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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2001

OR

[   ]

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

For the transition period from                          to                          

Commission File Number 23346

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

Delaware (State of or other jurisdiction of incorporation or organization)		13-3534145 (I.R.S. employer identification no.)

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:

Title of each class
Common Stock, $0.001 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]   No  [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

Approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of March 19, 2002 was $30,798,926.

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 Proxy Statement relating to Registrant’s annual meeting of stockholders scheduled to be held on May 23, 2002 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, 2001

ITEMS IN FORM 10-K

						Page
Part I
		Item 1.		Business		2
		Item 2.		Properties		5
		Item 3.		Legal Proceedings		6
		Item 4.		Submission of Matters to a Vote of Security Holders		7
Part II
		Item 5.		Market for the Registrant’s Common Equity and Related Stockholder Matters		7
		Item 6.		Selected Financial Data		8
		Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
		Item 7A		Quantitative and Qualitative Disclosures About Market Risk		18
		Item 8.		Financial Statements and Supplementary Data		18
		Item 9.		Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		18
Part III
		Item 10.		Directors and Executive Officers of the Registrant		19
		Item 11.		Executive Compensation		21
		Item 12.		Security Ownership of Certain Beneficial Owners and Management		21
		Item 13.		Certain Relationships and Related Transactions		21
Part IV
		Item 14.		Exhibits, Financial Statements, Schedule and Reports on Form 8-K		22

FORWARD-LOOKING STATEMENTS

Certain expectations and projections regarding the future performance of Equity Marketing, Inc., a Delaware corporation (the “Company”), discussed in this document are forward-looking and are made under the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These expectations and projections are based on currently available competitive, financial and economic data along with the Company’s operating plans and are subject to future events and uncertainties. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Actual results could vary materially from those anticipated for a variety of reasons. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are advised to review “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Statements and Risk Factors.”

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PART I

ITEM 1. BUSINESS

($000’s omitted)

General

Equity Marketing, Inc., a Delaware corporation (“Equity Marketing” or the “Company”), is a 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. 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’s products include character figurines, action vehicles, drinking vessels, watches, plush toys, play sets and a variety of other items. Programs of the promotions division of the Company, Equity Promotions (“Equity Promotions” or “Promotions”), are utilized primarily in promotional campaigns implemented by quick service restaurant and consumer products customers, which include Burger King Corporation (“Burger King”), Cadbury, The Coca-Cola Company, CVS/pharmacy, Kellogg’s, Procter & Gamble and others. Equity Consumer Products (“Equity Consumer Products” or “Consumer Products”), the consumer products division of the Company, designs and produces niche products based on trademarks owned by the Company such as Tub Tints® or on classic, time-tested licensed properties such as Scooby-Doo™ for sale to major mass market and specialty market retailers such as Toys ‘R’ Us, Inc. (“Toys ‘R’ Us”), Wal-Mart Stores, Inc. (“Wal-Mart”), Target Stores, Inc. (“Target”), Spencer Gifts, Inc., and to various international distributors worldwide.

The Company’s promotional programs are often based upon characters from entertainment properties licensed by television and motion picture studios and others. Licenses for characters upon which Equity Promotions’ programs are based are generally obtained directly by the Company’s customers (often with the Company’s assistance) from licensors, including Warner Bros. Inc. (“Warner Bros.”), Universal Studios (“Universal”), Nickelodeon, a division of MTV Networks, a division of Viacom, DreamWorks SKG, The Walt Disney Company, Sony Pictures Entertainment and Twentieth Century Fox. Such licenses are typically specific to the promotional campaign implemented by the Company’s customers and generally do not extend beyond the end of the promotional campaign. In contrast, Equity Consumer Products generally obtains licenses directly from licensors. These licenses generally grant the Company rights to design, manufacture and distribute certain specific items or types of items in specific United States and/or international markets for defined terms, typically one to three years.

The Company believes its principal competitive advantages are its extensive brand-building and measurable sales-building experience developed over years of serving Burger King and other customers, extensive creative capabilities, access to a broad range of intellectual property from the worlds of entertainment, music and sports and an infrastructure that can deliver unique, high-quality and cost-effective products and services in a very tight time frame.

The Company is seeking to acquire other companies. On July 31, 2001, the Company acquired 100% of the common stock of Logistix Limited, a United Kingdom corporation (“Logistix”). (see Note 4 of the accompanying Notes to Consolidated Financial Statements). Logistix is a leading 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 the leading BBC TV program Robot Wars®, UBOS™ (Ultimate Book of Spells) and more recently Ace Lightning™, among others. No assurance can be given that the acquisition of Logistix will be economically successful for the Company. In addition, no assurance can be given that the Company will find additional suitable acquisition candidates or that it will be successful in consummating such transactions.

Equity Promotions

The Company’s largest current market is the design and implementation of fully integrated promotional marketing programs which incorporate products used as free premiums or sold in conjunction with the purchase of meals at Burger King. The Company also produces products and provides related marketing services for use in promotional programs run by its consumer products and oil and gas company customers. Premium-based promotions are used for marketing purposes by both the companies sponsoring the promotions, typically the Company’s clients, and the licensors of the entertainment, music or sports properties on which the promotional products are based. The use of promotional products based upon entertainment, music or sports properties allows promotion sponsors to draw upon the popular identity developed by the licensed characters through exposure in various media such as television programs, motion pictures and publishing. Promotions are designed to benefit sponsors by generating consumer loyalty, building market share and enhancing the sponsors’ images as providers of value-added products and services. In addition, motion picture and television studio licensors often incorporate such promotions into their own marketing plans because of the substantial advertising expenditures made by sponsors of promotions and because the broad exposure of the licensed property to consumers in the sponsors’ restaurants and other retail outlets supplements the marketing of motion pictures and television programs by the studios.

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Equity Promotions performs a wide range of creative, design, development, production and fulfillment services for its customers. The Company assists customers with promotional strategy, calendar planning, and concept development; provides an initial evaluation of intellectual properties for which licenses are available; advises customers as to which licenses are consistent with their marketing objectives; and sometimes assists customers in procuring such licenses. The Company also proposes specific product and non-product based promotions utilizing the properties secured by its customers; develops promotional concepts and designs based on the property; provides the development and engineering necessary to translate the property, which often consists of two-dimensional artwork, into finished products; obtains or coordinates licensor approval of product designs, prototypes and finished products; contracts for and supervises the manufacture of products; arranges for safety testing to customer and regulatory specifications by an independent testing laboratory; and arranges insurance, customs clearance and, in most instances, the shipping of finished products to the customer. In some instances, the Company also provides warehousing, fulfillment and billing services. The Company also provides creative services as needed to customers for packaging and point-of-sale advertising. In some cases, customers obtain license rights or develop promotions concepts independently and engage the Company only to design and produce specific products. In other cases, the Company provides the full range of its services.

