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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from _____________ to _____________

Commission File Number 0-23346

EQUITY MARKETING, INC.

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:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
(Title of class)

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  o

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.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  o       No  x

As of June 30, 2003, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $49,185,910.

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

Documents Incorporated by Reference: Certain portions of the Registrant’s definitive Proxy Statement relating to registrant’s annual meeting of stockholders to be held on May 20, 2004 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, 2003

ITEMS IN FORM 10-K

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 Operation — Cautionary Statements and Risk Factors.”

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PART I

ITEM 1. BUSINESS

($000’s omitted)

Except as expressly indicated or unless the context otherwise requires, as used herein,“EMAK”, the “Company”, “we”, “our”, or “us”, means Equity Marketing, Inc., a Delaware corporation and its subsidiaries. Unless otherwise specifically indicated, all dollar amounts herein are expressed in thousands.

Overview and Strategy

EMAK is a leading global integrated marketing services company. We focus on the design and execution of strategy-based marketing programs providing measurable results for our clients. We complement our core marketing services business by developing and marketing distinctive consumer products, based on emerging and evergreen licensed properties, which are sold through mass-market and specialty retailers. EMAK is headquartered in Los Angeles, with offices in Chicago, Minneapolis, New York, Ontario (California), London, Paris and Hong Kong.

EMAK has expertise in the areas of: strategic planning and research, entertainment marketing, design and manufacturing of custom promotional products, promotion, event marketing, collaborative marketing, retail design and environmental branding. Our clients include Burger King Corporation, Diageo, Kellogg’s, Kohl’s, Macy’s, Nordstrom, Procter & Gamble, and Subway Restaurants, among others.

We believe our principal competitive advantages include:

	•		our ability, as a full-service agency, to both design and implement strategy-based marketing programs;
	•		extensive brand-building and sales-building experience developed over years of serving Burger King and other clients;
	•		extensive creative capabilities;
	•		our access to a broad range of intellectual properties 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, with stringent quality control.

Our principal strategy is to be a market-driven and customer-driven global organization that serves as a strategic marketing partner for 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 promotional product-based.

Our Consumer Products business supports and complements our Marketing Services business by leveraging our infrastructure, improving overall gross margins, strengthening our relationships with licensors and retailers who may also be promotions clients, and feeding our overall knowledge of trends in popular culture.

Our Acquisition Strategy

We focus on diversifying and growing our Marketing Services skills and client base with businesses that leverage our infrastructure, add new clients and complementary service offerings, and/or offer new channels of distribution or territories.

	•		In July 2001, EMAK acquired Logistix Kids, gaining a presence in Europe with broad-based strategic client relationships, including research, new concept development, licensing guidance and the development of premium-based promotions.
	•		In July 2002, EMAK acquired UPSHOT, gaining a marketing agency with expertise in promotion, event, collaborative marketing, retail design, and environmental branding, thereby providing us with the ability to provide a broader range of services to existing clients and to develop a more diverse client base.
	•		In September 2003, EMAK acquired SCI Promotion Group, establishing us as a leading provider of gift-with-purchase and purchase-with-purchase promotional programs to the retail department store industry.
	•		In February 2004, EMAK acquired Johnson Grossfield, expanding our client base in the Quick Service Restaurant category with the addition of the kids marketing program of Subway Restaurants.

We continue to seek new acquisition candidates that fit our strategy.

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Business Segments

Our business is classified into two reportable business segments, namely Marketing Services and Consumer Products. These business segments have been defined in a manner consistent with EMAK’s organizational structure, internal reporting, allocation of resources and operating decision-making.

Our Marketing Services revenues for the years ended December 31, 2001, 2002 and 2003 were $104,335, $168,659 and $183,687, or 72%, 82% and 84% of total revenues, respectively. Our Consumer Products revenues for the years ended December 31, 2001, 2002 and 2003 were $39,981, $38,173 and $35,426, or 28%, 18% and 16% of total revenues, respectively.

