenses and developing and manufacturing products prior
to a release of the motion picture or television program upon which the products
are based. Our customers, such as Burger King, typically require delivery
schedules that coincide with the release of the underlying entertainment
properties. Our results of operations may be adversely affected if the
entertainment properties upon which our products are based turn out to be less
popular than we anticipate. Also, delays in the release of motion pictures or
television programs could result in delays or cancellations of our promotions.
(see "Business--Equity Promotions")
We Rely on a Limited Number of Nonrenewable Product Orders
A large portion of our revenues come from a relatively limited number of
promotional programs by Burger King, which promotions are in effect for only a
limited period of time and generally are not repeated. We must continually
develop and sell new products and services for utilization in new promotional
programs (see "Business--Equity Promotions"). Many consumer products are
successfully marketed for only one or two years as a result of changing consumer
preferences. Accordingly, our consumer products business depends on the ability
to develop and market new products associated with new entertainment properties
or proprietary concepts. There can be no assurance that any new retail product
line will be successful (see "Business--Equity Consumer Products"). The
cancellation or premature termination of one or more retail product lines or
promotional programs, because of our inability to renew or extend licenses
(which typically have terms of three years or less) on favorable terms or
otherwise, or a significant change in promotional practices within the quick
service restaurant industry, could have a material adverse effect on us. In
addition, there can be no assurance that we or our customers will be able to
secure licenses for additional entertainment properties on which to base our
promotional and consumer products or that, if secured, such licenses will result
in successful products.
Our Markets Are Highly Competitive
The markets in which our businesses operate are highly competitive. Our
competitors, and in many cases their parent companies, include companies which
have far more extensive sales and development staffs and significantly greater
financial, marketing and other resources than we do. There can be no assurance
that we will be able to compete effectively against such companies.
We Rely on Foreign Manufacturers
During 2000, approximately 92% of our products were manufactured in China.
Foreign manufacturing is subject to a number of risks, including transportation
delays and interruptions, political and economic disruptions, the imposition of
tariffs, quotas and other import or export controls, and changes in governmental
policies.
We Face Foreign Currency Risk
As part of our business, we enter into contracts for the purchase and sale of
products with entities in foreign countries. While the vast majority of our
contracts are denominated in U.S. dollars, significant fluctuations in the local
currencies of the entities with whom we transact business may adversely affect
these entities' abilities to fulfill their obligations under their contracts.
There Are Risks Associated with Acquisitions
If we are presented with appropriate opportunities, we intend to make
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any acquisitions or investment. If we buy a
company, we could have
15
17
difficulty in assimilating that company's personnel and operations. In addition,
the key personnel of the acquired company may decide not to work for us. If we
make other types of acquisitions, we could have difficulty in assimilating the
acquired technology or products into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses. Future acquisitions could result in potentially dilutive issuances
of equity securities, the incurrence of debt, contingent liabilities and/or
amortization expenses related to goodwill and other intangible assets, which
could adversely affect our results of operations and financial condition.
We Face the Risk of Product Liability Claims
Products that we develop or sell may expose us to liability from claims by users
of such products for damages including, but not limited to, bodily injury or
property damage. We currently maintain product liability insurance coverage in
amounts that we believe are adequate. There can be no assurance that we will be
able to maintain such coverage or obtain additional coverage on acceptable terms
in the future, or that such insurance will provide adequate coverage against all
potential claims.
We Face the Risk of Product Recalls
Products that we develop or sell may expose us to liability for the costs
related to product recalls. These costs can include legal expenses, advertising,
collection and destruction of product, and free goods. Our product liability
insurance coverage generally excludes such costs and damages resulting from
product recall. On December 27, 1999, Burger King announced that in cooperation
with the CPSC it would conduct a voluntary recall of Pokemon(TM) balls included
with Burger King kids meals. The recall resulted primarily from the death of a
13-month-old child in Sonora, California on December 11, 1999.
We designed and manufactured 151 trading cards and 57 gift-with-purchase
products based on Pokemon(TM) for Burger King. We believe that these products
met or exceeded federal safety guidelines and underwent rigorous safety testing
by an independent, third party laboratory during and after production. Burger
King and its franchisees incurred substantial costs in the conduct of the
Pokemon(TM) ball recall, including costs for legal expenses, advertising,
collection and destruction of Pokemon(TM) balls, and free goods. Although we
strongly believe we met all of our contractual obligations with respect to the
Pokemon (TM) ball, we may be contractually required to indemnify Burger King and
its affiliates, including its franchisees, for some or all of these costs. While
we cannot currently estimate the amount of such costs, we believe that the
payment by us of the costs incurred in the conduct of the Pokemon(TM) ball
recall could have a material adverse effect on our business, financial condition
and results of operations. As of the date hereof, Burger King has not requested
indemnification for such costs.
A Significant Portion of our Common Stock is Controlled by our Officers and
Directors
Donald A. Kurz and Stephen P. Robeck beneficially own approximately 26% and 16%,
respectively, of our outstanding Common Stock. Mr. Kurz is our Chairman of the
Board and Chief Executive Officer. Mr. Robeck is a member of the Board of
Directors and serves as a consultant to us. Crown owns 100% of the outstanding
shares of the Company's Series A senior cumulative participating convertible
preferred stock, representing 1,694,915 shares of Common Stock on an as
converted basis. These stockholders, either individually or acting together,
would be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or
other business combination transactions.
We May Issue Preferred Stock
The Board of Directors has authority to issue up to one million shares of
preferred stock, and to fix the rights, preferences, privileges and restrictions
of those shares without any further vote or action by our stockholders. The
potential issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of, and the voting and other rights of, the
holders of Common Stock.
On March 29, 2000, Crown paid $11.9 million to the Company in exchange for
11,900 shares of Series A Preferred Stock with a conversion price of $14.75 per
share. In connection with such purchase, the Company granted to Crown five year
warrants to purchase 5,712 shares of Series B Preferred Stock at an exercise
price of $1,000 per share, and 1,428 shares of Series C Preferred Stock at an
exercise price of $1,000 per share. On June 20, 2000, Crown paid an additional
$13.1 million to the Company in exchange for an additional 13,100 shares of
Series A Preferred 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 Preferred Stock and an additional 1,572
shares of Series C Preferred Stock. The conversion prices of the Series B
Preferred Stock and the Series C Preferred Stock are $16.00 and $18.00,
respectively.
16
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Impact of Interest Rate Changes
The amounts borrowed under the Company's credit facility are at variable
interest rates and the Company is thus subject to market risk resulting from
interest rate fluctuations. No amounts were outstanding as of December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements referred to in the accompanying
Index setting forth the consolidated financial statements of the Company,
together with the reports of independent public accountants dated February 16,
2001.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to the executive officers
and directors of the Company.
NAME AGE POSITION
- --------------------------------------------------------------------------------------------
Donald A. Kurz 45 Chairman of the Board and Chief Executive Officer
Kim H. Thomsen 48 President, Marketing and Interactive
Services, Chief Creative Officer
Gaetano A. Mastropasqua 37 Executive Vice President, Client Services
Edward T. Boyd 46 Senior Vice President, Corporate Operations
Lawrence J. Madden 36 Senior Vice President and Chief Financial Officer
Leland P. Smith 37 Senior Vice President, General Counsel and
Secretary
Sanford R. Climan 45 Director
Jonathan D. Kaufelt 49 Director
Mitchell H. Kurz 49 Director
Alfred E. Osborne 56 Director
Bruce Raben 47 Director
Stephen P. Robeck 52 Director
Peter Ackerman 54 Director
Jeffrey S. Deutschman 44 Director
DONALD A. KURZ became Chairman and Chief Executive Officer of Equity Marketing
in January 1999, after serving as President and Co-CEO from 1991 through 1998.
He has also served as a director since 1990, when he joined Equity Marketing as
Executive Vice President. Mr. Kurz was previously a management consultant with
the general management consulting division of Towers Perrin, where he was a vice
president and senior partner and eventually headed the firm's New York office.
Mr. Kurz earned a bachelor's degree from Johns Hopkins University and a master's
in business administration from Columbia University Graduate School of Business.
KIM H. THOMSEN joined Equity Marketing in 1991 and is currently responsible for
the creative direction for all of the company's promotions and consumer
products. She was promoted to her current post in early 2000, and has added
oversight for the company's interactive division to her responsibilities. Prior
to joining Equity Marketing, she operated her own business as a creative
consultant. Ms. Thomsen earned her bachelor's degree from Cornell University.
GAETANO A. MASTROPASQUA joined Equity Marketing in 1997 as a Senior Director
responsible for the company's Burger King account. Mr. Mastropasqua oversees the
company's Burger King business. He was promoted to his current post in July
2000, and has added oversight of the company's client services division to his
responsibilities. His prior experience includes approximately seven years with
American Express, where he ultimately became a vice president of business
development, and more than three years with Andersen Consulting in Europe. He
holds a bachelor's degree from McGill University and a master's in business
administration from the Kellogg Graduate School of Management, Northwestern
University.
EDWARD T. BOYD joined Equity Marketing in early 1998 and is responsible for all
product realization, including manufacturing, quality control and distribution
and management information systems. He was promoted to his current post in early
2000, and has added oversight for the company's management information systems
and office administration functions. He was previously a Senior Vice President
of worldwide operations and sourcing for Harman International Industries, a Vice
President of operations for Mattel, Inc., and Director of operations for Thomson
Consumer Electronics. He holds a bachelor's degree from the University of
Portland and a master's degree in international management from the American
Graduate School of International Management.