Equity Promotions’ principal strategy is to be a market-driven and customer-driven organization that seeks to be a strategic marketing partner with its clients through recommending, executing and measuring a broad range of fully integrated brand-building and sales-building programs that may or may not be product-based. Equity Promotions also intends to continue to diversify its promotions customer base outside of quick service restaurants and to continue to expand its relationship with Burger King. In connection with these strategic goals, the Company acquired Logistix in July 2001, a marketing services agency with offices in London and Paris which focuses primarily on assisting consumer packaged goods companies in their efforts to market to children between the ages of seven and fourteen. Typically, this involves a broad-based strategic relationship, including research, new product development, licensing guidance and the development of premium-based promotions. (see Note 4 of the accompanying Notes to Consolidated Financial Statements). Logistix also derives a portion of its revenues from a consumer products business which holds the licenses for the leading BBC TV program Robot Wars®, UBOS™ (Ultimate Book of Spells) and more recently Ace Lightning™, among others. In addition to providing revenue diversification, access to new clients and greater access to existing markets, the Company intends to use Logistix as a platform from which to expand organically and through acquisition into other international markets not currently served by Logistix or the Company. No assurance can be given that the Company will be successful in pursuing such expansion.

The Company’s international promotions include unique products and programs tailored to local markets and the use of products from promotions originally run in the United States. American entertainment properties are generally released in other countries subsequent to the date of their release in the United States. Because the Company has already made its investment in the creative development of concepts based upon such entertainment properties by the time of their domestic release, it often has completed both creative, and in some instances, production work in advance of their foreign release. The Company pursues promotions opportunities worldwide. In 2001, the Company sold promotional products internationally in the United Kingdom, Germany, Spain, Sweden, Italy, Turkey, Australia, the Philippines, Singapore, Korea, Mexico and throughout Latin America.

Promotions revenues for the years ended December 31, 1999, 2000 and 2001 were $202,195, $208,607 and $117,305 or 89%, 90% and 81% of the Company’s revenues, respectively. A single promotions customer, Burger King, accounted for approximately 80%, 80% and 66% of the Company’s total revenues for the years ended December 31, 1999, 2000 and 2001, respectively. (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Cautionary Statements and Risk Factors”).

Equity Consumer Products

Equity Consumer Products designs and manufactures toys and other consumer products for sale to major mass market retailers such as Toys ‘R’ Us, Wal-Mart and Target, specialty market retailers such as Spencer Gifts, Inc., Store of Knowledge, Zany Brainy, and Blockbuster and to various international distributors worldwide. These products incorporate trademarks the Company owns such as Tub Tints® or licenses of classic, time-tested properties the Company has obtained from entertainment companies such as Warner Bros. In some cases, the products are based on the same licensed properties that are used by Equity Promotions.

In June 1998, the Company obtained a three-year licensing agreement with Warner Bros. to design, manufacture, market and distribute toys based on characters from Scooby-Doo™, one of the longest-running children’s cartoon shows in television history. In September 2000, the Company renewed through the end of 2003 its licensing agreement with Warner Bros. to design, manufacture, market and distribute toys based on characters from Scooby-Doo™. In 2001, the Company elected to exercise its option to design, manufacture, market and distribute toys in the United States and Canada based on the live-action Scooby-Doo™ feature film scheduled to be released by Warner Bros. Pictures in June 2002. Also in 2001, the Company executed a separate agreement with Warner Bros. granting to the Company manufacturing and distribution rights for Scooby-Doo™ toys in Europe and Latin America.

In July 1998, the Company acquired the worldwide rights to manufacture, market and distribute Tub Tints®, a children’s bath product consisting of effervescent tablets which dissolve in the bath and currently come in three colors: red, yellow and blue. Depending on which color tablets are mixed, a wide variety of colors can be created. In 2000, the Company introduced Tub Tints® toys, color tablets

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co-packed with either a wand, submarine or bath book. In 2001, the Company expanded its line of Tub Tints® toys to include, among others, stacking cups, a turtle, a whale and a diver.

In January 2002, the Company obtained a three-year licensing agreement with MGM to design, manufacture, market and distribute toys based on characters from The Pink Panther™. Under terms of the agreement, Equity Marketing will design and produce Pink Panther™ plush items for distribution to mass and specialty markets in the United States and Canada. The first products developed under this agreement will be available by spring 2002. The Pink Panther™ first debuted in 1964. Over the past 38 years, the Pink Panther™ has won an animated short Academy Award® for “Pink Phink’’ (1964) and has been featured in a total of nine live-action films and 176 cartoon shorts. Additionally, the Pink Panther™ serves as the proud “spokescat” for Owens Corning building materials/insulation and German telecommunications giant Deutsche Telekom.

Equity Consumer Products’ principal strategy is to focus on distinctive, niche products that compliment the Company’s promotions business and are based on trademarks owned by the Company or on classic, time-tested licensed properties that are likely to produce revenue for several years, thus increasing the predictability of the Company’s revenues. The Company intends to implement this strategy through internal growth. No assurance can be given that the Company will be successful in obtaining or renewing licenses under satisfactory terms.

Equity Consumer Products’ revenues were $24,868, $23,680 and $27,011 or 11%, 10% and 19% of the Company’s total revenues, for the years ended December 31, 1999, 2000 and 2001, respectively.

Backlog

Order backlog at March 22, 2001 and March 19, 2002 was approximately $66,108 and $106,150, respectively. The Company expects the 2002 order backlog to be filled by December 31, 2002.

Manufacturing

The Company’s products are manufactured according to Company and customer specifications by unaffiliated contract manufacturers. Equity Marketing Hong Kong, Ltd., a wholly owned subsidiary of the Company (“Equity Marketing HK”), manages production of the Company’s products by third parties in the Far East and currently is responsible for performing and/or procuring product sourcing, product engineering, quality control inspections, independent safety testing and export/import documentation. The Company believes that the presence of a dedicated staff in Hong Kong results in lower net costs, increased ability to respond rapidly to customer orders and maintenance of more effective quality control standards. The Company’s products are also manufactured by third parties in the United States. Equity Marketing generally retains, for itself or on behalf of its customers, ownership of the molds and tooling required for the manufacture of its products. The Company is not a party to any long-term contractual arrangements with any manufacturer. During 2001, approximately 95% of the Company’s 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 costs for the Company. The impact of such an event on the Company could be somewhat mitigated by the Company’s ability to source product for the US market from countries other than China. (see “Cautionary Statements and Risk Factors”).

Virtually all of the Company’s raw materials are available from numerous suppliers. The Company does not have long-term supply contracts in place with its suppliers. Accordingly, petroleum price increases could result in higher prices for the Company’s products which the Company may not be able to fully pass on to its customers. Any such failure could negatively impact the Company’s business, financial condition or results of operations.