A single client, Burger King, accounted for approximately 66%, 65% and 58% of our total revenues for the years ended December 31, 2001, 2002 and 2003, respectively.

The business segment revenues for 2001 and 2002 set forth above have been reclassified to conform to our management structure effective January 1, 2003; specifically, the results of the USI division, which had been previously reported as part of Marketing Services, are now being reported as part of Consumer Products.

Marketing Services

Our largest Marketing Services offering 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 other products at retail. We also create non-premium based integrated marketing programs that build brands and influence consumers behavior through promotion, event, collaborative marketing and retail and environmental design.

Premium-based promotions are used by both the companies sponsoring the promotions, typically our 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’ retail outlets supplements the marketing of motion pictures and television programs by the studios.

Licenses for characters upon which our programs are based are generally obtained directly by our clients (often with our assistance) from licensors, including Warner Bros. Consumer Products, Universal Studios, Nickelodeon, DreamWorks SKG, The Walt Disney Company, Sony Pictures Entertainment and Twentieth Century Fox. Such licenses are typically specific to the promotional campaign and generally do not extend beyond the end of the promotional campaign.

We perform a wide range of creative, design, development, production and fulfillment services for our clients, including:

	•		assisting clients in understanding the consumer through creative research and planning;
	•		assisting clients with promotional strategy, calendar planning, and concept development;
	•		evaluating intellectual properties for which licenses are available;
	•		advising clients as to which licenses are consistent with their marketing objectives;
	•		assisting clients in procuring licenses;
	•		proposing specific product and non-product based promotions utilizing the properties secured by our clients;
	•		developing promotional concepts and designs based on the property;
	•		providing the development and engineering necessary to translate the property, which often consists of two-dimensional artwork, into finished products;
	•		obtaining or coordinating licensor approval of product designs, prototypes and finished products;
	•		contracting for and supervising the manufacture of products;
	•		arranging for safety testing to customer and regulatory specifications by independent testing laboratories;
	•		arranging insurance, customs clearance and, in most instances, the shipping of finished products to the client;

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	•		providing warehousing, fulfillment and billing services; and
	•		providing creative services for packaging and point-of-sale advertising,
	•		developing collaborative marketing programs between retailers and manufacturers; and
	•		creating three dimensional environments to influence consumer’s purchasing behavior including environmental planning, store design, space planning and visual merchandising.

In some instances, customers obtain license rights or develop promotions concepts independently and engage us only to design and produce specific products. More often, we provide the full range of our services.

EMAK pursues promotions opportunities worldwide. Our international promotions often include unique products and programs tailored to local markets as well as 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 we have already made the investment in the creative development of concepts based upon such entertainment properties by the time of their domestic release, we often have completed both creative, and in some instances, production work, in advance of their foreign release.

Consumer Products

EMAK’s Consumer Products division designs, manufactures and markets toys and other consumer products for sale to major mass market retailers (such as Toys ‘R’ Us, Wal-Mart and Target), specialty market retailers and various international distributors. Our products are primarily based upon trademarks, characters and other intellectual properties we license from major entertainment companies. In some cases, our products are based on the same licensed properties used by our Marketing Services division.

The principal strategy of our Consumer Products business is to focus on distinctive, niche products that complement our promotions business and use the same design, production and logistics infrastructure. These products are based on emerging and evergreen licensed properties that are likely to produce revenue for several years, thus increasing the predictability of our revenues. We currently intend to implement this strategy principally through internal growth.

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The table below provides a summary of our current portfolio of emerging and evergreen licensed properties, including the names of the licensed property and the licensor, the dates on which the license was originally granted, when the first products were or will be marketed under the license, the expiration date of the current license term, the product categories covered by the license and the geographic territories in which the licensed product can be distributed.

