EMAK Worldwide 10Q 2001 Q3 Quarterly report

United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q


(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

or


( )	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 23346

EQUITY MARKETING, INC.
(Exact name of registrant as specified in its charter.)


Delaware		13-3534145
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


6330 San Vicente Blvd. Los Angeles, CA		90048
(Address of principal executive offices)		(Zip Code)

(323) 932-4300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

Common Stock, $.001 Par Value, 5,878,093 shares as of November 9, 2001.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX

EQUITY MARKETING, INC.

Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
September 30, 2001


			Page

Part I.	Financial Information

	Item 1.	Financial Statements		3

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Part II.	Other Information

	Item 4.	Submission of Matters to a Vote of Security Holders		23

	Item 6.	Exhibits and Reports on Form 8-K		23

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS


			December 31,		September 30,
			2000		2001

					(Unaudited)
CURRENT ASSETS:
	Cash and cash equivalents		$	32,405	$	23,998
	Marketable securities			5,100		—
	Accounts receivable (net of allowances of $3,090 and $2,805 as of December 31, 2000 and September 30, 2001, respectively)			30,137		29,282
	Note receivable			8,322		2,151
	Inventory			11,744		14,618
	Prepaid expenses and other current assets			4,828		5,591

		Total current assets		92,536		75,640
FIXED ASSETS, net				4,263		4,478
GOODWILL AND OTHER INTANGIBLE ASSETS, net				12,459		25,612
OTHER ASSETS				1,284		1,960

		Total assets	$	110,542	$	107,690

The accompanying notes are an integral part of these
condensed consolidated balance sheets.

EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


			December 31,			September 30,
			2000			2001

						(Unaudited)
CURRENT LIABILITIES:
	Accounts payable		$	18,421		$	20,530
	Accrued liabilities			21,975			18,015

		Total current liabilities		40,396			38,545
LONG-TERM LIABILITIES				1,856			1,917

		Total liabilities		42,252			40,462

COMMITMENTS AND CONTINGENCIES
Mandatory redeemable preferred stock, Series A senior cumulative participating convertible, $.001 par value, 25,000 issued and outstanding, stated at liquidation preference of $1,000 per share ($25,000), net of issuance costs				23,049			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, 6,141,396 and 5,858,208 shares outstanding as of December 31, 2000 and September 30, 2001, respectively			—			—
	Additional paid-in capital			18,209			19,682
	Retained earnings			32,863			35,314
	Accumulated other comprehensive income			—			377

				51,072			55,373
Less—
	Treasury stock, 2,207,083 and 2,649,793 shares, at cost, as of December 31, 2000 and September 30, 2001, respectively			(5,777	)		(11,140	)
	Stock subscription receivable			(11	)		(11	)
	Unearned compensation			(43	)		(43	)

		Total stockholders’ equity		45,241			44,179

		Total liabilities and stockholders’ equity	$	110,542		$	107,690

The accompanying notes are an integral part of these
condensed consolidated balance sheets.

EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)


			Three Months Ended				Nine Months Ended
			September 30,				September 30,

			2000		2001		2000		2001

REVENUES			$	56,026	$	40,828	$	154,817	$	97,092
COST OF SALES				39,589		29,187		114,279		69,258

		Gross profit		16,437		11,641		40,538		27,834

OPERATING EXPENSES:
	Salaries, wages and benefits			5,730		4,152		12,877		11,428
	Selling, general and administrative			5,233		4,806		14,812		12,082
	AmeriServe bankruptcy bad debt expense			—		—		482		—

		Total operating expenses		10,963		8,958		28,171		23,510

		Income from operations		5,474		2,683		12,367		4,324
INTEREST INCOME, net				391		206		746		1,400

		Income before provision for income taxes		5,865		2,889		13,113		5,724
PROVISION FOR INCOME TAXES				2,346		1,088		5,234		2,148

		Net income	$	3,519	$	1,801	$	7,879	$	3,576

NET INCOME			$	3,519	$	1,801	$	7,879	$	3,576
PREFERRED STOCK DIVIDENDS				375		375		582		1,125

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS			$	3,144	$	1,426	$	7,297	$	2,451

BASIC NET INCOME PER SHARE			$	0.50	$	0.24	$	1.16	$	0.41

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING				6,307,650		5,978,322		6,278,516		6,048,926

DILUTED NET INCOME PER SHARE			$	0.42	$	0.23	$	1.06	$	.39

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING				8,288,741		7,877,538		7,403,427		6,223,071

The accompanying notes are an integral part of these
condensed consolidated statements.

EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2000		2001		2000		2001

NET INCOME		$	3,519	$	1,801	$	7,879	$	3,576
OTHER COMPREHENSIVE INCOME:
	Foreign currency translation adjustments		—		377		—		377

COMPREHENSIVE INCOME		$	3,519	$	2,178	$	7,879	$	3,953

The accompanying notes are an integral part of these
condensed consolidated statements.

EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)


					Nine Months Ended
					September 30,

					2000			2001

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	7,879		$	3,576
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				1,972			1,770
		Provision for doubtful accounts				867			163
		Loss on asset disposal				—			3
		Tax benefit from exercise of stock options				295			246
		Changes in operating assets and liabilities:
			Increase (decrease) in cash and cash equivalents:
				Accounts receivable		(6,525	)		3,228
				Note receivable		227			6,171
				Inventory		(15,063	)		(1,409	)
				Prepaid expenses and other current assets		(586	)		(277	)
				Other assets		(425	)		(665	)
				Accounts payable		16,123			(1,291	)
				Accrued liabilities		10,076			(7,149	)
				Long-term liabilities		105			(72	)

			Net cash provided by operating activities			14,945			4,294

CASH FLOWS FROM INVESTING ACTIVITIES:
		Purchases of fixed assets				(453	)		(889	)
		Proceeds from sale of fixed assets				21			—
		Proceeds from sale of marketable securities				—			5,100
		Payment for purchase of Logistix Limited, net of $1,747 cash acquired				—			(11,408	)
		Payment for purchase of Contract Marketing, Inc. and U.S. Import and Promotions Co.				(349	)		(556	)

			Net cash provided by (used in) investing activities			(781	)		(7,753	)

CASH FLOWS FROM FINANCING ACTIVITIES:
		Repayments on line of credit				(12,500	)		—
		Proceeds from issuance of preferred stock and warrants, including $1,004 of accrued offering costs not yet paid				24,305			—
		Purchase of treasury stock				(1,148	)		(5,078	)
		Preferred stock dividends paid				(582	)		(1,125	)
		Proceeds from exercise of stock options				1,108			1,227

			Net cash provided by (used in) financing activities			11,183			(4,976	)

Effects of exchange rate changes on cash and cash equivalents						—			28

			Net (decrease) increase in cash and cash equivalents			25,347			(8,407	)
CASH AND CASH EQUIVALENTS, beginning of period						7,131			32,405

CASH AND CASH EQUIVALENTS, end of period					$	32,478		$	23,998

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	CASH PAID FOR:
		Interest			$	444		$	157

		Income taxes			$	5,756		$	2,179

The accompanying notes are an integral part of these
condensed consolidated statements.

EQUITY MARKETING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

NOTE 1 — ORGANIZATION AND BUSINESS

Equity Marketing, Inc., a Delaware corporation and subsidiaries (the “Company”), is a leading global marketing services company based in Los Angeles, with offices in London, Paris, New York, and Hong Kong. The Company designs and produces custom promotional programs that build sales and brand value for retailers, restaurant chains and consumer goods companies such as Burger King Corporation, Cadbury, The Coca-Cola Company, CVS/pharmacy, Kellogg’s, Procter & Gamble and others. The Company complements its core promotions business by developing and marketing distinctive consumer products, based on trademarks it owns or classic licensed properties, which are sold through specialty and mass-market retailers. The Company primarily sells to customers in the United States.

Equity Marketing Hong Kong, Ltd., a Delaware corporation (“EMHK”), is a 100% owned subsidiary of the Company. EMHK manages production of the Company’s products by third parties in the Far East and currently is responsible for performing and/or procuring product sourcing, product engineering, quality control inspections, independent safety testing and export/import documentation.

In 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. In May 2001, the Company paid $556 to the former stockholders of USI as additional cash consideration related to the Company’s purchase of USI. This amount was allocated to goodwill.

On July 31, 2001, the Company acquired 100% of the common stock of Logistix Limited, a United Kingdom corporation, (“Logistix”) (see Note 8 — Acquisition). Logistix is a marketing services agency which focuses primarily on assisting consumer packaged goods companies in their efforts to market to children between the ages of seven and fourteen by developing and executing premium-based promotions and by providing marketing consulting services. Logistix also derives a portion of its revenues from a consumer products business which holds the licenses for Robot Wars® and Rugrats™ entertainment properties, among others.

NOTE 2 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management and subject to year-end audit, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results for a full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

Certain reclassifications have been made to the accompanying 2000 financials statements to conform them to the current period presentation.

NET INCOME PER SHARE

Basic net income per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Net income available to common stockholders represents 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 dilutive effect of the assumed conversion of preferred stock using the if-converted method. Options and warrants to purchase 1,296,666, and 1,481,666 shares of common stock, $.001 par value per share (the “Common Stock”), as of September 30, 2000 and 2001, respectively, were excluded from the computation of diluted EPS as they would have been anti-dilutive. For the nine months ended

September 30, 2001, preferred stock convertible into 1,694,915 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 available to common stockholders” and other disclosures required by Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share”:


			For the Three Months Ended September 30,

			2000						2001

			Income		Shares		Per Share		Income		Shares		Per Share
			(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount

Basic EPS:
Income available to common stockholders			$	3,144		6,307,650	$	.50	$	1,426		5,978,322	$	.24

Preferred stock dividends				375		—				375		—
Effect of Dilutive Securities:
		Options and warrants		—		286,176				—		204,301
		Convertible preferred stock		—		1,694,915				—		1,694,915