Trademarks and Copyrights

The Company does not own trademarks or copyrights on properties on which most of its current products are based. These rights are typically owned or controlled by the creator of the property or by the entity which develops or promotes a property, such as a motion picture or television producer.

Competition

The domestic and international promotions and consumer products businesses are highly competitive. In its core domestic promotions business, Equity Marketing competes with several other companies. Competitors in promotions include the Alcone Marketing Group, a subsidiary of Omnicom Group, Inc., Marketing Store Worldwide, Promotional Partners International and DraftWorldwide, a subsidiary of The Interpublic Group of Companies. Competition in the international promotions industry includes local companies in each market and a small number of emerging international promotions companies. The Company expects that in 2002 the principal competitors to the Company’s consumer products business will be mid-sized toy companies like Trendmasters, Inc. and JAKKS Pacific, Inc. However, the toy industry includes major toy and game manufacturers such as Hasbro, Inc. and Mattel, Inc. that compete in some of the same product categories as Equity Consumer Products. The Company believes the principal competitive factors affecting its business are development of client promotional strategy, creative execution, license selection, price, product quality and safety and speed of

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production. The Company’s consumer products competitors include companies which have far more extensive sales and development staffs and significantly greater financial resources than does the Company. There can be no assurance that the Company will be able to compete effectively against such companies in the future.

Government Regulation

In the United States, the Company is subject to the provisions of, among other laws, the Federal Consumer Product Safety Act and the Federal Hazardous Substances Act (the “Acts”). The Acts empower the Consumer Product Safety Commission (the “CPSC”) to protect the public against unreasonable risks of injury associated with consumer products, including toys and other articles. The CPSC has the authority to exclude from the market articles which are found to be hazardous and can require a manufacturer to repair or repurchase such toys under certain circumstances. Any such determination by the CPSC is subject to court review. Violations of the Acts may also result in civil and criminal penalties. Similar laws exist in some states and cities in the United States and in many jurisdictions throughout the world. The Company performs quality control procedures (including the inspection of goods at factories and the retention of independent testing laboratories) to ensure compliance with applicable laws. Notwithstanding the foregoing, there can be no assurance that all of the Company’s products are or will be hazard-free. Any material product recall could have a material adverse effect on the Company’s results of operations and financial condition and could also negatively effect the Company’s reputation and the sales of its other products. (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

Employees

As of December 31, 2001, Equity Marketing employed a total of 219 individuals, including 135 individuals located in the United States, 43 individuals located in Europe and 41 individuals employed by and located at Equity Marketing HK. In addition, the Company utilizes, on an ongoing basis, the services of freelance artists and other temporary staff. Equity Marketing believes it maintains satisfactory relations with its employees.

ITEM 2. PROPERTIES

On January 4, 1999, Equity Marketing occupied its corporate offices and studio facilities of approximately 54,000 square feet of leased space in Los Angeles, California. The lease expires July 31, 2005. Equity Marketing Hong Kong, Ltd. occupies approximately 6,000 square feet of leased space in Hong Kong, under a lease which expires August 31, 2002. Logistix occupies approximately 3,800 square feet of leased space in Gerrards Cross outside of London under a lease that expires September 19, 2011 and approximately 6,300 square feet of leased space in Paris under a lease that expires January 2, 2004.

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ITEM 3. LEGAL PROCEEDINGS

The Perper Matter

On February 1, 2002, Alan Perper filed a complaint (No. BC 267 408) against the Company, Donald A. Kurz (Chairman of the Board and Chief Executive Officer of the Company) and Gaetano Mastropasqua (Executive Vice President, Client Services, of the Company) in the Superior Court of the State of California, County of Los Angeles. The plaintiff is a former employee of the Company who was terminated in November 2001. The complaint alleges that the plaintiff was wrongfully terminated and seeks $2,000,000 in compensatory damages plus punitive damages, interest and attorneys’ fees for (i) breach of written contract; (ii) breach of covenant of good faith and fair dealing; (iii) fraudulent deceit; (iv) intentional infliction of emotional distress; and (v) negligent infliction of emotional distress. Pursuant to indemnification agreements between the Company and each of Messrs. Kurz and Mastropasqua, the Company is obligated to defend and indemnify them in this matter. The Company believes the allegations of the complaint are without merit and intends to defend the action vigorously.

General Litigation

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

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

     None

PART II

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

The Company’s Common Stock is traded on the Nasdaq National Market under the symbol EMAK.

As of January 16, 2002 there were approximately 1,165 beneficial holders of the Company’s Common Stock.

The Company currently has no plans to pay dividends on its Common Stock. The Company intends to retain all earnings for use in its business. Under the Company’s current credit facility, the Company cannot pay dividends on its Common Stock without the prior consent of the lenders. (see Note 6 of the accompanying Notes to Consolidated Financial Statements).

The following table sets forth the high and low sales prices on the Nasdaq National Market for the calendar periods indicated:

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read with the Company’s consolidated financial statements and the notes to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The consolidated statements of operations data for the years ended December 31, 1999, 2000 and 2001 and the consolidated balance sheet data at December 31, 2000 and 2001 are derived from the Company’s consolidated financial statements which have been audited by Arthur Andersen LLP, the Company’s independent public accountants, and are included elsewhere in this Form 10-K. The statements of operations data for the years ended December 31, 1997 and 1998 and the consolidated balance sheets dated as of December 31, 1997, 1998 and 1999 are derived from the Company’s consolidated financial statements which have been audited by Arthur Andersen LLP and are not included in this Form 10-K.

Year Ended December 31,				1997				1998				1999				2000				2001
(in thousands, except share and per share data)
Consolidated Statements of Operations and Per Share Data:
Revenues				$	146,328			$	159,136			$	227,063			$	232,287			$	144,316
Cost of sales					105,310				112,153				170,416				172,270				104,129
Provision for production-in-process losses					—				2,666				—				—				—
	Gross Profit				41,018				44,317				56,647				60,017				40,187
Operating expenses:
		Salaries, wages and benefits			11,563				14,550				17,350				17,610				15,924
		Selling, general and administrative			14,330				22,127				22,829				23,075				18,323
		AmeriServe bankruptcy bad debt expense			—				—				1,014				482				—
		Impairment of assets			—				6,712				—				8,504				—
		Business process reengineering			—				2,220				—				—				—
		Logistix integration costs			—				—				—				—				192
		Restructuring loss (gain)			—				4,121				(604	)			(418	)			—
		Total operating expenses			25,893				49,730				40,589				49,253				34,439
		Income (loss) from operations			15,125				(5,413	)			16,058				10,764				5,748
Other income (expense), net					522				(511	)			(510	)			1,375				1,370
		Income (loss) before provision for income taxes			15,647				(5,924	)			15,548				12,139				7,118
Provision for income taxes					6,024				69				6,134				6,797				2,517
		Net income (loss)		$	9,623			$	(5,993	)		$	9,414			$	5,342			$	4,601
Preferred stock dividends					—				—				—				956				1,500
Net income (loss) available to common stockholders				$	9,623			$	(5,993	)		$	9,414			$	4,386			$	3,101
Basic income (loss) per share:
		Income (loss) per share		$	1.63			$	(0.98	)		$	1.51			$	0.70			$	0.52
Basic weighted average shares outstanding					5,913,313				6,089,618				6,227,842				6,275,590				5,996,662
Diluted income (loss) per share:
		Income (loss) per share		$	1.55			$	(0.98	)		$	1.46			$	0.68			$	0.50
Diluted weighted average shares outstanding					6,216,794				6,089,618				6,440,738				6,460,557				6,164,154