After we secure a new licensed property, we then develop, design and engineer a product line and packaging. Much of this work is performed by our internal staff of designers, artists, model makers and engineers. The initial development of a product line under a new license typically takes from four to 10 months. As a result, the addition of new licensed properties requires substantial investment in design and development well in advance of associated revenues. We expense such design and development costs as incurred. In addition, we regularly refresh, redesign and extend existing product lines.

We anticipate significant growth in our Consumer Products business in 2004, as several of our licensed properties reach their first full-year of distribution. In addition, the following factors are expected to favorably impact our Consumer Products business in 2004 and beyond:

	•		Our sales of Scooby-Doo™ merchandise were bolstered in 2002 by the release of the Warner Bros. live-action feature film Scooby-Doo™. The sequel, Scooby-Doo 2: Monsters Unleashed was released March 26, 2004.
	•		In 2003, we launched an expanded line of Crayola® brand bath toys, bath activities and playsets, coinciding with the centennial of the Crayola® crayon. Our 2004 plans for this line include the addition of new channels of distribution, including drug and grocery retailers.
	•		Our Kim Possible™ line was launched in Summer 2003 as a Wal-Mart exclusive, with distribution expanded to other major retailers in January 2004. Kim Possible™, an original animated comedy-adventure series, debuted in June 2002 on the Disney Channel as the highest rated premiere ever for an original Disney Channel series and now also airs Saturday mornings on ABC Kids.

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	•		In January 2004 we began distributing the first toy products based upon Baby Einstein™, the best selling brand of videos specifically created for babies and toddlers. We have granted exclusive distribution to Target and Babies R Us for 2004.
	•		In February 2004, Disney Enterprises, Inc. acquired the rights to various properties owned by The Jim Henson Company, including Jim Henson’s Bear in the Big Blue House™. We currently anticipate that Disney will provide a higher level of entertainment and marketing support for this property in the future, expanding opportunities for distribution of our plush toy line.
	•		In February 2004, we added another Disney property to our portfolio, with a license to produce and market preschool toys, plush, playsets and musical toys based on JoJo’s Circus™, a cartoon series that airs daily on Playhouse Disney.

Backlog

Order backlog at March 19, 2003 and March 26, 2004 was approximately $142,000 and $156,000, respectively. The Company expects the 2004 order backlog to be filled by December 31, 2004.

Manufacturing

Our products are manufactured according to EMAK and customer specifications by unaffiliated contract manufacturers, primarily in China. Our Hong Kong staff manages the production of our products by our contract manufacturers and performs or procures product sourcing, product engineering, quality control inspections, independent safety testing and export/import documentation. We believe 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. EMAK products are also manufactured by third parties in the United States and Europe.

We generally retain, either for our self or on behalf of our clients, ownership of the molds and tooling required for the manufacture of our products. We are not a party to any long-term contractual arrangements with any manufacturer.

During 2003, approximately 96% of our products were manufactured in China. China currently enjoys permanent “normal trade relations” (“NTR”) status under US tariff laws, which provides a favorable category of US import duties. China’s NTR status became permanent on January 1, 2002, following enactment of a bill authorizing such status upon China’s accession to the World Trade Organization, which occurred in December 2001. This substantially reduces the possibility of China losing its NTR status, which would result in increased manufacturing costs for us and those of our competitors sourcing products in China.

Virtually all of the raw materials used in our products are available from numerous suppliers. Our contract manufacturers generally do not have long-term supply contracts in place with their raw materials suppliers. Accordingly, we are subject to variations in the prices we pay to manufacturers for products, depending on what they pay for their raw materials. An increase in the cost of raw materials, such as petroleum, could result in price increases which EMAK may not be able to fully pass on to customers. Any such increase could negatively impact our business, financial condition or results of operations.

Trademarks and Copyrights

We do not typically own trademarks or copyrights on properties on which most of our products are based. These rights are 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.

Competition

Both our Marketing Services and Consumer Products businesses operate in highly competitive domestic and international markets.