Dilutive EPS:
	Income available to common stockholders and assumed conversion		$	3,519		8,288,741	$	.42	$	1,801		7,877,538	$	.23


			For the Nine Months Ended September 30,

			2000						2001

			Income		Shares		Per Share		Income		Shares		Per Share
			(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount

Basic EPS:
Income available to common stockholders			$	7,297		6,278,516	$	1.16	$	2,451		6,048,926	$	.41

Preferred stock dividends				582		—				—		—
Effect of Dilutive Securities:
		Options and warrants		—		246,623				—		174,145
		Convertible preferred stock		—		878,288				—		—

Dilutive EPS:
	Income available to common stockholders and assumed conversion		$	7,879		7,403,427	$	1.06	$	2,451		6,223,071	$	.39

INVENTORY

Inventory consists of (a) production-in-process which primarily represents tooling costs which are deferred and amortized over the life of the products and (b) purchased finished goods held for sale to customers and purchased finished goods in transit to customers’ distribution centers. Inventory is stated at the lower of average cost or market. As of December 31, 2000 and September 30, 2001, inventory consisted of the following:


	December 31,		September 30,
	2000		2001

Production-in-process	$	1,742	$	5,509
Finished goods		10,002		9,109

	$	11,744	$	14,618

FOREIGN CURRENCY TRANSLATION

Net foreign exchange gains or losses resulting from the translation of foreign subsidiaries’ accounts whose functional currency is not the United States dollar are recognized as a component of accumulated other comprehensive income in stockholders’ equity. For such subsidiaries their accounts are translated into United States dollars at the following rates of exchange: assets and liabilities at period-end exchange rates, equity accounts at historical rates, and income accounts at average exchange rates during the period.

For subsidiaries with transactions denominated in currencies other than their functional currency, net foreign exchange transaction gains or losses are included in determining net income.

DERIVATIVE INSTRUMENTS

The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

The Company designates its derivatives based upon criteria established by SFAS No. 133. For a derivative designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.

The Company uses derivatives to manage exposures to foreign currency. The Company’s objective for holding derivatives is to decrease the volatility of earnings and cash flows associated with changes in foreign currency. The Company enters into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on foreign currency receivables and payables. The gains and losses on the foreign exchange forward contracts offset the transaction gains and losses on the foreign currency receivables and payables recognized in earnings. The Company does not enter into foreign exchange forward contracts for trading purposes. Gains and losses on the contracts are included in interest and other income, net, in the Company’s Condensed Consolidated Statements of Income and offset foreign exchange gains or losses from the revaluation of intercompany balances or other current assets, investments, and liabilities denominated in currencies other than the functional currency of the reporting entity. The Company’s foreign exchange forward contracts related to current assets and liabilities generally range from one to three months in original maturity.

The fair values of derivative instruments as of September 30, 2001 and changes in fair values during 2001 were not material. The adoption of SFAS No. 133 did not have a material impact on the Company’s operating results. During 2001, there were no significant gains or losses recognized in earnings for hedge ineffectiveness.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets” were approved by the Financial Accounting Standards Board (“FASB”) effective June 30, 2001 for business combinations which are consummated after June 30, 2001. SFAS No. 141 eliminates the pooling-of-interests method for business combinations and requires use of the purchase method. SFAS No. 142 changes the accounting for goodwill and certain other intangible assets from an amortization approach to a non-amortization (impairment) approach. The statement requires amortization of goodwill recorded in connection with previous business combinations to cease upon adoption of the statement by calendar year companies on January 1, 2002. The Company has adopted the provisions of these statements for the acquisition of Logistix (see Note 8). Management believes that the adoption of SFAS No. 142 in 2002 will result in a significant decrease in amortization of goodwill on the consolidated statement of income, and is in the process of assessing other impacts from SFAS No. 142. Total after tax amount of goodwill amortization was $109 for the three months ending September 30, 2001 and $318 for the nine months ending September 30, 2001.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. SFAS 143 is effective for 2003. The Company is currently reviewing the requirements of SFAS 143 and has not yet determined its impact, if any, on the Company’s financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS 144 is effective for 2002 and generally is to be applied prospectively. The Company is currently reviewing the requirements of SFAS 144 and has not yet determined its impact, if any, on the Company’s financial position and results of operations.

NOTE 3 — SHORT-TERM DEBT

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 0.60 percent per annum and certain letter of credit fees. The applicable spread is based on the achievement of certain financial ratios. The Facility also requires the Company to comply with certain restrictions and covenants as amended from time to time. On September 30, 2001 certain covenants under the facility were amended. The Company was in compliance with the amended restrictions and covenants. The Facility may be used for working capital and acquisition financing purposes. As of September 30, 2001, there were no amounts outstanding under the Facility.

Letters of credit outstanding as of December 31, 2000 and September 30, 2001 totaled $414 and $401, respectively.

NOTE 4 — MANDATORY REDEEMABLE PREFERRED STOCK

On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability company (“Crown”), invested $11,900 in the Company in exchange for preferred stock and warrants to purchase additional preferred stock. Under the terms of the investment, Crown acquired 11,900 shares of Series A 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 30, 2005. A payment of $62.5 was made for the quarter ended September 30, 2001.