LAWRENCE J. MADDEN joined Equity Marketing in November 2000 as Senior Vice
President and Chief Financial Officer. He is responsible for the Company's
finance, treasury, accounting and corporate development functions. From October
1999 to October 2000, he served as Executive Vice President and Chief Financial
Officer for Atomic Pop, an online music company. From November 1997 to October
1999, Mr. Madden was the Senior Vice President and Chief Financial Officer for
the recorded music and music publishing investments of Wasserstein & Co., Inc.
From April 1994 to November 1997, he worked at PolyGram, a major entertainment
company based in New York, serving first as the top audit officer for the
corporation's North American operations and later as the Vice President, Finance
and Administration for Def Jam Records, a PolyGram subsidiary. Mr. Madden began
his career with Ernst & Young in New York, where he worked for eight years, from
September 1986 to April 1994. Mr. Madden received his master's in business
administration from New York University and his bachelor's degree from Albany
State University.
18
20
LELAND P. SMITH joined Equity Marketing in 1998 as Senior Vice President,
General Counsel and Secretary. He is responsible for the company's legal, human
resources and board administration. Mr. Smith was previously Assistant General
Counsel for Mattel, Inc., and an associate in the corporate department with
Riordan & McKinzie. He holds a bachelor's degree from Amherst College and a
juris doctor and a master's in business administration from the University of
Southern California.
SANFORD R. CLIMAN is Managing Director of Entertainment Media Ventures, a Los
Angeles-based venture capital fund focused on investment in the areas of
technology and media. He has been an Equity Marketing director since 1998. From
June 1997 through February 1999, he was a senior executive with Creative Artists
Agency ("CAA"). From October 1995 through May 1998, he was an Executive Vice
President for Universal Studios and, from June 1986 through September 1995, he
was a senior executive with CAA. Mr. Climan holds a bachelor's degree from
Harvard College, a master's of science in health policy and management from
Harvard School of Public Health and a master's in business administration from
Harvard Business School.
JONATHAN D. KAUFELT, a prominent tax and business attorney, has been an Equity
Marketing director since November 2000. Mr. Kaufelt most recently led the
business and tax department at Armstrong, Hirsch, Jackoway, Tyerman &
Wertheimer, P.C., a leading entertainment law firm in Los Angeles. He joined the
firm in 1986, after nine years at two New York law firms -- Kay, Collyer & Boose
from 1982 to 1986 and Simpson, Thacher & Bartlett from 1977 to 1982. Mr. Kaufelt
earned a juris doctor from Georgetown University, a master of laws in taxation
from New York University and a bachelor's degree from the University of
Pennsylvania. He serves on the board of Planned Parenthood of Los Angeles and as
a trustee of Rutgers Preparatory School in Somerset, New Jersey.
MITCHELL H. KURZ is the Chairman and founder of Kurz and Friends, a consulting
company to the global advertising and marketing services business. He has been
an Equity Marketing director since March 1999. Mr. Kurz retired from Young &
Rubicam Inc. in December 1998, following a 24-year career during which he held
numerous executive positions. His most recent position at Young & Rubicam was
Chairman of client services, where he oversaw key global client relationships
representing approximately 50% of the company's annual revenues. From 1996 to
1998, he was President and Chief Operating Officer of Young & Rubicam
Advertising, and from 1992 to 1996, he was Worldwide Chief Executive Officer of
Wunderman Cato Johnson, a Young & Rubicam operating unit. Mr. Kurz received his
master's in business administration from Harvard College and his bachelor's
degree from Dartmouth College. Mr. Kurz is the brother of Donald A. Kurz, the
Company's Chairman and Chief Executive Officer.
ALFRED E. OSBORNE, JR. is the founder and director of the Harold Price Center
for Entrepreneurial Studies at UCLA's Anderson Graduate School of Management. He
has been an Equity Marketing director since December 2000. Dr. Osborne joined
UCLA in 1972, serves as a management professor, and has served as an Associate
Dean and the Director of the MBA program before founding the Harold Price Center
for Entrepreneurial Studies in 1987. During that time, he was also the Brookings
Institution Economic Policy Fellow at the Securities and Exchange Commission. He
is currently on the Boards of Directors of Nordstrom, Inc. and K2, Inc., and is
an individual general partner of Technology Funding Venture Partners V and a
trustee of the WM Group of Funds. Dr. Osborne holds a doctorate in
business-economics, a master's in business administration, a master's in
economics and a bachelor's degree all from Stanford University.
BRUCE RABEN is a managing director with CIBC Oppenheimer, an investment banking
firm. He has been an Equity Marketing director since 1993. From 1990 through
1995, he was an Executive Vice President with Jeffries & Company, an
investment-banking firm. Mr. Raben is also a director of Global Crossings, Ltd.
and Evercom Holdings, Inc. Mr. Raben received a bachelor's degree from Vassar
College and a master's in business administration from Columbia University
Graduate School of Business.
STEPHEN P. ROBECK has been an Equity Marketing director since 1989 and currently
serves as a consultant to the Company. He was elected Chairman and Co-Chief
Executive officer in September 1991 and served in that role through December
1998. Between 1987 and September 1991, he served as Chief Operating Officer. Mr.
Robeck received his bachelor's degree from Lake Forest College.
PETER ACKERMAN was the Director of Capital Markets at Drexel Burnham Lambert, an
investment-banking firm, from 1978 to 1989. He has been an Equity Marketing
director since March 2000. Since 1989, Dr. Ackerman has been the Managing
Director of Rockport Capital, which is the Special Limited Partner of Crown
Capital Group. Dr. Ackerman received a doctorate from the Fletcher School of Law
and Diplomacy where he is the Chairman of the Board of Overseers. In addition,
he sits on the Boards of CARE, Colgate University and the Cato Institute and is
a member of the Council on Foreign Relations and the Executive Council of the
International Institute for Strategic Studies.
JEFFREY S. DEUTSCHMAN has been a Managing Director of Crown Capital Group since
1997. He has been an Equity Marketing director since March 2000. Prior to
joining Crown, he was a Partner at Aurora Capital Partners, a leveraged buyout
fund, from 1992 through 1995, a Partner at Deutschman, Clayton & Company, an
investment firm engaged in management buyout transactions, from 1987 through
19
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1991 and a Principal at Spectrum Group, Inc., which specialized in leveraged
acquisitions, from 1981 through 1986. Mr. Deutschman received a master's in
business administration from UCLA's Anderson Graduate School of Management and
his bachelor's degree from Columbia University. Mr. Deutschman sits on the
boards of JPS Industries, Davidson Cotton and Resort Theaters of America.
Additional information relating to this item appears under the caption "SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Company's Proxy
Statement relating to the Company's 2001 Annual Meeting of Stockholders, which
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to this item appears under the captions "ELECTION OF
DIRECTORS", "EXECUTIVE COMPENSATION AND RELATED MATTERS" and "REPORT OF THE
COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION" in the Company's Proxy
Statement relating to the Company's 2001 Annual Meeting of Stockholders, which
are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to this item appears under the caption "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Company's Proxy Statement
relating to the Company's 2001 Annual Meeting of Stockholders, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to this item appears under the caption "ELECTION OF
DIRECTORS" in the Company's Proxy Statement relating to the Company's 2001
Annual Meeting of Stockholders, which is incorporated herein by reference.
20
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(A). List of documents filed as part of this Report.
Financial Statements:
EQUITY MARKETING, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.............................................................22
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1999 and 2000...................................................23
Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000.....................24
Statements of Stockholders' Equity and Mandatory Redeemable Preferred Stock for the Years
Ended December 31, 1998, 1999 and 2000............................................................25
Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000.....................26
Notes to Consolidated Financial Statements........................................................27
Supplemental Schedule:
Report of Independent Public Accountants on Schedule II...........................................43
Schedule II Valuation and Qualifying Accounts.....................................................44
Note: All other supplementary schedules are omitted since they are not
applicable or the required information can be obtained from the
consolidated financial statements.
(B). Reports on Form 8-K
Report on Form 8-K filed with the Securities and Exchange Commission on
April 11, 2000 (Item 5).
Report on Form 8-K filed with the Securities and Exchange Commission on
April 24, 2000 (Item 5).
Report on Form 8-K filed with the Securities and Exchange Commission on
July 20, 2000 (Item 5).
Report on Form 8-K filed with the Securities and Exchange Commission on
October 20, 2000 (Item 5).
21
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Equity Marketing, Inc.:
We have audited the accompanying consolidated balance sheets of Equity
Marketing, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and 2000, and the related consolidated statements of operations,
stockholders' equity and mandatory redeemable preferred stock and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Equity Marketing,
Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
Arthur Andersen LLP
Los Angeles, California
February 16, 2001
22
24
EQUITY MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
DECEMBER 31,
------------------------
ASSETS 1999 2000
- ---------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 7,131 $ 32,405
Marketable securities -- 5,100
Accounts receivable (net of allowances of $5,370 and $3,090
as of December 31, 1999 and 2000, respectively) 37,385 30,137
Note receivable, current portion 5,024 8,322
Inventory 8,742 11,744
Deferred income taxes 4,457 3,176
Prepaid expenses and other current assets 1,239 1,652
- ---------------------------------------------------------------------------------------------------
Total current assets 63,978 92,536
Fixed Assets, net 4,907 4,263
Goodwill and Other Intangibles, net 21,846 12,459
Note Receivable, long-term portion 5,491 --
Other Assets 1,022 1,284
- ---------------------------------------------------------------------------------------------------
Total assets $ 97,244 $ 110,542
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 12,500 $ --
Accounts payable 21,726 18,421
Due to customer 4,424 11,725
Accrued payroll and payroll related costs 4,015 3,378
Accrued liabilities 10,268 6,872
- ---------------------------------------------------------------------------------------------------
Total current liabilities 52,933 40,396
Deferred Income Taxes 1,012 454
Long-Term Liabilities 1,274 1,402
- ---------------------------------------------------------------------------------------------------
Total liabilities 55,219 42,252
- ---------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 11)
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 -- 23,049
------ -------
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 6,141,396 shares
outstanding as of December 31, 1999 and
2000, respectively -- --
Additional paid-in capital 15,942 18,209
Retained earnings 28,477 32,863
- ---------------------------------------------------------------------------------------------------
44,419 51,072
LESS--
Treasury stock, 1,921,299 and 2,207,083 shares at cost as of
December 31, 1999 and 2000, respectively (2,129) (5,777)
Stock subscription receivable (21) (11)
Unearned compensation (244) (43)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 42,025 45,241
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 97,244 $ 110,542
===================================================================================================
The accompanying notes are an integral part of
these consolidated balance sheets.