In our core domestic Marketing Services business, EMAK competes with subsidiaries of The Interpublic Group of Companies (including Draft Worldwide, The Zipatoni Company, Momentum and Marketing Drive Worldwide), Frankel (a subsidiary of Publicis), 141 Worldwide (a subsidiary WPP), Marketing Store Worldwide, Creata Promotion and Wunderman (a subsidiary of WPP). Competition in the international promotions industry includes local companies in each market and a small number of emerging international promotions companies.

We believe the principal competitive factors affecting our Marketing Services business are the development of client marketing and promotional strategies, unique consumer insights, creative execution, license selection, price, product and service quality and safety and speed of production.

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Our Consumer Products competitors include companies which have far more extensive sales and development staffs and significantly greater financial resources than EMAK. Our principal competitors are mid-sized toy companies like Playmates Holdings Limited, Play Along, 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 EMAK.

We believe the principal competitive factors affecting our Consumer Products business are license selection, price, product quality and play value.

Government Regulation

In the United States, our business is subject to the provisions of the Consumer Product Safety Act and the Federal Hazardous Substances Act. These acts empower the Consumer Product Safety Commission to protect the public against unreasonable risks of injury associated with promotional and consumer products, including toys and other articles. The Consumer Product Safety Commission 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 Consumer Product Safety Commission 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.

We perform quality control procedures (including the inspection of goods at factories and the retention of independent testing laboratories) to ensure compliance with applicable product safety requirements, both domestically and internationally. Notwithstanding the foregoing, there can be no assurance that all of our products are or will be hazard-free. A product recall could have a material adverse effect on our results of operations and financial condition and could also negatively affect EMAK’s reputation and the sales of our other products.

Employees

As of December 31, 2003, EMAK employed a total of 356 individuals, including 246 individuals located in the United States, 59 individuals located in Europe and 51 individuals in Hong Kong. In addition, we utilize freelance artists and other temporary staff on an ongoing basis in order to serve our clients needs. We believe that our relations with our employees are very good.

Executive Officers of the Registrant

The following persons are the executive officers of EMAK. Such executive officers are appointed annually by our board of directors and serve at the pleasure of the board. The table below provides information with respect to our Executive Officers:

Donald A. Kurz became our Chairman and Chief Executive Officer 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 EMAK 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 EMAK in 1991 and is currently responsible for the creative direction for all of our marketing services and consumer products. She was promoted to her current post in early 2000. Prior to joining EMAK, she operated her own business as a creative consultant. Ms. Thomsen earned her bachelor’s degree from Cornell University.

Bret R. Hadley joined EMAK in July 2001 and is responsible for our consumer products division as well as all product realization, including manufacturing, quality control and distribution, as well as management information systems. From November 1999 to May 2001, he was President and CEO of Frank Schaeffer Publications, Inc., an educational products firm. From November 1997 to November 1999, he was President of Wham-O, Inc., a toy and sporting goods manufacturer. From December 1985 to November 1997, he served in various senior leadership positions for Mattel, Inc., including most recently Senior Vice President-International Marketing.

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He holds a bachelor’s degree from the University of Minnesota and a master’s in business administration from UCLA’s Anderson Graduate School of Management.

Gaetano A. Mastropasqua joined EMAK in 1997 as a Senior Director responsible for our Burger King account. Mr. Mastropasqua currently oversees our Burger King business. He was promoted to his current post in July 2000, and has added oversight of our new business function 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.

Ian P. Madeley joined EMAK in July 2001 and is responsible for the operations of our Logistix Kids subsidiary, which the Company acquired on July 31, 2001. Mr. Madeley had been the Managing Director of Logistix since 1989. In February 2003 he was named President, International with responsibility for implementing EMAK’s business strategies in Europe and other international markets. Mr. Madeley is also responsible for expanding our Logistix Kids brand to the U.S. and oversees our newest acquisition, Johnson Grossfeild. Prior to joining Logistix, he was the Marketing Manager of SP Agency Stansfield Lake, and prior thereto was a Marketing Manager of New Product Development for Express Foods Group, a leading dairy product supplier. He holds a bachelor’s degree in economics from Hull University.