As of December 31,		1997				1998				1999				2000				2001
(in thousands)
Consolidated Balance Sheet Data:
Working capital		$	28,128			$	4,268			$	11,045			$	52,140			$	36,620
Total assets			57,153				115,480				97,244				110,542				99,487
Long-term debt			—				—				—				—				—
Stockholders’ equity			36,140				32,407				42,025				45,241				42,473

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

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

Year Ended December 31,			1999				2000				2001
Revenues				100.0	%			100.0	%			100.0	%
Cost of sales				75.1	%			74.2	%			72.2	%
Gross Profit				24.9	%			25.8	%			27.8	%
Operating expenses:
	Salaries, wages and benefits			7.6	%			7.6	%			11.0	%
	Selling, general and administrative			10.1	%			9.9	%			12.7	%
	AmeriServe bankruptcy bad debt expense			0.4	%			0.2	%			—	%
	Impairment of assets			—	%			3.7	%			—	%
	Logistix integration costs			—	%			—	%			0.1	%
	Restructuring loss (gain)			(0.3	)%			(0.2	)%			—	%
	Total operating expenses			17.8	%			21.2	%			23.8	%
	Income from operations			7.1	%			4.6	%			4.0	%
Other income (expense), net				(0.2	)%			0.6	%			0.9	%
	Income before provision for income taxes			6.9	%			5.2	%			4.9	%
Provision for income taxes				2.7	%			2.9	%			1.7	%
	Net income			4.2	%			2.3	%			3.2	%

EBITDA

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

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Year ended December 31, 2001 compared to year ended December 31, 2000

Revenues in 2001 decreased $87,971, or 37.9%, to $144,316 from $232,287 in 2000. Promotions revenues decreased $91,302, or 43.8%, to $117,305 from $208,607 primarily as a result of decreased revenues associated with Burger King programs in 2001 as compared to 2000 (see below). This decrease was partially offset by promotional revenues generated by Logistix following its acquisition by the Company in July 2001. Consumer products revenues increased $3,331, or 14.1%, to $27,011 from $23,680 in 2000. This increase is primarily due to revenue generated by Robot Wars™ product subsequent to the Logistix acquisition.

Although the Company’s share of Burger King’s custom promotional products business in 2001 was consistent with 2000 levels, the dollar volume of custom promotional product purchases by Burger King from the Company declined in 2001 by approximately 49%. 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 will increase in 2002 compared 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 $68,141 to $104,129 (72.2% of revenues) from $172,270 (74.2% of revenues) in 2000 due primarily to lower revenues in 2001. The gross margin percentage for the year increased to 27.8% from 25.8% in 2000. This increase is a result of a greater relative mix of higher margin Consumer Products revenue and increased efficiencies produced throughout the Company’s operations.

Salaries, wages and benefits decreased $1,686 in 2001, or 9.6%, to $15,924 (11.0% of revenues) from $17,610 in 2000 (7.6% of revenues). The decrease was primarily attributable to a reduction in 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 $4,752 in 2001, or 20.6%, to $18,323 (12.7% of revenues) from $23,075 (9.9% of revenues) in 2000. This decrease is due primarily to decreases in freight out, warehousing costs, product development costs and bad debt all resulting from the decrease in sales volume. This decrease is also attributable to a decline in travel and entertainment expenses, marketing expenses and outside services costs, partially offset by an increase in advertising expense and insurance expense. The decrease is also attributable to a reduction in amortization expense resulting from the write-off of the goodwill and trademark in December 2000 associated with the 1998 acquisition of Corinthian Marketing, Inc. Selling, general and administrative expenses increased as a percentage of revenues from 9.9% in 2000 to 12.7% in 2001 as a result of lower revenues, which decreased at a greater rate.

The AmeriServe bad debt expense in 2000 represents a charge resulting from the bankruptcy of AmeriServe. (see “AmeriServe Bankruptcy” below).

In 2000, the Company recorded a charge for impairment of assets of $8,504 for the write-off associated with the impairment of the goodwill and the Headliners® trademark acquired in the Company’s purchase in 1998 of Corinthian Marketing Inc. The impairment is a result of the Company’s decision at the end of 2000 to decrease the marketing of the Headliners® brand in the future and of its decision not to pursue new Headliners® licenses or renew expiring licenses. This decision was pursuant to a continued slowdown in sales in the sports collectible market.

The Logistix integration costs totaling $192 incurred in 2001 represent expenses directly related to the integration of Logistix.

The restructuring gain recorded in 2000 primarily represents a reversal of a portion of the 1998 restructuring charge related to outstanding inventory purchase commitments and the lease commitment for a warehouse facility. (see Note 2, “Restructuring Charge” in the accompanying Notes to Consolidated Financial Statements).

Other income is composed primarily of net interest income of $1,446 and a loss on foreign exchange of $76. Net interest income decreased $41 in 2001 from $1,487 in 2000. The decrease was due to a decline in interest rates and to the reduced level of cash and cash equivalents as a result of the acquisition of Logistix and the stock buyback program as well as a reduction in imputed interest income on a note receivable (see “AmeriServe Bankruptcy”).

The effective tax rate changed in 2001 to 35.4% from 56.0% in 2000. This decrease was due primarily to the write-off of non-deductible goodwill related to Corinthian in 2000 and tax free municipal interest income earned in 2001.

Net income decreased $741, or 13.9%, to $4,601 in 2001 (3.2% of revenues) from $5,342 in 2000 (2.3% of revenues) primarily due to lower gross profits earned on decreased revenues, partially offset by a decrease in salaries and benefits, selling, general and administrative expenses and a lower effective tax rate in 2001. 2000 net income was negatively impacted by the impairment of assets and AmeriServe bankruptcy bad debt expense incurred in 2000.