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. The dividends for the quarter ended September 30, 2001 totaled $375 and were paid in October 2001. These dividends were 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 condensed consolidated balance sheets at its Liquidation Preference net of issuance costs. The issuance costs totaled approximately $1,951 and included an accrual of approximately $700 for the present value of the commitment fee discussed above.

NOTE 5 — STOCK REPURCHASE

twelve month period. In the period from August 2, 2001 through September 30, 2001, the Company has purchased 203,400 shares at an average price of $12.60 per share including commissions. Since initiating the overall buyback program on July 20, 2000, the Company has purchased a total of 728,494 shares at an average price of $12.37 per share including commissions. 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.

NOTE 6 — SEGMENTS

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, restructuring, 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 other intangibles. Corporate assets consist of cash, certain corporate receivables, fixed assets, and certain trademarks.

Industry Segments


	As of and For the Three Months Ended September 30, 2000

			Consumer
	Promotions		Products		Corporate			Total

Total revenues	$	47,652	$	8,374	$	—		$	56,026

Income (loss) before provision (benefit) for income taxes	$	10,066	$	1,703	$	(5,904	)	$	5,865
Provision (benefit) for income taxes		4,026		681		(2,361	)		2,346

Net income (loss)	$	6,040	$	1,022	$	(3,543	)	$	3,519

Fixed asset additions, net	$	—	$	—	$	109		$	109

Depreciation and amortization	$	183	$	119	$	355		$	657

Total assets	$	80,901	$	17,480	$	44,524		$	142,905


	As of and For the Three Months Ended September 30, 2001

			Consumer
	Promotions		Products		Corporate			Total

Total revenues	$	30,958	$	9,870	$	—		$	40,828

Income (loss) before provision (benefit) for income taxes	$	4,811	$	1,953	$	(3,875	)	$	2,889
Provision (benefit) for income taxes		1,812		735		(1,459	)		1,088

Net income (loss)	$	2,999	$	1,218	$	(2,416	)	$	1,801

Fixed asset additions, net	$	—	$	—	$	306		$	306

Depreciation and amortization	$	274	$	—	$	394		$	668

Total assets	$	68,202	$	3,457	$	36,031		$	107,690


	As of and For the Nine Months Ended September 30, 2000

			Consumer
	Promotions		Products		Corporate			Total

Total revenues	$	138,482	$	16,335	$	—		$	154,817

Income (loss) before provision (benefit) for income taxes	$	24,398	$	2,470	$	(13,755	)	$	13,113
Provision (benefit) for income taxes		9,738		986		(5,490	)		5,234

Net income (loss)	$	14,660	$	1,484	$	(8,265	)	$	7,879

Fixed asset additions, net	$	—	$	—	$	453		$	453

Depreciation and amortization	$	548	$	356	$	1,068		$	1,972

Total assets	$	80,901	$	17,480	$	44,524		$	142,905


	As of and For the Nine Months Ended September 30, 2001

			Consumer
	Promotions		Products		Corporate			Total

Total revenues	$	78,549	$	18,543	$	—		$	97,092

Income (loss) before provision (benefit) for income taxes	$	13,014	$	3,063	$	(10,353	)	$	5,724
Provision (benefit) for income taxes		4,863		1,142		(3,857	)		2,148

Net income (loss)	$	8,151	$	1,921	$	(6,496	)	$	3,576

Fixed asset additions, net	$	—	$	—	$	889		$	889

Depreciation and amortization	$	641	$	—	$	1,129		$	1,770

Total assets	$	68,202	$	3,457	$	36,031		$	107,690

NOTE 7 — 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 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 nine months ended September 30, 2000. This charge was offset by $607 of imputed interest income, at 9% per annum, recorded on the note receivable for the same period in 2000. The balance of the note receivable as of September 30, 2001 was $2,151, which was recorded as a current asset as the note is due by December 2001. For the quarter ended September 30, 2000 and 2001, the Company recorded $260 and $81, respectively, of imputed interest income on the note receivable.

As of July 2000, the Burger King system completed a transition to alternative distributors. The largest distribution company accounted for approximately 22.2% of the products purchased from the Company by the Burger King system for the three months ended September 30, 2001.

NOTE 8 — ACQUISITION

On July 31, 2001, the Company acquired 100% of the common stock of Logistix in exchange for 8,500 British pounds ($12,144 as of July 31, 2001) in cash plus related transaction costs of $1,011. Potential additional cash consideration may be paid based upon the results of operations of Logistix during each fiscal year through July 31, 2004. Management believes that this acquisition will provide the company with a strong presence in Europe, contribute to the company's growth internationally, and help diversify the company's revenue mix. The acquisition was financed through the Company’s existing cash reserves.