23
25
EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1999 2000
- ----------------------------------------------------------------------------------------------------
REVENUES $ 159,136 $ 227,063 $ 232,287
Cost of sales 112,153 170,416 172,270
Provision for production-in-process losses 2,666 -- --
- ----------------------------------------------------------------------------------------------------
Gross Profit 44,317 56,647 60,017
- ----------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries, wages and benefits 14,550 17,350 17,610
Selling, general and administrative 22,127 22,829 23,075
AmeriServe bankruptcy bad debt expense -- 1,014 482
Impairment of assets 6,712 -- 8,504
Business process reengineering 2,220 -- --
Restructuring loss (gain) 4,121 (604) (418)
- ----------------------------------------------------------------------------------------------------
Total operating expenses 49,730 40,589 49,253
- ----------------------------------------------------------------------------------------------------
Income (loss) from operations (5,413) 16,058 10,764
OTHER (EXPENSE) INCOME:
Interest expense (783) (881) (405)
Interest income 272 138 1,892
Other income (expense) -- 233 (112)
- ----------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (5,924) 15,548 12,139
PROVISION FOR INCOME TAXES 69 6,134 6,797
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ (5,993) $ 9,414 $ 5,342
====================================================================================================
PREFERRED STOCK DIVIDENDS $ -- $ -- $ 956
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (5,993) $ 9,414 $ 4,386
====================================================================================================
BASIC INCOME (LOSS) PER SHARE:
INCOME (LOSS) PER SHARE $ (0.98) $ 1.51 $ 0.70
====================================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 6,089,618 6,227,842 6,275,590
====================================================================================================
DILUTED INCOME (LOSS) PER SHARE:
INCOME (LOSS) PER SHARE $ (0.98) $ 1.46 $ 0.68
====================================================================================================
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 6,089,618 6,440,738 6,460,557
====================================================================================================
The accompanying notes are an integral part of these consolidated statements.
24
26
EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
MANDATORY REDEEMABLE PREFERRED STOCK
(in thousands, except share data)
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------------------ ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 6,010,103 $ -- -- $ -- $ 13,371
Net income -- -- -- -- --
Issuance of shares pursuant to
restricted stock plan 47,367 -- -- -- 352
Cancellation of shares
pursuant to restricted stock plan (14,812) -- -- -- (381)
Amortization of restricted stock grants -- -- -- -- --
Exercise of stock options 175,000 -- -- -- 1,191
Issuance of stock to 401(k) Tax
Deferred Saving Plan 10,060 -- -- -- 66
Consulting services rendered
In exchange for stock options -- -- -- -- 211
Tax benefit from exercise of stock options -- -- -- 533
Loan forgiveness -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,227,718 -- -- -- 15,343
Net income -- -- -- -- --
Cancellation of shares
pursuant to restricted stock plan (33,450) -- -- -- (202)
Amortization of restricted stock grants -- -- -- -- --
Exercise of stock options 54,290 -- -- -- 263
Issuance of stock to 401(k) Tax
Deferred Savings Plan 21,542 -- -- -- 183
Consulting services rendered
in exchange for stock options -- -- -- -- 172
Tax benefit from exercise of stock options -- -- -- -- 183
Purchase of treasury stock (50,000) -- -- -- --
Loan forgiveness -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 6,220,100 -- -- -- 15,942
Net income -- -- -- -- --
Issuance of preferred stock and warrants -- -- 25,000 23,049 359
Cancellation of shares pursuant to restricted
stock plan (2,905) -- -- -- (48)
Amortization of restricted stock grants -- -- -- -- --
Exercise of stock options 209,985 -- -- -- 1,448
Consulting services rendered in exchange
for stock options -- -- -- -- 106
Tax benefit from exercise of stock options -- -- -- -- 402
Preferred stock dividends -- -- -- -- --
Purchase of treasury stock (285,784) -- -- -- --
Loan forgiveness -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 6,141,396 $ -- 25,000 $ 23,049 $ 18,209
=====================================================================================================================
STOCK
RETAINED TREASURY SUBSCRIPTION UNEARNED
EARNINGS STOCK RECEIVABLE COMPENSATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 25,056 $ (1,279) $ (43) $ (965) $ 36,140
Net income (5,993) -- -- -- (5,993)
Issuance of shares pursuant to
restricted stock plan -- -- -- (352) --
Cancellation of shares
pursuant to restricted stock plan -- -- -- 381 --
Amortization of restricted stock grants -- -- -- 248 248
Exercise of stock options -- -- -- -- 1,191
Issuance of stock to 401(k) Tax
Deferred Saving Plan -- -- -- -- 66
Consulting services rendered
In exchange for stock options -- -- -- -- 211
Tax benefit from exercise of stock options -- -- -- -- 533
Loan forgiveness -- -- 11 -- 11
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 19,063 (1,279) (32) (688) 32,407
Net income 9,414 -- -- -- 9,414
Cancellation of shares
pursuant to restricted stock plan -- -- -- 202 --
Amortization of restricted stock grants -- -- -- 242 242
Exercise of stock options -- -- -- -- 263
Issuance of stock to 401(k) Tax
Deferred Savings Plan -- 11 -- -- 194
Consulting services rendered
in exchange for stock options -- -- -- -- 172
Tax benefit from exercise of stock options -- -- -- -- 183
Purchase of treasury stock -- (861) -- -- (861)
Loan forgiveness -- -- 11 -- 11
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 28,477 (2,129) (21) (244) 42,025
Net income 5,342 -- -- -- 5,342
Issuance of preferred stock and warrants -- -- -- -- 23,408
Cancellation of shares pursuant to restricted
stock plan -- -- -- 48 --
Amortization of restricted stock grants -- -- -- 153 153
Exercise of stock options -- -- -- -- 1,448
Consulting services rendered in exchange
for stock options -- -- -- -- 106
Tax benefit from exercise of stock options -- -- -- -- 402
Preferred stock dividends (956) -- -- -- (956)
Purchase of treasury stock -- (3,648) -- -- (3,648)
Loan forgiveness -- -- 10 -- 10
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 32,863 $ (5,777) $ (11) $ (43) $ 68,290
====================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
25
27
EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,993) $ 9,414 $ 5,342
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,022 2,708 2,655
Provision for bad debts 1,435 1,585 1,225
(Gain) loss on asset disposal -- (233) 117
Tax benefit from exercise of stock options 533 183 402
Amortization of restricted stock 248 242 153
Issuance of stock to 401(k) Tax Deferred Savings Plan 66 194 --
Impairment of assets 6,712 -- 8,504
Consulting services rendered in exchange for stock options 211 172 106
Other 48 54 10
Changes in assets and liabilities-
Increase (decrease) in cash and cash equivalents:
Accounts receivable (28,570) (2,973) 6,023
Note receivable -- -- 2,193
Inventory (2,814) 3,362 (3,002)
Deferred income taxes (1,984) 202 723
Prepaid expenses and other current assets (2,613) 2,885 (413)
Other assets 437 (24) (262)
Accounts payable 11,554 (6,706) (4,217)
Accrued liabilities 13,330 7,043 2,393
Long-term liabilities 280 322 128
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (5,098) 18,430 22,080
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of EPI Group Limited (1,003) -- --
Payment for purchase of Corinthian Marketing, Inc. and Trademark (8,436) -- --
Payment for purchase of Contract Marketing, Inc. and U.S. Import &
Promotions Co. (15,088) (149) (349)
Proceeds from sales of fixed assets -- 545 25
Purchases of fixed assets (4,366) (847) (921)
Purchase of marketable securities -- -- (5,100)
Other (68) -- --
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (28,961) (451) (6,345)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 30,000 -- --
Repayments on line of credit -- (17,500) (12,500)
Preferred stock dividends paid -- -- (581)
Proceeds from issuance of preferred stock and warrants including $875 of
accrued offering costs not yet paid -- -- 24,283
Purchase of treasury stock -- (861) (3,111)
Proceeds from exercise of stock options 1,191 263 1,448
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 31,191 (18,098) 9,539
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,868) (119) 25,274
Cash acquired in acquisitions 1,183 -- --
CASH AND CASH EQUIVALENTS, beginning of year 8,935 7,250 7,131
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 7,250 $ 7,131 $ 32,405
========================================================================================================================
CASH PAYMENTS DURING YEAR FOR:
Interest $ 616 $ 869 $ 518
========================================================================================================================
Taxes $ 2,143 $ 3,141 $ 7,828
========================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
26
28
EQUITY MARKETING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation and subsidiaries (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, 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. The
Company's functional currency is United States dollars.
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 (see Note 4).
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant accounts and transactions between
the Company and its subsidiaries have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with a maturity at the date of
purchase of three months or less to be cash equivalents. Short-term investments
included in cash and cash equivalents are valued at amortized cost, which
approximates fair value as of December 31, 1999 and 2000.