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EBITDA in 2001 decreased $13,088, or 60.9%, to $8,417 from $21,505 in 2000 primarily due to lower gross profits earned on decreased revenues in 2001, partially offset by a decrease in salaries, wages and benefits and selling, general and administrative expenses for the year ended December 31, 2001. (see “EBITDA” above).

Year ended December 31, 2000 compared to year ended December 31, 1999

Revenues in 2000 increased $5,224, or 2.3%, to $232,287 from $227,063 in 1999. Promotions revenues increased $6,412, or 3.2%, to $208,607 primarily as a result of increased revenues in 2000 associated with several large international Burger King promotions based on Nintendo’s Pokémon™ property. This increase was partially offset by a decrease in revenues from domestic Burger King promotions compared to 1999, which included an extraordinarily large Pokémon™ promotion in the fourth quarter. The increase in promotional revenue was also the result of growth in the non-Burger King promotions business, which grew 13% compared to 1999. Consumer Products revenues decreased $1,188, or 4.8%, to $23,680 from $24,868 in 1999. Excluding liquidation sales of discontinued consumer product lines of $2,875 in 1999 related to the Company’s decision to exit the event-based-license consumer product business, sales in 2000 increased $1,687, or 7.7%, primarily due to increased sales in Scooby-Doo™ and Tub Tints® product, partially offset by reduced sales of Headliners®.

Cost of sales increased $1,854 to $172,270 (74.2% of revenues) from $170,416 (75.1% of revenues) in 1999 due primarily to higher revenues in 2000. The gross margin percentage for the year increased to 25.8% from 24.9% in 1999. This increase is partially a result of lower than expected returns and better than expected sales from a promotional program, which was closed in the prior year. The increase was also due to improved margins in the Company’s Consumer Products and non-Burger King promotion businesses.

Salaries, wages and benefits increased $260, or 1.5%, to $17,610 (7.6% of revenues). This increase was primarily due to staffing additions resulting from the Company’s growth initiatives in 2000.

Selling, general and administrative expenses increased $246, or 1.1%, to $23,075 (9.9% of revenues) due primarily to increased warehousing costs and higher creative design and development costs associated with several large 2000 promotional programs. These increases were partially offset by reduced shipping and commission expenses. Selling, general and administrative expenses decreased as a percentage of revenues from 10.1% to 9.9% as a result of revenues which increased at a greater rate.

The AmeriServe bad debt expense represents a charge resulting from the bankruptcy of AmeriServe. (see “AmeriServe Bankruptcy” below).

The Company recorded a charge for impairment of assets of $8,504 for the write-off associated with the impairment of the goodwill and the Headliners® trademark acquired in the Company’s purchase in 1998 of Corinthian. The impairment is a result of the Company’s decision at the end of 2000 to decrease the marketing of the Headliners® brand in the future and of its decision not to pursue new Headliners® licenses or renew expiring licenses. This decision was pursuant to a continued slowdown in sales in the sports collectible market.

The restructuring gain primarily represents a reversal of a portion of the 1998 restructuring charge related to outstanding inventory purchase commitments and the lease commitment for a warehouse facility. (see Note 2, “Restructuring Charge” in the accompanying Notes to Consolidated Financial Statements).

Other income is composed primarily of net interest income of $1,487 and a loss on disposal of fixed assets of $112. Net interest income increased $2,230 from net interest expense of $743 in 1999 as a result of $1,084 of imputed interest income recorded on a note receivable (see “AmeriServe Bankruptcy”) and to additional interest income earned on the cash proceeds received from the issuance of preferred stock. (see “Issuance of Preferred Stock”).

The effective tax rate changed in 2000 to 56.0% from 39.5% in 1999. This increase was due to the write-off of non-deductible goodwill related to Corinthian.

Net income decreased $4,072, or 43.3%, to $5,342 in 2000 (2.3% of revenues) from $9,414 (4.2% of revenues) primarily due to the $8,504 write-off of unamortized goodwill and other intangibles recorded in connection with the 1998 acquisition of Corinthian and the AmeriServe bankruptcy bad debt expense, partially offset by greater gross profits earned on increased revenues and a restructuring gain in 2000. Excluding the impact of the restructuring gain, AmeriServe bad debt expense and the impairment of assets, the Company would have reported net income of approximately $12,828 or $1.69 per diluted share in 2000.

EBITDA in 2000 increased $3,343, or 18.4%, to $21,505 from $18,162 in 1999 primarily due to greater gross profits earned on increased revenues in 2000, partially offset by the increase in salaries, wages and benefits and selling, general and administrative for the year ended December 31, 2000.

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Financial Condition and Liquidity

The Company’s financial position remained strong in 2001 primarily due to its profitable operating results. At December 31, 2001, the Company had no debt and its cash and marketable securities were $29,135, compared to $37,505 as of the prior year.

As of December 31, 2001, the Company’s net accounts receivable decreased $7,442 to $22,695 from $30,137 in 2000. This was primarily due to the reduced sales volume levels in 2001 as compared to 2000. At December 31, 2001, inventory decreased $2,407 to $9,337 from $11,744 in 2000. This was primarily due to a reduction in Burger King inventory partially offset by Logistix inventory as compared to the same period in 2000.

At December 31, 2001, accounts payable increased $3,693 to $22,114 from $18,421 in 2000. Due to customer decreased $7,797 to $3,928 from $11,725 in 2000. At December 31, 2001, accrued liabilities, including accrued payroll and payroll related costs, decreased $4,662 to $5,588 from $10,250 in 2000. The increase in accounts payable was primarily due to additional payables subsequent to the acquisition of Logistix. This increase was partially offset by a reduction in accounts payable to vendors for Burger King product as a result of reduced sales volume levels. The decrease in due to customer was primarily due to the payment in 2001 of royalty and administrative fees collected from distribution centers in the fourth quarter of 2000 (for large promotional programs in that quarter) on behalf of promotional customers. The decrease in accrued liabilities was primarily attributable to the payment of employee bonuses related to 2000 and the payment of federal and state income taxes related to 2000 net income.

At December 31, 2001, working capital was $36,620 compared to $52,140 at December 31, 2000. The decrease in working capital was primarily due to the cash used in the acquisition of Logistix and cash used to repurchase the Company’s common stock (see “Stock Repurchase”), partially offset by cash generated by operating activities for the year ended December 31, 2001.

The Company’s current strategy and business plan calls for the consummation of additional acquisitions as well as the continued repurchase of the Company’s common stock. The Company plans to continue to evaluate the level of such expenditures in the context of the capital available to it and changing market conditions.

The Company believes that its cash from operations, cash on hand at December 31, 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. (see “Credit Facilities” and Note 6 of the accompanying Notes to Consolidated Financial Statements).

