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Table of Contents

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, 2002

or

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

Commission File Number: 23346

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

Delaware		13-3534145
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
6330 San Vicente Blvd.
Los Angeles, CA		90048
(Address of principal executive offices)		(Zip Code)

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

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

Yes [  ]       No [X]

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, 5,748,603 shares as of November 11, 2002.

Table of Contents

EQUITY MARKETING, INC.

Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
September 30, 2002

			Page
Part I.	Financial Information
	Item 1.	Financial Statements		3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 4.	Controls and Procedures		26
Part II.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K		27

2

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

	December 31,					September 30,
	2001					2002
						(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents		$	21,935				$	22,847
Marketable securities			7,200					500
Accounts receivable (net of allowances of $2,336 and $2,596 as of December 31, 2001 and September 30, 2002, respectively)			22,695					29,463
Note receivable (Note 6)			2,183					—
Inventories (Note 2)			9,337					13,581
Prepaid expenses and other current assets			6,775					6,607
Total current assets			70,125					72,998
Fixed assets, net			4,178					4,243
Goodwill (Notes 2 and 7)			24,690					33,091
Other intangibles, net (Notes 2 and 7)			749					846
Other assets			1,620					1,547
Total assets		$	101,362				$	112,725

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

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EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	December 31,					September 30,
	2001					2002
						(Unaudited)
CURRENT LIABILITIES:
Accounts payable		$	22,114				$	24,001
Accrued liabilities			11,391					20,422
Total current liabilities			33,505					44,423
LONG-TERM LIABILITIES			2,335					2,143
Total liabilities			35,840					46,566
COMMITMENTS AND CONTINGENCIES
Mandatory redeemable preferred stock, Series A senior cumulative participating convertible, $.001 par value per share, 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, $.001 par value per share, 50,000,000 shares authorized, 5,715,293 and 5,748,603 shares outstanding as of December 31, 2001 and September 30, 2002, respectively			—					—
Additional paid-in capital			20,050					20,854
Retained earnings			35,964					35,689
Accumulated other comprehensive income			242					1,366
			56,256					57,909
Less–
Treasury stock, 2,869,793 and 2,899,608 shares, at cost, as of December 31, 2001 and September 30, 2002, respectively (Note 4)			(13,773)					(14,164)
Unearned compensation			(10)					(635)
Total stockholders’ equity			42,473					43,110
Total liabilities and stockholders’ equity		$	101,362				$	112,725

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

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EQUITY MARKETING, INC.

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2001				2002				2001				2002
REVENUES		$	40,828			$	53,119			$	97,092			$	136,385
COST OF SALES			29,187				38,084				69,258				99,865
FORGIVENESS OF NOTE RECEIVABLE (Note 6)			—				—				—				1,685
Gross profit			11,641				15,035				27,834				34,835
OPERATING EXPENSES:
Salaries, wages and benefits			4,152				6,054				11,428				14,979
Selling, general and administrative			4,725				5,490				12,001				14,552
Integration costs (Note 7)			81				161				81				219
Restructuring charge (Note 8)			—				178				—				178
Total operating expenses			8,958				11,883				23,510				29,928
Income from operations			2,683				3,152				4,324				4,907
OTHER INCOME, net			206				121				1,400				191
Income before provision for income taxes and cumulative effect of change in accounting principles			2,889				3,273				5,724				5,098
PROVISION FOR INCOME TAXES			1,088				1,142				2,148				1,752
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES		$	1,801			$	2,131			$	3,576			$	3,346
Cumulative effect of change in accounting principles, net of tax (Note 2)			—				—				—				(2,496	)
Net income		$	1,801			$	2,131			$	3,576			$	850
NET INCOME			1,801				2,131				3,576				850
PREFERRED STOCK DIVIDENDS			375				375				1,125				1,125
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS			1,426				1,756				2,451				(275	)
BASIC INCOME (LOSS) PER SHARE
Income per share before cumulative effect of change in accounting principles		$	0.24			$	0.31			$	0.41			$	0.39
Cumulative effect of change in accounting principles			—				—				—				(0.44	)
BASIC INCOME (LOSS) PER SHARE		$	0.24			$	0.31			$	0.41			$	(0.05	)
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING			5,978,322				5,740,001				6,048,926				5,714,546
DILUTED (LOSS) INCOME PER SHARE
Income per share before cumulative effect of change in accounting principles		$	0.23			$	0.28			$	0.39			$	0.38
Cumulative effect of change in accounting principles			—				—				—				(0.42	)
DILUTED INCOME (LOSS) PER SHARE		$	0.23			$	0.28			$	0.39			$	(0.05	)
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING			7,877,538				7,582,285				6,223,071				5,908,233

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

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EQUITY MARKETING, INC.

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2001				2002				2001				2002
NET INCOME		$	1,801			$	2,131			$	3,576			$	850
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (Note 2)			377				222				377				1,164
Unrealized gain (loss) on foreign currency forward contracts (Note 2)			—				130				—				(40	)
COMPREHENSIVE INCOME		$	2,178			$	2,483			$	3,953			$	1,974

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

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EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

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		Nine Months Ended September 30,
		2001				2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,576			$	850
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principles, net of tax			—