MARKETABLE SECURITIES
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation at each
balance sheet date. Marketable securities have been classified as
available-for-sale and are carried at fair value. As of December 31, 2000, the
cost of marketable securities held approximates fair value.
The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization, interest income, realized
gains and losses and declines in value judged to be other than temporary are
included in interest income and expense. The cost of securities sold is based on
specific identification.
27
29
Marketable securities represent state and municipal debt securities with
maturity dates between 2002 and 2024. The Company intends to hold such
securities only for the near term.
REVENUE RECOGNITION
The Company records sales when title and risk of loss pass to the customer. When
a right of return exists, the Company's practice is to estimate and provide for
any future returns at the time of sale, in accordance with SFAS No. 48, "Revenue
Recognition When Right of Return Exists." The Company's revenue recognition
policies are in compliance with Securities and Exchange Commission's Staff
Accounting Bulletin No. 101: "Revenue Recognition in Financial Statements."
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 products held for sale to customers and purchased finished
products in transit to customers' distribution centers. Inventory is stated at
the lower of average cost or market. As of December 31, 1999 and 2000, inventory
consisted of the following:
DECEMBER 31,
---------------------
1999 2000
--------------------------------------------------------
Production-in-process $ 1,088 $ 1,742
Finished goods 7,654 10,002
--------------------------------------------------------
$ 8,742 $ 11,744
========================================================
FIXED ASSETS
Fixed assets are stated at cost. Depreciation and amortization is provided on a
straight-line basis over estimated useful lives as follows:
Leasehold improvements -- lesser of lease term or life of related asset
Furniture, fixtures, equipment, hardware and software -- 3-7 years
Betterments, which extend the life or add value to fixed assets are capitalized
and depreciated over their remaining useful life. Repairs and maintenance are
expensed as incurred.
GOODWILL AND OTHER INTANGIBLES
Goodwill is the excess of the purchase price over the estimated fair values of
the net assets acquired in the purchases of EPI, Corinthian, and USI. Goodwill
is being amortized using the straight-line method over estimated useful lives
ranging from 5 to 20 years. Accumulated amortization for goodwill at December
31, 1999 and 2000 was $1,666 and $1,796, respectively. Other intangibles consist
primarily of trademarks. As of December 31, 1999 trademarks totaled $2,624 net
of amortization and were primarily composed of the Headliners(R) trademark
acquired in the purchase of Corinthian. As of December 31, 2000 trademarks
totaled $40 net of amortization. Trademarks are being amortized over estimated
useful lives ranging from 10 to 20 years. Accumulated amortization for the
trademarks at December 31, 1999 and 2000 was $258 and $13, respectively. For the
years ended December 31, 1998, 1999 and 2000, amortization expense amounted to
$932, $1,252 and $1,232, respectively.
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of." This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The carrying value of existing assets are reviewed when events
or changes in circumstances indicate that an impairment test is necessary in
order to determine if an impairment has occurred. When factors indicate that
such assets should be evaluated for possible impairment, the Company will
estimate undiscounted future cash flows before interest expected to result from
the use of the assets over their remaining amortization period and their
eventual disposition, and compare the amounts to the carrying value of the
assets to determine if an impairment loss has occurred (see Note 3). If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying value of the assets exceeds their
estimated fair value.
DUE TO CUSTOMER
Pursuant to the terms of certain contracts between the Company and a certain
promotions customer, the Company collects certain fees from the customer's
distribution companies on behalf of that customer. Once these fees are collected
from the distribution companies, the Company remits the fees to the customer. As
of December 31, 1999 and 2000, the amounts due to customer were $4,424 and
$11,725, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statements and tax basis of assets and liabilities
28
30
using the tax rates in effect for the years in which the differences are
expected to reverse (see Note 10).
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 (loss) available to common
stockholders represent reported net income (loss) 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 1,115,101, 280,000 and
1,327,666 shares of common stock, $.001 par value per share (the "Common
Stock"), for the years ended December 31, 1998, 1999 and 2000, respectively,
were excluded from the computation of diluted EPS as they would have been
anti-dilutive. In 2000, preferred stock convertible into 1,083,560 shares of
common stock was excluded from the computation of diluted EPS as it would have
been anti-dilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "income (loss) available to common
stockholders" and other disclosures required by SFAS No. 128, "Earnings per
Share":
For the years ended December 31,
1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income (loss)
available
to common
stock-
holders $ (5,993) 6,089,618 $ (0.98) $ 9,414 6,227,842 $ 1.51 $ 4,386 6,275,590 $ 0.70
======= ======= ==========
Preferred
stock
dividends -- -- -- -- -- --
Effect of
Dilutive
Securities:
Options
and
warrants -- -- -- 212,896 -- 184,967
Convertible
preferred
stock -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Dilutive EPS:
Income (loss)
available
to common
stockholders
and assumed
conversion $ (5,993) 6,089,618 $ (0.98) $ 9,414 6,440,738 $ 1.46 $ 4,386 6,460,557 $ 0.68
========= ========= ======= ========= ========= ======= ========= ========= =========
ROYALTIES
The Company enters into agreements to license intellectual properties such as
trademarks, copyrights, and patents. The agreements may call for minimum amounts
of royalties to be paid in advance and throughout the term of the agreement
which are non-refundable in the event that product sales fail to meet certain
minimum levels. Advance royalties resulting from such transactions are stated at
the lower of the amounts paid or the amounts estimated to be recoverable from
future sales of the related products.
CONCENTRATION OF RISK
The Company regularly extends credit to several distribution companies in
connection with its business with Burger King Corporation ("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 $28,774 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 $15,970 and satisfaction of
certain contractual obligations owed by the Company to RSI. This agreement
resulted in a net pre-tax charge of $1,014 for the quarter ended December 31,
1999. A note receivable of $10,515 was recorded on the accompanying consolidated
balance sheets as of December 31, 1999. $6,642 of the $28,774 pre-petition trade
receivables related to sales made in January 2000. Accordingly, the remaining
$5,455 portion of the note receivable was recorded in January 2000, and resulted
in a net pre-tax charge of $482 for the year ended December 31, 2000. This
charge was offset by $1,084 of imputed interest income, at 9% per annum,
recorded on the note receivable for 2000. The balance of the note receivable as
of December 31, 2000 was $8,322, which was recorded as a current asset as the
note is due in December 2001.
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 expected to complete the
transition to alternative distributors by July 2000 and that the
debtor-in-possession financing provided by Burger King to AmeriServe would
29
31
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 18.4% of the products purchased
from the Company by the Burger King system.
As of December 31, 2000, one distribution company which serves the international
distribution channel for the Burger King system accounted for 33% of total
accounts receivable. The receivables from this distribution company were
collected in January 2001.
The Company purchases 92% of its manufactured products from suppliers located in
China. China currently enjoys "normal trade relations" ("NTR") status under US
tariff laws, which provides a favorable category of US import duties. As a
result of continuing concerns in the US Congress regarding China's human rights
policies, and disputes regarding Chinese trade policies, including the country's
inadequate protection of US intellectual property rights, there has been, and
may be in the future, opposition to the annual extension of NTR status for
China. In 2000, the US Congress passed legislation that will make permanent
China's NTR status once China joins the World Trade Organization. The loss of
NTR status for China would result in a substantial increase in the import duty
for the Company's products manufactured in China and imported into the US and
would result in increased costs for the Company. The impact of such an event on
the Company could be somewhat mitigated by the Company's ability to source
product for the US market from countries other than China. However, there can be
no assurance that the Company would be able to obtain manufactured products
under acceptable terms.
SUPPLEMENTAL CASH FLOW INFORMATION
During 1999, the Company sold a portion of its excess inventory to a customer in
exchange for credits toward future purchases of advertising media. The credits
were valued at $1,011 and can be used over a period of five years. During 1999
and 2000, the Company utilized $225 and $223, respectively, of these credits. Of
the remaining balance of the credits, $227 is recorded in prepaid expenses and
other current assets and $336 is recorded in other assets in the accompanying
consolidated balance sheets.
COMPREHENSIVE INCOME
There are no adjustments to net income (loss) to arrive at comprehensive income
(loss).
SHIPPING AND HANDLING COSTS
In accordance with the Emerging Issues Task Force Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs," the Company classifies all amounts billed
to customers related to shipping and handling as revenues. Shipping and handling
costs are recorded in selling, general and administrative expenses. For the
years ended December 31, 1998, 1999 and 2000 such costs totaled $1,182, $4,553,
and $3,526, respectively.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes standards for
reporting and disclosure of derivative and hedging instruments. SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133," requires SFAS No.
133 to be adopted for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company has not yet adopted SFAS No. 133, but if it had been
adopted, there would not have been any effect on reported income because the
Company had not entered into any derivative or hedging financial contracts. The
Company plans to adopt SFAS No. 133 in 2001.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1999 consolidated
financial statements to conform them with the 2000 presentation.
2. RESTRUCTURING CHARGE
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, of which 15 were terminated as of December 31, 1998
and the remainder in 1999, a provision for outstanding inventory purchase
commitments on purchase orders the Company has cancelled, and a provision for
costs associated with the planned closure of the Company's warehouse facility.
The workforce reductions include employees from the consumer products business,
retail pin business, warehouse and other support services. Excluding the
warehouse employees, the workforce reductions were completed by the end of the
first quarter of 1999. The warehouse closed in the second quarter of 1999. As of
December 31, 1998 and the remainder in 1999, the Company was in the process of
negotiating settlements on remaining minimum royalty guarantees with licensors.