Future minimum annual commitments for guaranteed minimum royalty payments under license agreements, non-cancelable operating leases, employment agreements, guaranteed royalty commitments, minimum advertising commitments and letters of credit as of December 31, 2001 are as follows:

		2002				2003				2004				2005				2006				Thereafter				Total
Operating Leases		$	1,801			$	1,851			$	1,952			$	1,197			$	1,061			$	2,267			$	10,129
Guaranteed Royalties			1,235				3,037				9				—				—				—				4,281
Advertising Commitments			1,000				1,846				—				—				—				—				2,846
Employment Agreements			405				—				—				—				—				—				405
Total		$	4,441			$	6,734			$	1,961			$	1,197			$	1,061			$	2,267			$	17,661

The Company had no material commitments for capital expenditures at December 31, 2001. Letters of credit outstanding as of December 31, 2000 and 2001 totaled $414 and $551, respectively.

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 November 14, 2001 and February 8, 2002 certain covenants under the facility were amended. The Company was in compliance with the amended requirements as of December 31, 2001. The Facility may be used for working capital and acquisition financing purposes. As of December 31, 2001, there were no amounts outstanding under the Facility.

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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 year through July 31, 2004. The acquisition was financed through the Company’s existing cash reserves.

Issuance of Preferred Stock

On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability company (“Crown”), invested $11,900 in the Company in exchange for preferred stock and warrants to purchase additional preferred stock. Under the terms of the investment, Crown acquired 11,900 shares of Series A mandatory redeemable senior cumulative participating convertible preferred stock, par value $.001 per share, of the Company (the “Series A Stock”) with a conversion price of $14.75 per share. In connection with such purchase, the Company granted to Crown five year warrants (collectively, the “Warrants”) to purchase 5,712 shares of Series B senior cumulative participating convertible preferred stock, par value $.001 per share, of the Company (the “Series B Stock”) at an exercise price of $1,000 per share, and 1,428 shares of Series C senior cumulative participating convertible preferred stock, par value $.001 per share, of the Company (the “Series C Stock”) at an exercise price of $1,000 per share. The Warrants are immediately exercisable. The conversion prices of the Series B Stock and the Series C Stock are $16.00 and $18.00, respectively. On June 20, 2000, Crown paid an additional $13,100 to the Company in exchange for an additional 13,100 shares of Series A Stock with a conversion price of $14.75 per share. In connection with such purchase, the Company granted to Crown Warrants to purchase an additional 6,288 shares of Series B Stock and an additional 1,572 shares of Series C Stock. Each share of Series A Stock is convertible into 67.7966 shares of Common Stock, representing 1,694,915 shares of Common Stock in aggregate. Each share of Series B Stock and Series C Stock is convertible into 62.5 and 55.5556 shares of Common Stock, respectively, representing 916,666 shares of Common Stock in aggregate. Also in connection with such purchase, the Company agreed to pay Crown a commitment fee in the aggregate amount of $1,250, paid in equal quarterly installments of $62.5 commencing on June 30, 2000 and ending on March 31, 2005. The Company paid $250 in fees for the year ended December 31, 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. Total dividend for the year ended December 31, 2001 amounted to $1,500, of which $375 was paid in January 2002 and recorded in accounts payable in the accompanying consolidated balance sheet as of December 31, 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.

The Series A Stock is recorded in the accompanying consolidated balance sheets at its Liquidation Preference net of issuance costs. The issuance costs total approximately $1,951 and include an accrual of approximately $1,000 for the present value of the commitment fee discussed above.

Stock Repurchase

The Company’s Board of Directors has authorized up to $10,000 for the repurchase of the Company’s Common Stock over a twelve month period. The repurchase program commenced on July 21, 2000 and expired July 21, 2001. During this period, the Company spent $6,430 to purchase an aggregate of 523,594 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 December 31, 2001 the Company spent $5,196 to purchase 423,400 shares at an average price of $12.27 per share including commissions. Since initiating the overall buyback program on July 20, 2000, the Company has spent $11,644 to purchase a total of 948,494 shares at an average price of $12.28 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 is being funded through a combination of working capital and bank debt.

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Inflation

The effect of inflation on the Company’s operations during 2001 was insignificant. The Company will continue its policy of controlling costs and adjusting prices to the extent permitted by competitive factors.

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.

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 year ended December 31, 2000. This charge was offset by $1,084 of imputed interest income, at 9% per annum, recorded on the note receivable for 2000. The balance of the note receivable as of December 31, 2001 was $2,183, which was recorded as a current asset as the note is due on March 29, 2002. For the year ended December 31, 2001, the Company recorded $411 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 20.8% of the products purchased from the Company by the Burger King system for the year ended December 31, 2001. As of December 31, 2001, one distribution company which serves the international distribution channel for the Burger King system accounted for 11.5% of total net accounts receivable.

Pokémon Recall

On December 27, 1999, Burger King announced that in cooperation with the CPSC it would conduct a voluntary recall of Pokémon™ balls included with Burger King kids meals. The Company designed and manufactured 151 trading cards and 57 gift-with-purchase products based on Pokémon™ for Burger King. Burger King, its franchisees and RSI incurred substantial costs in the conduct of the Pokémon™ ball recall, including costs for legal expenses, advertising, collection and destruction of Pokémon ™ balls, and free goods. RSI has communicated to the Company that its costs incurred in connection with the Pokémon™ ball recall totaled approximately $1.94 million (which includes certain costs incurred by Burger King and its affiliates, including its franchisees). Although the Company strongly believes it met all of its contractual obligations with respect to the Pokémon ™ ball, the Company may be requested to reimburse Burger King and its affiliates, including its franchisees and RSI, for some or all of these costs. As of the date hereof, Burger King has not requested reimbursement of such costs, and the Company is engaged in ongoing discussions with RSI which could result in taking these costs into account as part of an expansion of the contractual and business relationship between the two companies.

Related Party Transactions

Stephen P. Robeck, formerly Chairman of the Board and Co-Chief Executive Officer, entered into a consulting agreement with the Company commencing on January 1, 1999 and ending on December 31, 2001. The agreement provided that Mr. Robeck would serve as a financial and business consultant to the Company and be available to fulfill his obligations thereunder no less than twenty hours per month. The agreement contained provisions restricting Mr. Robeck’s ability to compete with the Company while providing services as a consultant and to solicit the Company’s employees through the first anniversary of the end of the consulting period. Under the agreement, Mr. Robeck received a consulting fee of $210 per year, a car allowance of $18 per year and certain medical, disability and life insurance benefits.

In April 2001, the Company contracted to purchase print management services from ISG, a company controlled by Jeffrey S. Deutschman, Jason Ackerman and affiliates. In 2001, the Company paid ISG approximately $460 in print management fees. The Company believes that such services were negotiated on an arms length basis. Mr. Deutschman, a director of the Company, is a manager of Crown. Mr. Ackerman, a director of the Company, is a manager of Crown.