Teresa L. Tormey joined EMAK in November 2002 as Senior Vice President, General Counsel and Secretary. She is responsible for our legal and business affairs, compliance and board administration functions. Ms. Tormey was previously a partner in the corporate finance and transactions practice group of Oppenheimer Wolff & Donnelly LLP. She holds a bachelor’s degree in economics from UC Davis and a juris doctor from Pepperdine University School of Law.

Zohar Ziv joined EMAK in February 2004 as Senior Vice President and Chief Financial Officer. He is currently responsible for the Company’s finance, treasury, accounting and corporate development functions. Prior to joining EMAK, Mr. Ziv was the CFO of Stravina Operating Company, LLC, a supplier of personalized novelty items, from June 2002 to February 2004; the CFO of Joico Laboratories, Inc., a hair product supplier, from July 2001 to June 2002; the CFO of Intellisys Group, Inc., a multimedia system designer and integrator, from June 1999 to February 2001; and the CFO of Inovision Holdings, L.P., a medical supply manufacturer, from January 1988 to June 1999. His prior experience includes approximately twelve years with Flowserve Corp., formerly BW/IP International, where he ultimately became a treasurer and division controller, and more than four years with Getty Oil Company. Mr. Ziv has a master of business administration in international management from Thunderbird, The American Graduate School of International Management, and a bachelor of science in accounting from California State University, Northridge. He is a certified public accountant.

Available Information

Our website address is www.equity-marketing.com. EMAK makes available, free of charge, on or through this website our periodic and current reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Act of 1934 as soon as reasonably practicable after such material is filed with or furnished to the SEC. Information contained on our website is not part of this report.

ITEM 2. PROPERTIES

Our corporate headquarters consist of approximately 57,000 square feet of leased space in Los Angeles, California under a lease which expires December 31, 2009. SCI occupies approximately 41,000 square feet of office and warehouse space in Ontario, California under a lease which expires October 31, 2007. We also lease an approximately 40,000 square foot warehouse in Indianapolis, Indiana under a lease which expires May 31, 2005. In Hong Kong, we occupy approximately 6,000 square feet of leased space in Kowloon, under a lease which expires August 31, 2004. Logistix occupies approximately 7,400 square feet and 1,900 square feet of leased space in Gerrards Cross outside of London under leases that expire September 20, 2014 and September 19, 2011, respectively, and approximately 2,200 square feet of leased space in Paris under a lease that expires January 31, 2013. UPSHOT occupies approximately 30,000 square feet of leased space in Chicago, Illinois under a lease that expires March 31, 2009. In connection with a restructuring plan implemented in 2002, UPSHOT vacated approximately 30,000 square feet of leased space in Chicago and approximately 12,000 square feet of leased space in Richmond, Virginia. The Richmond, Virginia facility is currently occupied by a subtenant and we are currently seeking a subtenant for the Chicago facility.

ITEM 3. LEGAL PROCEEDINGS

EMAK is involved in various legal proceedings generally incidental to our business. While the result of any litigation contains an element of uncertainty, management presently believes that the outcome of any known, pending or threatened legal proceeding or claim, individually or combined, will not have a material adverse effect on our financial position, results of operations or cash flows.

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

There were no matters submitted to a vote of security holders during the fourth quarter of our fiscal year ended December 31, 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is traded on The Nasdaq National Stock Market under the symbol EMAK. On March 26, 2004 there were approximately 1,150 beneficial holders of our Common Stock.

We currently have no plans to pay dividends on our Common Stock. We intend to retain all earnings for use in our business. Under EMAK’s current credit facility, we cannot pay dividends on our Common Stock without the prior consent of the lender. (See Note 6 of the accompanying Notes to Consolidated Financial Statements.)

The high and low Common Stock prices per share were as follows:

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ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below have been derived from EMAK’s audited consolidated financial statements and should be read in conjunction with the related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”