During 1999, the Company reversed a portion of the restructuring reserves for
projected royalty guarantee shortfalls as a result of negotiated settlements
with certain licensors. These reversals totaled $641 and are reflected net of a
$37 charge as a restructuring gain in the accompanying statements of operations
for the year ended December 31, 1999. During 2000, the Company reversed a
portion of the restructuring reserves for inventory purchase commitments and
lease commitment for the warehouse facility as a result of negotiated
settlements with certain vendors and as a result of the dismissal of a lawsuit
from the landlord of the warehouse facility. These reversals totaled $418 and
are reflected as a restructuring gain in the accompanying statements of
operations for the year ended December 31, 2000. Details of the restructuring
charge are as follows:
Original Utilized Utilized Reversed Charged Utilized Reversed To Be
Charge 1998 1999 1999 1999 2000 2000 Utilized
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for projected minimum royalty
guarantee shortfalls $ 2,187 $ -- $ (267) $ (641) $ -- $(1,084) $ -- $ 195
Employee severance and termination benefits 738 (127) (648) -- 37 -- -- --
Outstanding inventory purchase commitments 800 -- (716) -- -- -- (84) --
Lease commitment for warehouse facility 396 -- (31) -- -- (31) (334) --
- -----------------------------------------------------------------------------------------------------------------------------------
$ 4,121 $ (127) $(1,662) $ (641) $ 37 $(1,115) $ (418) $ 195
===================================================================================================================================
30
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3. IMPAIRMENT OF ASSETS
During the fourth quarter of 1998, the Company's EPI subsidiary lost its primary
customer, Shell Oil Company, as a result of that company's merger with Texaco.
This loss triggered an impairment review of EPI's long-lived assets, which
consisted primarily of goodwill. Based on revised projections of EPI's ongoing
business, the Company calculated the present value of expected cash flows
(before interest) to determine the fair value of the assets. Accordingly, the
Company recorded an impairment charge of $5,520 for a write-down of the goodwill
and other intangibles associated with the EPI purchase. This charge is reflected
in impairment of assets in the accompanying consolidated statements of
operations and is reflected in the corporate segment (see Note 12).
In addition to the write-down of EPI goodwill, during the fourth quarter of
1998, the Company realized an impairment loss on certain assets associated with
the activities which the Company has exited (see Note 2). Such impairment
totaled $1,192 and is also reflected in impairment of assets in the accompanying
consolidated statements of operations. Of this amount, approximately $1,095
represents an impairment of royalty advances paid on long-term license
agreements which the Company has discontinued and which will not be recouped
against future sales. Such impairment is reflected in the consumer products
segment (see Note 12). The remaining $97 reflects an impairment of capitalized
costs associated with an internet site associated with the retail pin business
as well as an impairment of warehouse leasehold improvements. Such impairments
are reflected in the corporate segment (see Note 12).
As of December 31, 2000, as a result of continued weakness in the sports
collectible market and as a result of disappointing fourth quarter sales of
Headliners(R), the Company decided to decrease the marketing of the
Headliners(R) brand and decided not to pursue new Headliners(R) licenses or
renew existing licenses. This decision triggered an impairment review of
Corinthian's long-lived assets, which consisted primarily of goodwill and the
Headliners(R) trademark. Based on revised projections of Corinthian's ongoing
business, the Company calculated the present value of expected cash flows
(before interest) to determine the fair value of the assets. Accordingly, the
Company recorded an impairment charge of $8,504 for a write-off of the goodwill
and trademark associated with the Corinthian purchase. This charge is reflected
in impairment of assets in the accompanying consolidated statements of
operations and is reflected in the corporate segment (see Note 12).
4. ACQUISITIONS
On April 24, 1998, the Company acquired 100% of the common stock of Corinthian
and certain trademarks related to its business, including the Headliners(R)
trademark (the "Trademark"), from Corinthian Marketing PLC, for total cash
consideration of $7,892 plus related transaction costs of $544 at the closing.
The total consideration was net of a holdback amount for which the Company
accrued approximately $600 as of the acquisition date. In September 1999, this
holdback was settled and the accrual was reversed as a reduction to goodwill.
Corinthian is engaged principally in the design, manufacture, marketing and
distribution of the Headliners(R) brand of collectible sports figurines.
Subsequent to the impairment write-off discussed above, as of December 31, 2000,
the balances of the Corinthian goodwill and Trademark were zero.
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 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. In August 1999 and March 2000, $149 and
$349,respectively, were paid to the stockholders of CMI and USI and allocated to
Goodwill. As of December 31, 2000, the excess of the purchase price over the
estimated fair value of the net assets acquired was $13,916 which has been
recorded as goodwill and is being amortized on a straight line basis over 20
years.
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 USI had occurred at the beginning of each period presented 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 USI had been a
single entity during 1998, nor is it necessarily indicative of the results of
operations that may occur in the future.
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33
YEAR ENDED
DECEMBER 31,
1998
-----------------------------------------------------------------
(UNAUDITED)
Pro forma revenues $ 166,752
Pro forma net income (loss) $ (6,719)
Pro forma basic income (loss) per share $ (1.10)
Pro forma diluted income (loss) per share $ (1.10)
Pro forma basic weighted average
shares outstanding 6,089,618
Pro forma diluted weighted average
shares outstanding 6,089,618
5. FIXED ASSETS, NET
Fixed assets, net is summarized as follows:
DECEMBER 31,
---------------------
1999 2000
-------------------------------------------------------------------------
Furniture, fixtures and equipment $ 2,389 $ 2,269
Computer software 2,562 2,625
Computer hardware 2,538 3,210
Leasehold improvements 1,369 1,413
-------------------------------------------------------------------------
Fixed assets, at cost 8,858 9,517
Accumulated depreciation and amortization (3,951) (5,254)
-------------------------------------------------------------------------
Fixed assets, net $ 4,907 $ 4,263
=========================================================================
For the years ended December 31, 1998, 1999 and 2000, depreciation and
amortization expense related to fixed assets was $1,090, $1,456 and $1,423
respectively.
6. INFORMATION SYSTEMS
Based on strategic and operational assessments, the Company replaced its
information systems in 1999. The Company spent a total of $4,302, of which
$2,220 was spent on business process reengineering in 1998. In accordance with
Emerging Issues Task Force Issue No. 97-13, such business process reengineering
costs were expensed as incurred. These expenses are presented as business
process reengineering expenses in the accompanying consolidated statements of
operations for the year ended December 31, 1998.
7. LINE OF CREDIT
At December 31, 1999 and 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 December 31, 2000, the Company was in compliance with these requirements.
As of December 31, 2000, the marginal interest rate on available borrowings
under the Credit Agreement was 9.2%. There were $12,500 and zero outstanding
under the Credit Agreement at December 31, 1999 and 2000, respectively. Letters
of credit outstanding as of December 31, 1999 and December 31, 2000 totaled $401
and $414, respectively.
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.
On December 17, 2000, the Company signed a non-binding term sheet with Bank of
America to commit to terms and conditions for a new senior credit facility. The
proposed credit facility will replace the Company's existing credit facility
discussed above. Under the terms of the proposed agreement, the new credit
facility will be secured by substantially all of the Company's assets and will
provide for a line of credit of up to $35,000 for three years from the date of
closing with borrowing availability determined by a formula based on
32
34
qualified assets. The final terms and conditions under the proposed agreement
are currently under negotiation. The credit facility is expected to be in place
in the second quarter of 2001.
8. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Tax Deferred Savings Plan (the "401(k) Plan"), which
became effective on January 1, 1992. The 401(k) Plan covers substantially all of
its eligible employees, as defined under the 401(k) Plan. The Company makes
annual contributions to the 401(k) Plan consisting of a discretionary matching
contribution equal to a determined percentage of the employee's contribution and
a discretionary amount determined each year by the Company and paid out of the
Company's current or accumulated net profit. Costs related to contributions to
the 401(k) Plan for the years ended December 31, 1998, 1999, and 2000 were $154,
$235 and $145, respectively.
9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has three stock option plans, the 1996 Equity Marketing, Inc. Stock
Option Plan (the "1996 Employee Plan"), the 2000 Equity Marketing, Inc. Stock
Option Plan (the "2000 Employee Plan" and collectively with the 1996 Employee
Plan, the "Employee Plans") and the Non-Employee Director Stock Option Plan (the
"Director Plan", and collectively with the Employee Plans referred to as the
"Option Plans"). A total of 3,490,000 shares of common stock are reserved for
issuance pursuant to options granted and to be granted under Option Plans.
1,007,695 shares are available for grant as of December 31, 2000. Options
pursuant to the Employee Plans typically vest over three to five years and
expire ten years from the date of grant. The 1996 Employee Plan expires in 2001.
The 2000 Employee Plan expires in 2010. Options pursuant to the Director Plan
vest over six months to three years and expire ten years from the date of grant.
The Director Plan expires in 2003.
The Option Plans provide for option grants at exercise prices not less than the
fair market value on the date of grant in the case of qualified incentive stock
options, and not less than par value in the case of non-qualified options.