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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 July 1, 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 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 4). 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 operations, and is in the process of assessing other impacts from SFAS No. 142. The total after tax amount of goodwill amortization was $485 for the year ended December 31, 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.

Selected Significant Accounting Policies

Revenue Recognition

For product related sales, the Company records revenues when title and risk of loss pass to the customer. When a right of return exists, the Company’s practice is to estimate and provide for any future returns at the time of sale, in accordance with SFAS No. 48, “Revenue Recognition When Right of Return Exists.” Accruals for customer discounts and rebates and defective returns are recorded as the related revenues are recognized.

Service revenues include all amounts that are billable to clients under service contracts. Service related revenues are recognized on a time and materials basis, or on a straight-line basis, depending on the contract. Revenue from time and material service contracts is recognized as the services are rendered. Revenue from fixed price retainer contracts is recognized on a straight-line basis over the contract term. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimable. Reimbursements, including those relating to travel and other out-of-pocket expenses, and other similar third-party costs, such as printing costs, are included in revenues, and an equivalent amount of reimbursable expenses are included in cost of sales. Service revenues for the years ended December 31, 1999, 2000 and 2001 totaled $0, $347 and $3,215, respectively.

The Company’s revenue recognition policies are in compliance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101: “Revenue Recognition in Financial Statements.”

Goodwill and Other Intangibles

The Company accounts for goodwill and other intangible assets acquired prior to July 1, 2001 under the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of.” This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The carrying value of existing assets are reviewed when events or changes in circumstances indicate that an impairment test is necessary in order to determine if an impairment has occurred. When factors indicate that such assets should be evaluated for possible impairment, the Company will estimate undiscounted future cash flows before interest expected to result from the use of the assets over their remaining amortization period and their eventual disposition, and compare the amounts to the carrying value of the assets to determine if an impairment loss has occurred. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds their estimated fair value.

The Company accounts for goodwill and other intangible assets acquired after July 1, 2001 in accordance with SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” (see Recent Accounting Pronouncements). Under the provisions of SFAS No. 142, the carrying value of assets acquired, including goodwill, are reviewed annually. During such a review the Company will estimate the fair value of the reporting unit to which the assets were assigned by discounting the reporting unit’s estimated future cash flows before interest. The Company will compare the discounted flows to the carrying value of the acquired net assets to determine if an impairment loss has occurred. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds their estimated fair values.

Royalties

The Company enters into agreements to license intellectual properties such as trademarks, copyrights, and patents. The agreements may call for minimum amounts of royalties to be paid in advance and throughout the term of the agreement, which are non-refundable in the event that product sales fail to meet certain minimum levels. Advance royalties resulting from such transactions are stated at the lower of the amounts paid or the amounts estimated to be recoverable from future sales of the related products. Furthermore, minimum guaranteed royalty commitments are reviewed on a periodic basis to ensure that amounts are recoverable based on estimates of future sales of the products under license. A loss provision will be recorded in the consolidated statements of operations to the extent that future minimum royalty guarantee commitments are not recoverable. Estimated future sales are projected based on historical experience, including that of similar products, and anticipated advertising and marketing support by the licensor.

Cautionary Statements and Risk Factors

This section is written to be responsive to the Securities and Exchange Commission’s “Plain English” guidelines. In this section the words “we”, “our”, “ours” and “us” refer only to Equity Marketing, Inc. and its subsidiaries and not any other person. Set forth below and elsewhere in this Form 10-K and in other documents we file with the Securities and Exchange Commission are important risks and uncertainties that could cause our actual results of operations, business and financial condition to differ materially from the results contemplated by the forward looking statements contained in this Form 10-K.

We Depend Significantly on One Key Customer

Our success is largely dependent on a single customer, Burger King, which accounted for approximately 80%, 80% and 66% of our revenues for the years ended December 31, 1999, 2000 and 2001, respectively. Burger King has no contractual commitment to do business with us. There can be no assurance that Burger King will do business with us in the future. The termination or a significant reduction by Burger King of its business with us would adversely affect our business. The Burger King business is also subject to significant year-to-year variability. For instance, the Company’s revenues generated by its business with Burger King dropped from $186,349 in 2000 to $95,405 in 2001. The success of our business with Burger King is also partially dependent on the overall success of the Burger King system, which sales could be negatively impacted by such factors as increased competition, a change in ownership, product recalls or bovine spongiform encephalopathy, commonly known as “mad cow” disease. (see “Business— Equity Promotions” and Note 11 of Notes to Consolidated Financial Statements).

We Rely on a Limited Number of Nonrenewable Product Orders

A large portion of our revenues come from a relatively limited number of promotional programs by Burger King, which promotions are in effect for only a limited period of time and generally are not repeated. We must continually develop and sell new products and services for utilization in new promotional programs as part of Burger King’s annual promotions calendar (see “Business— Equity Promotions”). Many consumer products are successfully marketed for only one or two years as a result of changing consumer preferences. Accordingly, our consumer products business depends on the ability to develop and market new products associated with new entertainment properties or proprietary concepts. There can be no assurance that any new retail product line will be successful (see “Business— Equity Consumer Products”). The cancellation or premature termination of one or more retail product lines or promotional programs, because of our inability to renew or extend licenses (which typically have terms of three years or less) on favorable terms or otherwise, or a significant change in promotional practices within the quick service restaurant industry, could have a material adverse effect on us. In addition, there can be no assurance that we or our customers will be able to secure licenses for additional entertainment properties on which to base our promotional and consumer products or that, if secured, such licenses will result in successful products.

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We Face the Risk of Product Liability Claims

Products that we develop or sell may expose us to liability from claims by users of such products for damages including, but not limited to, bodily injury or property damage. We currently maintain product liability insurance coverage in amounts that we believe are adequate. There can be no assurance that we will be able to maintain such coverage or obtain additional coverage on acceptable terms in the future, or that such insurance will provide adequate coverage against all potential claims.

We Face the Risk of Product Recalls

Products that we develop or sell may expose us to liability for the costs related to product recalls. These costs can include legal expenses, advertising, collection and destruction of product, and free goods. Our product liability insurance coverage generally excludes such costs and damages resulting from product recall.

We Face Credit Risk

We regularly extend credit to several distribution companies in connection with our business with Burger King. Failure by one or more distribution companies to honor their payment obligations to us could have a material adverse effect on our operations.

Our Future Operating Results are Difficult to Predict

We experience significant quarter-to-quarter variability in our revenues and net income. The promotions business tends to include larger promotions in the summer and during the winter holiday season. Major movie and television release schedules also vary year-to-year, influencing the promotional schedules of our customers, as well as the particular promotions for which we are retained. The motion picture or television characters on which the promotions business is often based may only be popular for short periods of time or not at all. There may not be comparable popular characters or similar promotional campaigns in the future. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarter our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our Common Stock may fall significantly.