The acquisition has been accounted under the purchase method of accounting. The financial statements reflect the preliminary allocation of the purchase price to the acquired net assets based on their estimated fair values as of the acquisition date. The Company is in the process of finalizing valuations of the individual assets. The allocation of the purchase price may change based upon these valuations. The Company’s preliminary allocation of purchase price for the acquisition, based upon estimated fair values is as follows:


Net current assets	$	6,086
Property, plant and equipment		440
Other non-current assets		11
Net current liabilities		(6,124	)
Non-current liabilities		(134	)

Estimated fair value, net tangible assets acquired		279
Goodwill		12,510
Other intangible assets		366

Total Purchase Price	$	13,155

The intangible assets other than goodwill associated with the Logistix acquisition are being amortized over their estimated useful lives ranging from 1 to 3 years. The weighted average amortization period for intangible assets excluding goodwill is 1.3 years. There are no assumed residual values associated with the intangible assets. None of the goodwill is expected to be deducted for tax purposes. Goodwill as well as other intangible assets have been allocated to the Promotions segment (see Note 6 - Segments). Intangible assets associated with the Logistix acquisition are accounted for in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Goodwill has an indefinite life and is not amortized.

The following selected unaudited pro forma consolidated results of operations are presented as if the acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments for the amortization of intangibles, reduced interest income and related income tax effects. The pro forma data is for informational purposes only and does not necessarily reflect the results of operations had the companies operated as one during the period. No effect has been given for synergies, if any, that may have been realized through the acquisitions.


		Three Months Ended				Nine Months Ended

		September 30,		September 30,		September 30,		September 30,
		2000		2001		2000		2001

Revenues		$	59,654	$	44,627	$	169,333	$	108,488
Net income		$	3,547	$	1,516	$	7,991	$	2,475
Net income per common share
	Basic	$	0.50	$	0.19	$	1.18	$	0.22
	Diluted	$	0.43	$	0.18	$	1.08	$	0.22

Refer to Note 2 for further discussion of the method of computation of earnings per share.


ITEM 2.—	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT

Certain expectations and projections regarding the future performance of Equity Marketing, Inc. (the “Company”) discussed in this quarterly report are forward-looking and are made under the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These expectations and projections are based on currently available competitive, financial and economic data along with the Company’s operating plans and are subject to future events and uncertainties. Forward-looking statements can be identified by the use of forward looking terminology, such as may, will, should, expect, anticipate, estimate, continue, plans, intends or other similar terminology. Management cautions you that the following factors, among others, could cause the Company’s actual consolidated results of operations and financial position in 2001 and thereafter to differ significantly from those expressed in forward-looking statements:

Marketplace Risks

•		Dependence on a single customer, Burger King, which may adversely affect the Company’s financial condition and results of operations

•		Significant quarter-to-quarter variability in the Company’s revenues and net income, which may result in operating results below the expectations of securities analysts and investors

•		Dependence on the popularity of licensed entertainment properties, which may adversely affect the Company’s financial condition and results of operations

•		Dependence on the ability to license, develop and market new products, which may adversely affect the Company’s financial condition and results of operations

•		Increased competitive pressure, which may affect the sales of the Company’s products

•		Dependence on foreign manufacturers, which may increase the costs of the Company’s products and affect the demand for such products

•		Concentration risk associated with accounts receivable. The Company regularly extends credit to several distribution companies in connection with its business with Burger King.

Financing Risks

•		Currency fluctuations, which may affect the Company’s suppliers and the Company’s reportable income

•		Need for additional working capital to fund the Company’s business, which may not be available at all or on favorable terms when required

Other Risks

•		Potential negative impact of past or future acquisitions, which may disrupt the Company’s ongoing business, distract senior management and increase expenses

•		Adverse results of litigation, governmental proceedings or environmental matters, which may lead to increased costs or interruption in normal business operations of the Company

•		Changes in laws or regulations, both domestically and internationally, including those affecting consumer products or environmental activities or trade restrictions, which may lead to increased costs

•		Exposure to liability for the costs related to product recalls. These costs can include legal expenses, advertising, collection and destruction of product, and free goods. The Company’s product liability insurance coverage generally excludes such costs and damages resulting from product recall

The Company undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstance after the date hereof or to reflect the occurrence of unanticipated events. The risks highlighted herein should not be assumed to be the only items that could affect future performance of the Company. In addition to the information contained in this document, readers are advised to review the Company’s Form 10-K for the year ended December 31, 2000, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Statements and Risk Factors.”

ORGANIZATION AND BUSINESS

King Corporation, Cadbury, The Coca-Cola Company, CVS/pharmacy, Kellogg’s, Procter & Gamble and others. The Company complements its core promotions business by developing and marketing distinctive consumer products, based on trademarks it owns or classic licensed properties, which are sold through specialty and mass-market retailers. The Company primarily sells to customers in the United States.