Transactions involving the Option Plans are summarized as follows:
EXERCISABLE AT END OF YEAR
WEIGHTED --------------------------
AVERAGE WEIGHTED
EXERCISE AVERAGE
NUMBER PRICE EXERCISE
OF SHARES PER SHARE SHARES PRICE
- ---------------------------------------------------------------- --------------------------
Outstanding at December 31, 1997 1,202,350 $ 14.84 429,778 $ 6.89
==========================
Granted 1,111,917 15.58
Exercised (175,000) 6.81
Canceled (1,024,166) 19.84
- ---------------------------------------------------------------- --------------------------
Outstanding at December 31, 1998 1,115,101 12.23 421,114 $ 11.52
==========================
Granted 548,000 9.20
Exercised (54,290) 4.84
Canceled (206,500) 14.86
- ---------------------------------------------------------------- --------------------------
Outstanding at December 31, 1999 1,402,311 10.65 660,506 $ 10.29
==========================
Granted 722,750 10.46
Exercised (209,985) 11.72
Canceled (250,256) 11.17
- ---------------------------------------------------------------- --------------------------
Outstanding at December 31, 2000 1,664,820 $ 11.11 716,155 $ 11.63
================================================================ ==========================
The following table summarizes information about the Company's stock options
outstanding and exercisable as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------
$ 0.32 - $ 7.50 419,320 5.84 $ 5.63 363,405 $ 5.39
$ 8.44 - $11.00 706,500 8.90 $ 9.88 61,250 $ 9.83
$11.25 - $20.75 464,000 8.14 $15.28 216,500 $17.01
$26.00 - $28.13 75,000 6.95 $27.85 75,000 $27.85
- -----------------------------------------------------------------------------------------------------
1,664,820 7.83 $11.11 716,155 $11.63
=====================================================================================================
33
35
On December 14, 1998, the Company permitted option holders to exchange their
outstanding stock options for a lesser number of options priced at fair market
value on that date, $7.50. Options with an exercise price greater than $20.00 a
share were eligible to be exchanged for options priced at $7.50 with a 50%
reduction in the number of options, and options with an exercise price less than
or equal to $20.00 a share were eligible to be exchanged for options priced at
$7.50 with a 33% reduction in the number of options. Each replacement grant
retained the original grant's vesting schedule but imposed a one year moratorium
on exercise. Twenty-one employees and consultants of the Company elected to
participate, exchanging an aggregate of options to purchase 817,500 shares of
Common Stock at exercise prices ranging from $12.25 to $28.13 a share in return
for an aggregate of options to purchase 422,417 shares of Common Stock at an
exercise price of $7.50 per share. Donald A. Kurz and Stephen P. Robeck, the
Company's co-chief executive officers at that date, were not eligible to
participate in the exchange.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995. In accordance with provisions of SFAS No. 123, the
Company applies APB Opinion 25 and related interpretations in accounting for its
stock option plans and, accordingly, does not recognize compensation cost. If
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123, net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the table below (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholders - as reported $ (5,993) $ 9,414 $ 4,386
Net income (loss) available to common stockholders - pro forma $ (9,672) $ 5,572 $ 3,229
Basic earnings (loss) per share-as reported $ (0.98) $ 1.51 $ 0.70
Basic earnings (loss) per share-pro forma $ (1.59) $ 0.89 $ 0.51
Diluted earnings (loss) per share-as reported $ (0.98) $ 1.46 $ 0.68
Diluted earnings (loss) per share-pro forma $ (1.59) $ 0.87 $ 0.50
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro-forma compensation cost may
not be representative of the cost to be expected in future years.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
- ---------------------------------------------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 69.97% 70.39% 66.60%
Risk free interest rate 4.41% 5.09% 6.40%
Expected life of options 3 years 3 years 5 years
The weighted average fair value of options granted during 1998, 1999 and 2000 is
$7.28, $4.55 and $5.99, respectively.
During 1998, the Company granted options to purchase 60,000 shares of common
stock to a member of the Board of Directors in exchange for consulting services
rendered. The securities are to vest through March 2001. On December 14, 1998
these options were exchanged for options to purchase 40,000 shares of common
stock at an exercise price of $7.50. Options to purchase 33,334 shares of common
stock have vested and been exercised as of December 31, 2000. The fair value of
these options was estimated at the date of grant and repricing using the
Black-Scholes option pricing model with assumptions consistent with those shown
above. For the years ended December 31, 1998, 1999 and 2000, the Company has
recorded compensation expense of approximately $211, $172 and $106,
respectively, related to these options.
In March 2000, the Company granted options to purchase 50,000 shares of common
stock to a member of the Board of Directors in exchange for services rendered in
connection with the Company's issuance of preferred stock. These shares vested
immediately and have an exercise price of $14.75. The fair value of these
options was estimated at the date of grant using the Black-Scholes option
pricing model with assumptions consistent with those shown above. These were
valued at $359. This amount was recorded as a reduction to mandatory redeemable
preferred stock and as additional paid-in-capital in the accompanying
consolidated balance sheets as of December 31, 2000.
WARRANTS
On March 29, 2000 and June 20, 2000, the Company granted Crown Capital, Inc.
15,000 warrants to purchase additional preferred stock. (see "Preferred Stock").
PREFERRED STOCK
The Company has authorized 1,000,000 shares of preferred stock, par value $.001
per share ("Preferred Stock"). The Board of Directors is empowered to issue
Preferred Stock from time to time in one or more series, without stockholder
approval, and to determine the rights, preferences and restrictions,
34
36
including dividend, conversion, voting, redemption (including sinking fund
provisions), and other rights, liquidation preferences and the number of shares
constituting any series and the designations of such series.
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 mandatory redeemable
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. The Company paid $187.5 in fees for the year ended December 31,
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. Total dividends for the year
ended December 31, 2000 amounted to $956, of which $375 was paid in January 2001
and was recorded in accounts payable in the accompanying consolidated balance
sheets.
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 consolidated balance sheets
at its Liquidation Preference net of issuance costs. The issuance costs totaled
approximately $1,951 and included 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 a twelve month period. The repurchase program
commenced on July 21, 2000. Purchases will be conducted in the open market at
prevailing prices, based on market conditions when the Company is not in a quiet
period. 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 December 31, 2000, the Company has purchased an aggregate of
285,784 shares at an average price of $12.76 per share including commissions.
STOCK SUBSCRIPTION RECEIVABLE
On September 27, 1991, a minority stockholder of the Company purchased 1,850,000
shares of the Company's treasury stock for an aggregate purchase price of $107.
Since the stock was sold below cost, the loss on the issuance of the treasury
stock was charged to retained earnings. The purchase price for these shares was
paid with promissory notes, payable in ten years, together with interest at an
annual rate of 8.41% per year on the unpaid principal balance. The notes are
subject to the terms of the Loan Forgiveness Agreements dated September 27,
1991, pursuant to which the principal amount of the notes will be forgiven at
10% per year, provided that the stockholder remains employed by the Company at
such time. The stock subscription receivable is included in the accompanying
consolidated balance sheets as a reduction of stockholders' equity. The Company
records the annual reduction as compensation expense.
35
37
RESTRICTED STOCK
The Company has reserved 100,000 shares of common stock for issuance under the
1995 Stock Award Plan, (the "Plan"), which covers certain key salaried employees
who are not officers or directors of the Company. For the year ended December
31, 2000, 2,905 shares with an aggregate market value on the date of grant of
$48 were canceled under the Plan. No shares were issued under the plan for the
year ended December 31, 2000. The shares are subject to restrictions, which
lapse over a three to five year period and continued employment with the
Company.
Unearned compensation was charged for the market value of the restricted shares
as these shares were issued in accordance with the Plan. The unearned
compensation is shown as a reduction of stockholders' equity in the accompanying
consolidated balance sheets and is being amortized ratably over the restricted
period. Compensation charged to expense was $248, $242 and $153 in 1998, 1999
and 2000, respectively. At December 31, 2000, 69,690 shares were available for
issuance under the Plan.
10. INCOME TAXES
In accordance with SFAS No. 109 "Accounting for Income Taxes," deferred income
taxes reflect the impact of temporary differences between values recorded for
assets and liabilities for financial reporting purposes and the values utilized
for measurement in accordance with current tax laws.
The provision for income taxes consist of:
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
- -------------------------------------------------------------------------------
CURRENT:
Federal $ 1,266 $ 4,970 $ 4,921
State and local 175 779 751
- -------------------------------------------------------------------------------
1,441 5,749 5,672
- -------------------------------------------------------------------------------
DEFERRED:
Federal (1,673) 175 627
State and local (232) 27 96
- -------------------------------------------------------------------------------
(1,905) 202 723
- -------------------------------------------------------------------------------
Additional paid-in capital from
benefit of stock options exercised 533 183 402
- -------------------------------------------------------------------------------
$ 69 $ 6,134 $ 6,797
===============================================================================
Income taxes recorded by the Company differ from the amounts computed by
applying the statutory United States Federal income tax rate to income before
income taxes. The following schedule reconciles income tax expense at the
statutory rate and the actual income tax expense as reflected in the
accompanying consolidated statements of operations.
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
- ---------------------------------------------------------------------------------------------
Tax at the Federal statutory rate $ (2,014) $ 5,341 $ 4,176
State income taxes, net of the Federal tax benefit (170) 541 636
Other 2,253 252 1,985
- ---------------------------------------------------------------------------------------------
$ 69 $ 6,134 $ 6,797
=============================================================================================
Other reflects the effects of permanent differences such as amortization of
goodwill, the write-off of the EPI goodwill in 1998 and the write-off of the
Corinthian goodwill in 2000.
The tax effects of the significant temporary differences giving rise to the
Company's deferred tax assets (liabilities) for the years ended December 31,
1999 and 2000 are as follows:
1999 2000
- ------------------------------------------------------------
Allowance for doubtful accounts $ 2,031 $ 1,245
Inventory reserve 654 812
Accrued expenses 1,625 812
Other 147 307
- ------------------------------------------------------------
Total current 4,457 3,176
- ------------------------------------------------------------
Trademark (1,016) --
Depreciation 54 (38)
Other (50) (416)
- ------------------------------------------------------------
Total non-current (1,012) (454)
- ------------------------------------------------------------
Total $ 3,445 $ 2,722
============================================================
36
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11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has operating leases for its properties, which expire at various
dates through 2008.
Future minimum lease payments under non-cancelable operating are as follows:
YEAR
-------------------------------------------------
2001 $ 1,668
2002 1,486
2003 1,480
2004 1,629
2005 953
Thereafter 362
-------------------------------------------------
Total $ 7,578
=================================================
Aggregate rental expenses for operating leases were $1,235, $1,783 and $1,775
for the years ended December 31, 1998, 1999 and 2000, respectively.
GUARANTEED ROYALTIES
For the years ended December 31, 1998, 1999, and 2000, the Company incurred
$6,149, $5,295 and $3,758, respectively, in royalty expense. License agreements
for certain copyrights and trademarks require minimum guaranteed royalty
payments over the respective terms of the licenses. As of December 31, 2000, the
Company was committed to pay total minimum guaranteed royalties as follows:
YEAR
-------------------------------------------------
2001 $ 1,046
2002 1,000
2003 1,000
-------------------------------------------------
Total $ 3,046
=================================================
EMPLOYMENT AGREEMENTS
As of December 31, 2000, the Company has employment agreements with several key
executives. Guaranteed compensation under these agreements is as follows:
YEAR
-------------------------------------------------
2001 $ 1,055
2002 655
-------------------------------------------------
Total $ 1,710
=================================================
LEGAL PROCEEDINGS
On December 27, 1999, Burger King announced that in cooperation with the
Consumer Product Safety Commission (the "CPSC") it would conduct a voluntary
recall of Pokemon(TM) balls included with Burger King kids meals. The recall
resulted primarily from the death of a 13-month-old child in Sonora, California
on December 11, 1999. Subsequent to the announcement of the recall, on January
25, 2000, a 4-month-old child in Indianapolis, Indiana also reportedly
suffocated when one half of a Pokemon(TM) ball covered his nose and mouth. The
Company designed and manufactured 151 trading cards and 57 gift-with-purchase
products based on Pokemon(TM) for Burger King. The Company believes that these
products met or exceeded federal safety guidelines and underwent rigorous safety
testing by an independent, third party laboratory during and after production.
On May 4, 2000, a lawsuit entitled Estate of Kira Alexis Murphy, Madelyne Ariana
Alto, Netanya Noel Alto and Jill Ann Alto v. Burger King Corporation, Fast Food
Enterprise of California, Inc., Equity Marketing, Inc., and Specialized
Technology Resources, Inc., Case No. B C229358, was filed in the Superior Court
of the State of California for the County of Los Angeles. The lawsuit was filed
by plaintiffs who alleged that the Pokemon(TM) ball caused the death of Kira
Alexis Murphy. The lawsuit asserted causes of action for product liability,
breach of warranty, wrongful death and negligent infliction of emotional
distress, and sought an unspecified amount of damages and attorneys' fees. This
lawsuit was settled in the fourth quarter of 2000. The settlement was not
material to the Company's results of operations.
On August 11, 2000, two lawsuits entitled Ashley L. Jones v. Burger King
Corporation, Southdown Corporation, Equity Marketing, Inc., and Specialized
Technology Resources, Inc., Case No. 49D130008CT001170, and Sheila Jones v.
37
39
Burger King Corporation, Southdown Corporation, Equity Marketing, Inc., and
Specialized Technology Resources, Inc., Case No. 49D050008CT001154, were filed
in the Superior Court of the State of Indiana for the County of Marion. The
lawsuits were filed by plaintiffs who alleged that the Pokemon(TM) ball caused
the death of Zachary B. Jones. The lawsuits asserted causes of action for
negligence, product liability, breach of warranty, wrongful death and negligent
infliction of emotional distress, and sought an unspecified amount of
compensatory and punitive damages and attorneys' fees. On September 7, 2000, the
lawsuits were removed to the United States District Court for the Southern
District of Indiana, Indianapolis Division (Case No. IP00-1400 C Y/G and Case
No. IP00-1401 C B/S, respectively). These lawsuits were settled in the first
quarter of 2001. The settlements were not material to the Company's results of
operations.
On February 28, 2000, a class action lawsuit entitled Scott Pace and Diane
Mitchell Bubonic v. Burger King Corporation, Case No. 310285, was filed in the
Superior Court of the State of California for the City and County of San
Francisco. The lawsuit was filed by individuals purporting to represent all
individuals in the State of California that received a Pokemon(TM) ball from a
Burger King restaurant. The lawsuit alleged that the Pokemon(TM) ball was unsafe
and asserted causes of action for breach of implied warranty and fraud in the
sale of consumer goods, and sought an unspecified amount of damages and
attorneys' fees. This lawsuit was dismissed without prejudice by the plaintiffs
in the first quarter of 2001.
Burger King and its franchisees incurred substantial costs in the conduct of the
Pokemon(TM) ball recall, including costs for legal expenses, advertising,
collection and destruction of Pokemon (TM) balls, and free goods. Although the
Company strongly believes it met all of its contractual obligations with respect
to the Pokemon (TM) ball, the Company may be contractually required to indemnify
Burger King and its affiliates, including its franchisees, for some or all of
these costs. While the Company cannot currently estimate the amount of such
costs, management believes that the payment by the Company of the costs incurred
in the conduct of the Pokemon(TM) ball recall could have a material adverse
effect on the Company's business, financial condition and results of operations.
As of the date hereof, Burger King has not requested indemnification for such
costs.
GENERAL LITIGATION
The Company is involved in various other legal proceedings generally incidental
to its business. While the result of any litigation contains an element of
uncertainty, management presently believes that the outcome of any other known,
pending or threatened legal proceeding or claim, individually or combined, will
not have a material adverse effect on the Company's financial position or
results of operations.
12. INDUSTRY SEGMENTS, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company's revenues are highly dependent on obtaining major contracts from a
limited number of customers. Approximately 63%, 80% and 80% of the Company's
revenues for the years ended December 31, 1998, 1999 and 2000, respectively,
were from one customer in the promotional segment.
Effective January 1, 1998, the Company adopted the provisions of SFAS 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 provides various services and 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 programs are used for marketing
purposes by both the companies sponsoring the promotions and the licensors of
the entertainment properties on which the promotional programs are based. The
consumer products segment designs and contracts for the manufacture of toys and
other consumer products for sale to major mass market and specialty retailers,
who in turn sell the products to consumers.
Earnings of industry segments and geographic areas exclude interest income,
interest expense, depreciation expense, impairment charges, restructuring,
business process reengineering, 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
inventory, receivables, goodwill and the Headliners(R) trademark. Corporate
assets consist of cash, certain corporate receivables, fixed assets, and certain
trademarks.
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INDUSTRY SEGMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------
Total revenues $ 116,280 $ 42,856 $ -- $ 159,136
==========================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 22,201 $ (7,092) $ (21,033) $ (5,924)
Provision (benefit) for income taxes 8,501 (2,716) (5,716) 69
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 13,700 $ (4,376) $ (15,317) (5,993)
==========================================================================================================
Fixed asset additions, net $ -- $ -- $ 4,366 $ 4,366
==========================================================================================================
Depreciation and amortization $ 565 $ 367 $ 1,090 $ 2,022
==========================================================================================================
Total assets $ 69,185 $ 23,508 $ 22,787 $ 115,480
==========================================================================================================
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------
Total revenues $ 202,195 $ 24,868 $ -- $ 227,063
==========================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 36,192 $ (1,026) $ (19,618) $ 15,548
Provision (benefit) for income taxes 14,278 (405) (7,739) 6,134
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 21,914 $ (621) $ (11,879) $ 9,414
==========================================================================================================
Fixed asset additions, net $ -- $ -- $ 847 $ 847
==========================================================================================================
Depreciation and amortization $ 743 $ 504 $ 1,461 $ 2,708
==========================================================================================================
Total assets $ 62,910 $ 19,588 $ 14,746 $ 97,244
==========================================================================================================
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------
Total revenues $ 208,607 $ 23,680 $ -- $ 232,287
==========================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 38,779 $ 490 $ (27,130) $ 12,139
Provision (benefit) for income taxes 14,570 184 (7,957) 6,797
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 24,209 $ 306 $ (19,173) $ 5,342
==========================================================================================================
Fixed asset additions, net $ -- $ -- $ 921 $ 921
==========================================================================================================
Depreciation and amortization $ 751 $ 475 $ 1,429 $ 2,655
==========================================================================================================
Total assets $ 57,195 $ 5,427 $ 47,920 $ 110,542
==========================================================================================================
Information about the Company's operations by geographical area is as follows:
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
- -------------------------------------------------------------------------------------------
Revenues:
United States $ 138,571 $ 205,182 $ 193,420
International 20,565 21,881 38,867
- -------------------------------------------------------------------------------------------
Total revenues $ 159,136 $ 227,063 $ 232,287
===========================================================================================
Income (loss) from operations:
United States $ (10,669) $ 14,516 $ 8,963
International 5,256 1,542 1,801
- -------------------------------------------------------------------------------------------
Total income (loss) from operations $ (5,413) $ 16,058 $ 10,764
===========================================================================================
Fixed assets, net:
United States $ 5,736 $ 4,586 $ 3,979
International 156 321 284
- -------------------------------------------------------------------------------------------
Total fixed assets $ 5,892 $ 4,907 $ 4,263
===========================================================================================
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41
13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
1999
Revenues $ 27,457 $ 56,011 $ 53,334 $ 90,261
Income (loss) from operations $ (219) $ 4,990 $ 4,771 $ 6,516
Net income (loss) available to
common stockholders (265) $ 2,864 $ 2,772 $ 4,043
Basic Income (Loss) Per Share:
Income (loss) per share $ (0.04) $ 0.46 $ 0.44 $ 0.65
Weighted average shares
outstanding 6,210,497 6,223,099 6,230,906 6,247,248
Diluted Income (Loss) Per Share:
Income (loss) per share $ (0.04) $ 0.45 $ 0.42 $ 0.61
Weighted average shares
outstanding 6,210,497 6,340,969 6,533,737 6,600,100
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
2000
Revenues $ 43,477 $ 55,314 $ 56,026 $ 77,470
Income (loss) from operations $ 2,054 $ 4,839 $ 5,474 $ (1,603)
Net income (loss) available
to common stockholders $ 1,288 $ 2,865 $ 3,144 $ (2,911)
Basic Income (Loss) Per Share:
Income (loss) per share $ 0.21 $ 0.46 $ 0.50 $ (0.46)
Weighted average shares
outstanding 6,236,718 6,291,180 6,307,650 6,266,811
Diluted Income (Loss) Per Share:
Income (loss) per share $ 0.20 $ 0.41 $ 0.42 $ (0.46)
Weighted average shares
outstanding 6,473,471 7,412,498 8,288,741 6,266,811
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS
ANGELES AND STATE OF CALIFORNIA ON THE 30TH DAY OF MARCH, 2001.