On July 31, 2001, the Company acquired 100% of the common stock of Logistix Limited, a United Kingdom corporation (“Logistix”), in exchange for 8,500 British pounds (approximately $12,144 as of July 31, 2001) in cash plus potential additional cash consideration based upon the results of operations of Logistix during each fiscal year through July 31, 2004. Logistix is a marketing services agency which focuses primarily on assisting consumer packaged goods companies in their efforts to market to children between the ages of seven and fourteen by developing and executing premium-based promotions and by providing marketing consulting services. Logistix also derives a portion of its revenues from a consumer products business which holds the licenses for Robot Wars® and Rugrats™ entertainment properties, among others.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the Company’s operating results as a percentage of total revenues:


				Three Months						Nine Months
				Ended September 30,						Ended September 30,

				2000			2001			2000			2001

Revenues					100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales					70.7			71.5			73.8			71.3

			Gross profit		29.3			28.5			26.2			28.7

Operating Expenses:
	Salaries, wages and benefits				10.2			10.1			8.3			11.8
	Selling, general and administrative				9.3			11.8			9.4			12.4
	AmeriServe bankruptcy bad debt expense				—			—			0.5			—

		Total operating expenses			19.5			21.9			18.2			24.2

		Income from operations			9.8			6.6			8.0			4.5
Interest income, net					0.7			0.5			0.5			1.4

		Income before provision for income taxes			10.5			7.1			8.5			5.9
Provision for income taxes					4.2			2.7			3.4			2.2

			Net income		6.3	%		4.4	%		5.1	%		3.7	%

EBITDA

While many in the financial community consider earnings before interest, taxes, depreciation and amortization (“EBITDA”) to be an important measure of comparative operating performance, it should be considered in addition to, but not as a substitute for or superior to, operating income, net earnings, cash flow and other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States. EBITDA does not reflect cash available to fund cash requirements, and the items excluded from EBITDA, such as depreciation and amortization, are significant components in assessing the Company’s financial performance. Other significant uses of cash flows are required before cash will be available to the Company, including debt service, taxes and cash expenditures for various long-term assets. The Company’s calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. The following table sets forth EBITDA for the periods indicated:


		For Three Months Ended September 30,						For Nine Months Ended September 30,

		2000			2001			2000			2001

Net income		$	3,519		$	1,801		$	7,879		$	3,576
Add:	Depreciation and amortization		657			668			1,972			1,770
	Interest (income) expense, net		(391	)		(206	)		(746	)		(1,400	)
	Provision for income taxes		2,346			1,088			5,234			2,148

EBITDA		$	6,131		$	3,351		$	14,339		$	6,094

THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 (000’s omitted):

Revenues for the three months ended September 30, 2001 decreased $15,198, or 27.1%, to $40,828 from $56,026 in the comparable period in 2000. Promotions revenues decreased $16,694, or 35.0%, to $30,958 primarily as a result of decreased revenues associated with Burger King programs in 2001 compared to the same period in 2000 (see below) as well as from the cancellation of a number of projects by our client, Texaco, due to a merger with Chevron. This decrease was partially offset by additional promotions revenue generated by Logistix. Consumer Product revenues increased $1,496, or 17.9%, to $9,870 primarily due to revenue generated by Robot Wars™ product subsequent to the acquisition of Logistix and due to increased sales of Tub Tints® product.

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 40% to 50%. The Company believes that sales to Burger King reached their low point for 2001 in the second quarter. 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. The statements set forth herein are forward looking and actual results could differ materially.

Cost of sales decreased $10,402 to $29,187 (71.5% of revenues) for the three months ended September 30, 2001 from $39,589 (70.7% of revenues) in the comparable period in 2000 due to the lower sales volume in 2001. The gross margin percentage decreased to 28.5% for the three months ended September 30, 2001 from 29.3% in the comparable period for 2000. The higher margins for 2000 were due to a revenue mix that was more heavily weighted towards international promotions which tend to carry higher gross margins.

Salaries, wages and benefits decreased $1,578, or 27.5%, to $4,152, (10.1% of revenues) for the three months ended September 30, 2001 from $5,730 in the comparable period for 2000. The decrease was primarily attributable to a reduction in accruals for performance bonuses for employees in 2001. This decrease was partially offset by the addition of employees from the acquisition of Logistix.

Selling, general and administrative expenses decreased $427, or 8.2%, to $4,806 (11.8% of revenues) for the three months ended September 30, 2001 from $5,233 in the comparable period for 2000. This decrease is due primarily to a decline in warehousing and external design and development costs as a result of the lower sales volume. This decrease is also attributable to a decline in travel and entertainment expenses and outside services costs, partially offset by an increase in insurance expense. The decrease was also attributable to a reduction in amortization expense resulting from the write-off of the goodwill and trademark in December 2000 associated with the acquisition of Corinthian Marketing, Inc. in April 1998, partially offset by amortization expense for intangible assets acquired in the purchase of Logistix. The decrease in selling, general and administrative expenses was partially offset by increased operating expenses incurred as a result of the acquisition of Logistix. Selling, general and administrative expenses increased as a percentage of revenues from 9.3% to 11.8% as a result of lower revenues, which decreased at a greater rate.

Net interest income decreased $185, or 47.3%, to $206 (0.5% of revenues) for the three months ended September 30, 2001 from $391 in the comparable period for 2000. This decrease was attributable to a decline in interest rates as well as to the reduced level of cash and cash equivalents subsequent to the acquisition of Logistix. The decrease was also attributable to a reduction in imputed interest income on a note receivable (see “AmeriServe Bankruptcy”).

The effective tax rate for the three months ended September 30, 2001 was 37.7% compared to 40.0% for the same period in 2000. The reduction in the effective tax rate is the result of non-taxable interest income generated in 2001 from municipal securities.

Net income decreased $1,718, or 48.8%, to $1,801 (4.4% of revenues) from $3,519 (6.3% of revenues) in 2000 primarily due to lower gross margin earned on decreased revenues as well as decreased net interest income and was partially offset by a decrease in salaries, wages and benefits, selling, general and administrative expenses, and a lower effective tax rate in 2001.

For the three months ended September 30, 2001, EBITDA decreased $2,780, or 45.3%, to $3,351 from $6,131 in 2000 primarily due to lower gross margins earned on decreased revenues, partially offset by the decrease in salaries, wages and benefits and selling, general and administrative expenses in 2001.

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 (000’s omitted):

Revenues for the nine months ended September 30, 2001 decreased $57,725, or 37.3%, to $97,092 from $154,817 in the comparable period in 2000. Promotions revenues decreased $59,933, or 43.3% to $78,549 primarily as a result of decreased revenues associated with Burger King programs in 2001 compared to the same period in 2000 (see below). Consumer Product revenues increased $2,208, or 13.5%, to $18,543 primarily due to increased sales of Tub Tints® product and due to revenue generated by Robot Wars™ product subsequent to the acquisition of Logistix.

Cost of sales decreased $45,021 to $69,258 (71.3% of revenues) for the nine months ended September 30, 2001 from $114,279 (73.8% of revenues) in the comparable period in 2000 due to the lower sales volume in 2001. The gross margin percentage increased to 28.7% for the nine months ended September 30, 2001 from 26.2% in the comparable period for 2000. This increase was primarily due to a shift in the Company’s revenue mix, resulting from a higher relative mix in 2001 of Consumer Product revenues, and international promotion revenues, which tend to carry higher gross margins.

Salaries, wages and benefits decreased $1,449, or 11.3%, to $11,428, (11.8% of revenues) for the nine months ended September 30, 2001 from $12,877 in the comparable period in 2000. The decrease was primarily attributable to a reduction in accruals for performance bonuses for employees in 2001. This decrease was partially offset by the addition of employees from the acquisition of Logistix and staffing additions resulting from the Company’s growth initiatives.

Selling, general and administrative expenses decreased $2,730, or 18.4%, to $12,082 (12.4% of revenues) for the nine months ended September 30, 2001 from $14,812 in the comparable period in 2000. This decrease is due primarily to decreases in freight out, warehousing costs and bad debt resulting from the decrease in sales volume. This decrease is also attributable to a decline in travel and entertainment expenses and outside services costs, partially offset by an increase in advertising expense and insurance expense. The decrease was also attributable to a reduction in amortization expense resulting from the write-off of the goodwill and trademark in December 2000 associated with the acquisition of Corinthian Marketing, Inc. in April 1998. Selling, general and administrative expenses increased as a percentage of revenues from 9.4% to 12.4% as a result of lower revenues, which decreased at a greater rate.

The AmeriServe bad debt expense recorded in the nine months ended September 30, 2000 represents a charge resulting from the bankruptcy of AmeriServe. (see “AmeriServe Bankruptcy”)

Net interest income increased $654, or 87.7%, to $1,400 (1.4% of revenues) for the nine months ended September 30, 2001 from $746 in

the comparable period for 2000. This increase was attributable to interest income generated by the significantly increased level of cash and cash equivalents. This increase was partially offset by a reduction in imputed interest income on a note receivable (see “AmeriServe Bankruptcy”). The increase was also partially offset by a decline in interest rates as well as to the reduced level of cash and cash equivalents subsequent to the acquisition of Logistix.

The effective tax rate for the nine months ended September 30, 2001 was 37.5% compared to 39.9% for the same period in 2000. The reduction in the effective tax rate is the result of non-taxable interest income generated in 2001 from municipal securities.

Net income decreased $4,303, or 54.6%, to $3,576 (3.7% of revenues) from $7,879 (5.1% of revenues) in 2000 primarily due to lower gross margin earned on decreased revenues and was partially offset by a decrease in both salaries and benefits and selling, general and administrative expenses, as well as increased net interest income, and a lower effective tax rate in 2001.

For the nine months ended September 30, 2001, EBITDA decreased $8,245, or 57.5%, to $6,094 from $14,339 in 2000 primarily due to lower gross margins earned on decreased revenues, partially offset by the decrease in both salaries and benefits and selling, general and administrative expenses in 2001.

FINANCIAL CONDITION AND LIQUIDITY

The Company’s financial position remained strong in the third quarter of 2001. At September 30, 2001, the Company had no debt and its cash and cash equivalents and marketable securities were $23,998, compared to $37,505 as of December 31, 2000.