EQUITY MARKETING, INC.
By: /s/ Donald A. Kurz
-----------------------------------------
Donald A. Kurz
Chairman of the Board and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Equity Marketing, Inc. do hereby
severally constitute and appoint Donald A. Kurz, Leland P. Smith and Lawrence J.
Madden, and each of them, our true and lawful attorneys and agents, to do any
and all acts and things in our name and behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our names in
the capacities indicated below, which said attorneys and agents, or any of them,
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-K, including specifically, but without limitation,
power and authority to sign for us or any of us, in our names in the capacities
indicated below, any and all amendments hereto; and we do each hereby ratify and
confirm all said attorneys and agents, or any one of them, shall do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Donald A. Kurz Chairman of the Board and Chief March 30, 2001
- ---------------------------- Executive Officer
Donald A. Kurz (Principal Executive Officer)
/s/ Lawrence J. Madden Senior Vice President and Chief March 30, 2001
- ---------------------------- Financial Officer (Principal
Lawrence J. Madden Financial and Accounting Officer)
/s/ Peter Ackerman Director March 30, 2001
- ----------------------------
Peter Ackerman
/s/ Sanford R. Climan Director March 30, 2001
- ----------------------------
Sanford R. Climan
/s/ Jeffrey S. Deutschman Director March 30, 2001
- ----------------------------
Jeffrey S. Deutschman
/s/ Jonathan D. Kaufelt Director March 30, 2001
- ----------------------------
Jonathan D. Kaufelt
/s/ Mitchell H. Kurz Director March 30, 2001
- ----------------------------
Mitchell H. Kurz
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43
/s/ Alfred E. Osborne Director March 30, 2001
- ----------------------------
Alfred E. Osborne
/s/ Bruce Raben Director March 30, 2001
- ----------------------------
Bruce Raben
/s/ Stephen P. Robeck Director March 30, 2001
- ----------------------------
Stephen P. Robeck
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Equity Marketing, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Equity Marketing, Inc.
and subsidiaries included in this Form 10-K and have issued our report
thereon dated February 16, 2001. Our audits were made for the purpose of forming
an opinion on the basic consolidated financial statements taken as a whole. The
schedule listed in the index in Item 14 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
/s/ ARTHUR ANDERSEN LLP
- ------------------------------
Arthur Andersen LLP
Los Angeles, California
February 16, 2001
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SCHEDULE II
EQUITY MARKETING, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
Balance at Charged to Additions
Beginning of Operating Charged to Net Balance at
CLASSIFICATION of Year Expenses Revenues Deductions End of Year
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Allowances for doubtful
accounts receivable
and sales returns $ 600 $ 1,435 $ 3,734 $ (2,085)(A) $ 3,684
Restructuring reserves -- 4,121 -- (127) 3,994
Year Ended December 31, 1999
Allowances for doubtful
accounts receivable
and sales returns $ 3,684 $ 1,585 $ 4,031 $ (3,930)(A) $ 5,370
Restructuring reserves 3,994 (604) -- (1,662) 1,728
Year Ended December 31, 2000
Allowances for doubtful
accounts receivable
and sales returns $ 5,370 $ 1,225 $ 199 $ (3,704)(A) $ 3,090
Restructuring reserves 1,728 (418) -- (1,115) 195
(A) Represents product returns, credits applied and accounts receivable written
off, net of recoveries.
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Exhibit Description
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation. (2)
3.2 Amended and Restated Bylaws. (4)
3.3 First Amendment to Amended and Restated Bylaws (5)
3.4 Certificate of Designation of Series A Senior Cumulative
Participating Convertible Preferred Stock, Series B Senior
Cumulative Participating Convertible Preferred Stock and Series C
Senior Cumulative Participating Convertible Preferred Stock of
the Company, dated March 29, 2000 (9)
4.0 Form of Warrant to Purchase Shares of Series B Senior Cumulative
Participating Convertible Preferred Stock, dated March 29, 2000
(9)
4.1 Form of Warrant to Purchase Shares of Series C Senior Cumulative
Participating Convertible Preferred Stock, dated March 29, 2000
(9)
10.0 Securities Purchase Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000
(9)
10.1 Registration Rights Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000
(9)
10.2 Agreement of Lease dated July 17, 1998 between Miracle Mile,
L.L.C. and Equity Marketing, Inc. (8)
10.3 Agreement of Lease, dated March 10, 2000, between Wide Harvest
Investment Ltd. and Equity Marketing Hong Kong, Ltd. (8)
10.4 Promissory Notes, dated September 27, 1991, issued by Donald A.
Kurz to Equity Marketing, Inc. (1)
10.5 Loan Forgiveness Agreements, dated September 27, 1991, between
Equity Marketing, Inc. and Donald A. Kurz. (1)
10.6 Tax Indemnification Agreement, dated October 1, 1993, among
Stephen P. Robeck, Donald A. Kurz and Equity Marketing, Inc. (1)
10.7 Reimbursement Agreement, dated October 1, 1993, among Donald A.
Kurz, Stephen P. Robeck and Equity Marketing, Inc. (1)
10.8 Amended and Restated Credit Agreement dated December 10, 1998
between Equity Marketing, Inc., Sanwa Bank California, and
Imperial Bank. (5)
10.9 First Amendment and Waiver to Amended and Restated Credit
Agreement dated March 30, 1999 between Equity Marketing, Inc.,
Sanwa Bank California, and Imperial Bank. (5)
10.10 Second Amendment to Amended and Restated Credit Agreement dated
June 18, 1999 between Equity Marketing, Inc., Sanwa Bank
California, and Imperial Bank. (6)
10.11 Third Amendment to Amended and Restated Credit Agreement dated
October 28, 1999 between Equity Marketing, Inc., Sanwa Bank
California, and Imperial Bank. (7)
10.12 Fourth Amendment to Amended and Restated Credit Agreement dated
January 25, 2000 between Equity Marketing, Inc., Sanwa Bank
California, and Imperial Bank. (8)
10.13 Fifth Amendment to Amended and Restated Credit Agreement dated
March 13, 2000 between Equity Marketing, Inc., Sanwa Bank
California, and Imperial Bank. (8)
10.14 Sixth Amendment to Amended and Restated Credit Agreement dated
March 24, 2000 between Equity Marketing, Inc., Sanwa Bank
California, and Imperial Bank. (8)
10.15 Seventh Amendment to Amended and Restated Credit Agreement dated
June 27, 2000 between Equity Marketing, Inc., Sanwa Bank
California, and Imperial Bank. (10)
Bank. (10) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS OF THE COMPANY
10.16 Form of Director's and Officer's Indemnification Agreement. (4)
10.17 Equity Marketing, Inc. Deferred Compensation Plan. (2)
10.18 Equity Marketing, Inc. Amended and Restated Stock Option Plan.
(4)
10.19 Equity Marketing Inc. Non-Employee Director Stock Option Plan.
(3)
10.20 Employment agreement dated January 1, 1999 between Equity
Marketing, Inc. and Donald A. Kurz. (5)
10.21 Consulting agreement dated January 1, 1999 between Equity
Marketing, Inc. and Stephen P. Robeck. (5)
10.22 Equity Marketing, Inc. 2000 Stock Option Plan. (11)
21. Subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP.
- ----------
(1) Previously filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (Registration Statement No. 33-67778), which is incorporated herein by
reference.
(2) Previously filed as an exhibit to the Registrant's Statement on Form 10-K
for the year ended December 31, 1995, which is incorporated herein by reference.
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47
(3) Previously filed as an exhibit to the Registrant's Statement on Form 10-K
for the year ended December 31, 1997, which is incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Statement on Form 10-Q
for the quarter ended September 30, 1998, which is incorporated herein by
reference.
(5) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated April 16, 1999, which is incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Statement on Form 10-Q
for the quarter ended June 30, 1999, which is incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Statement on Form 10-Q
for the quarter ended September 30, 1999, which is incorporated herein by
reference.
(8) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated April 11, 2000, which is incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Statement on Form 10-Q
for the quarter ended March 31, 2000, which is incorporated herein by reference.
(10) Previously filed as an exhibit to the Registrant's Statement on Form 10-Q
for the quarter ended June 30, 2000, which is incorporated herein by reference.
(11) Previously filed as an exhibit to the Registrant's Notice of Annual Meeting
and Proxy Statement dated July 21, 2000, which is incorporated herein by
reference.
46