As of September 30, 2001, the Company’s net accounts receivable decreased $855 to $29,282 from $30,137 at December 31, 2000. This decrease is a result of the lower level of sales volume in the third quarter compared to the fourth quarter of 2000. As of September 30, 2001, inventory increased $2,874 to $14,618 from $11,744 from December 31, 2000. The increase in inventory is primarily a result of both Burger King and Logistix programs which are expected to be delivered in the fourth quarter.

As of September 30, 2001, accounts payable increased $2,109 to $20,530 from $18,421 at December 31, 2000. This increase is associated with the increase in inventory levels.

As of September 30, 2001, accrued liabilities decreased $3,960 to $18,015 from $21,975 at December 31, 2000. This decrease is primarily attributable to the payment of employee bonuses related to 2000, the payment of federal and state income taxes related to 2000 net income, and payment of royalty and administrative fees collected from distribution companies on behalf of promotional customers related to the fourth quarter of 2000.

As of September 30, 2001, working capital was $37,095 compared to $52,140 at December 31, 2000. The decrease in working capital was primarily a result of cash used in the acquisition of Logistix and cash used to repurchase shares of the Company’s common stock (see “Stock Repurchase”), partially offset by cash generated by operating activities during the nine months ended September 30, 2001. The Company believes that its cash from operations, cash on hand at September 30, 2001 and its credit facility will be sufficient to fund its working capital needs for at least the next twelve months. The statements set forth herein are forward-looking and actual results may differ materially.

CREDIT FACILITIES

On April 24, 2001, the Company entered into a credit facility (the “Facility”) with Bank of America. The Facility is secured by substantially all of the Company’s assets and provides for borrowings up to $35,000 for three years from the date of closing. Borrowing availability is 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 1.50 and 2.25 percent or a variable rate equivalent to the 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 0.60 percent per annum and certain letter of credit fees. The applicable spread is based on the achievement of certain financial ratios. The Facility also requires the Company to comply with certain restrictions and covenants as amended from time to time. On September 30, 2001 certain covenants under the facility were amended. The Company was in compliance with the amended restrictions and covenants. The Facility may be used for working capital and acquisition financing purposes. As of September 30, 2001, there were no amounts outstanding under the Facility.

ISSUANCE OF PREFERRED STOCK

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 30, 2005. A payment of $62.5 was made for the quarter ended September 30, 2001.

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.

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 and expired July 21, 2001. During this period, the Company purchased an aggregate of 525,094 shares at an average price of $12.28 per share including commissions. On July 24, 2001, the Company’s Board of Directors authorized up to an additional $10,000 for the repurchase of the Company’s common stock over a twelve month period. In the period from August 2, 2001 through September 30, 2001, the Company has purchased 203,400 shares at an average price of $12.60 per share including commissions. Since initiating the overall buyback program on July 20, 2000, the Company has purchased a total of 728,494 shares at an average price of $12.37 per share including commissions. 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.

AMERISERVE BANKRUPTCY

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 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 nine months ended September 30, 2000. This charge was offset by $607 of imputed interest income, at 9% per annum, recorded on the note receivable for the same period in 2000. The balance of the note receivable as of September 30, 2001 was $2,151, which was recorded as a current asset as the note is due by December 2001. For the quarter ended September 30, 2000 and 2001, the Company recorded $260 and $81, respectively, of imputed interest income on the note receivable.

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders of the Company was held on September 28, 2001. Proxies for the Annual Meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition to that of management. All of management’s nominees for directors as listed in the proxy statement were elected. At the Annual Meeting, the following matters were approved by the Stockholders:


				Votes Against or		Abstentions and
		Votes For		Withheld		Broker Non-Votes

1.	Election of Directors by holders of Common Stock
	Stephen P. Robeck		4,994,686		29,410		—
	Donald A. Kurz		4,971,841		52,255		—
	Mitchell H. Kurz		4,994,686		29,410		—
	Bruce Raben		4,994,586		29,510		—
	Alfred E. Osborne Jr.		4,994,386		29,710		—
	Jonathan D. Kaufelt		4,994,586		29,510		—
	Sanford R. Climan		4,994,686		29,410		—

2.	Election of Directors by holders of Series A Preferred Stock
	Peter Ackerman		25,000		—		—
	Jeffrey S. Deutschman		25,000		—		—

3.	Ratification of Arthur Andersen LLP as the Company’s Independent Auditor		6,705,491		12,270		1,250

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.1

First Amendment to Credit Agreement by and between Bank of America, N.A. and Equity Marketing, Inc., dated September 30, 2001.*

(*)

To be filed on a Current Report on Form 8-K.

(b) Reports on Form 8-K:

Report on Form 8-K filed with the Securities and Exchange Commission on August 6, 2001 (Item 5).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles and State of California on the 14th day of November, 2001

EQUITY MARKETING, INC.

/s/ LAWRENCE J. MADDEN

Lawrence J. Madden
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

EXHIBIT INDEX

EXHIBIT

10.1

First Amendment to Credit Agreement by and between Bank of America, N.A. and Equity Marketing, Inc., dated September 30, 2001.*

(*)

To be filed on a Current Report on Form 8-K.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

EMAK Worldwide (EMAK) Inactive 10-Q2001 Q3 Quarterly report

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