The Success of Our Products Depends on the Popularity of Licensed Materials

Our promotional and consumer products are typically based on entertainment properties, such as characters from current motion pictures or television programs. The success of these products depends on the popularity of the entertainment properties on which they are based. Each motion picture and television program is an individual artistic work, and its commercial success is dependent on unpredictable consumer preferences. Often we spend substantial resources in securing licenses and developing and manufacturing products prior to a release of the motion picture or television program upon which the products are based. Our customers, such as Burger King, typically require delivery schedules that coincide with the release of the underlying entertainment properties. Our results of operations may be adversely affected if the entertainment properties upon which our products are based turn out to be less popular than we anticipate. Also, delays in the release of motion pictures or television programs could result in delays or cancellations of our promotions. (see “Business— Equity Promotions”).

Our Markets Are Highly Competitive

The markets in which our businesses operate are highly competitive. Our competitors, and in many cases their parent companies, include companies which have far more extensive sales and development staffs and significantly greater financial, marketing and other resources than we do. There can be no assurance that we will be able to compete effectively against such companies.

We Rely on Foreign Manufacturers

During 2001, approximately 95% of our products were manufactured in China. Foreign manufacturing is subject to a number of risks, including transportation delays and interruptions, political and economic disruptions, the imposition of tariffs, quotas and other import or export controls, and changes in governmental policies.

We Face Foreign Currency Risk

As part of our business, we enter into contracts for the purchase and sale of products with entities in foreign countries. While the vast majority of our contracts are denominated in U.S. dollars, significant fluctuations in the local currencies of the entities with whom we transact business may adversely affect these entities’ abilities to fulfill their obligations under their contracts.

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Logistix enters into contracts denominated primarily in U.S. dollars, British pounds sterling and Euro’s. Although the Company attempts to reduce its exposure to changes in foreign currency exchange rates through the use of certain hedging techniques, changes in such exchange rates may result in changes in the value of the Company’s commitments and anticipated foreign currency cash flows.

There Are Risks Associated with Acquisitions

If we are presented with appropriate opportunities, we intend to make investments in complementary companies, products or technologies. We may not realize the anticipated benefits of any acquisitions or investment. If we buy a company, we could have difficulty in assimilating that company’s personnel and operations. In addition, the key personnel of the acquired company may decide not to work for us. If we make other types of acquisitions, we could have difficulty in assimilating the acquired technology or products into our operations. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to goodwill and other intangible assets, which could adversely affect our results of operations and financial condition.

A Significant Portion of our Common Stock is Controlled by our Officers and Directors

Donald A. Kurz and Stephen P. Robeck beneficially own approximately 28% and 16%, respectively, of our outstanding Common Stock. Mr. Kurz is our Chairman of the Board and Chief Executive Officer. Mr. Robeck is a member of the Board of Directors. Crown owns 100% of the outstanding shares of the Company’s Series A senior cumulative participating convertible preferred stock, representing 1,694,915 shares of Common Stock on an as converted basis. These stockholders, either individually or acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.

We May Issue Preferred Stock

The Board of Directors has authority to issue up to one million shares of preferred stock, and to fix the rights, preferences, privileges and restrictions of those shares without any further vote or action by our stockholders. The potential issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of, and the voting and other rights of, the holders of Common Stock.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Impact of Interest Rate Changes

The amounts borrowed under the Company’s credit facility are at variable interest rates, and the Company is subject to market risk resulting from interest rate fluctuations. No amounts were outstanding under the facility as of December 31, 2001.

Impact of Foreign Currency Fluctuation

Approximately 7% of the Company’s revenues are denominated in foreign currencies, and the Company is subject to market risks resulting from fluctuations in foreign currency exchange rates. In certain instances, the Company enters into foreign currency exchange contracts in order to reduce exposure to changes in foreign currency exchange rates that affect the value of its firm commitments and certain anticipated foreign currency cash flows. The Company currently intends to continue to enter into such contracts to hedge against future material foreign currency exchange rate risks.

In September 2001, the Company’s Logistix subsidiary entered into a foreign currency forward contract to sell Euro’s in exchange for pound sterling aggregating GBP 979 at an average rate of 1.587, which expires in May 2002. At December 31, 2001, this foreign currency forward contract had a balance of GBP 747 and an estimated fair value of $29.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Financial Statements referred to in the accompanying Index setting forth the consolidated financial statements of the Company, together with the reports of independent public accountants dated February 27, 2002.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table provides information with respect to the executive officers and directors of the Company.

Donald A. Kurz became Chairman and Chief Executive Officer of Equity Marketing in January 1999, after serving as President and Co-CEO from 1991 through 1998. He has also served as a director since 1990, when he joined Equity Marketing as Executive Vice President. Mr. Kurz was previously a management consultant with the general management consulting division of Towers Perrin, where he was a vice president and senior partner and eventually headed the firm’s New York office. Mr. Kurz earned a bachelor’s degree from Johns Hopkins University and a master’s in business administration from Columbia University Graduate School of Business.

Kim H. Thomsen joined Equity Marketing in 1991 and is currently responsible for the creative direction for all of the company’s promotions and consumer products. She was promoted to her current post in early 2000. Prior to joining Equity Marketing, she operated her own business as a creative consultant. Ms. Thomsen earned her bachelor’s degree from Cornell University.

Bret R. Hadley joined Equity Marketing in July 2001 and is responsible for the Company’s Consumer Products division as well as all product realization, including manufacturing, quality control and distribution. 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. 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 Equity Marketing in 1997 as a Senior Director responsible for the company’s Burger King account. Mr. Mastropasqua oversees the company’s Burger King business. He was promoted to his current post in July 2000, and has added oversight of the company’s client services division to his responsibilities. His prior experience includes approximately seven years with American Express, where he ultimately became a vice president of business development, and more than three years with Andersen Consulting in Europe. He holds a bachelor’s degree from McGill University and a master’s in business administration from the Kellogg Graduate School of Management, Northwestern University.

Lawrence J. Madden joined Equity Marketing in November 2000 as Senior Vice President and Chief Financial Officer. He is responsible for the Company’s finance, treasury, accounting, management information systems and corporate development functions. From October 1999 to October 2000, he served as Executive Vice President and Chief Financial Officer for Atomic Pop, an online music company. From November 1997 to October 1999, Mr. Madden was the Senior Vice President and Chief Financial Officer for the recorded music and music publishing investments of Wasserstein & Co., Inc. From April 1994 to November 1997, he worked at PolyGram, a major entertainment company based in New York, serving first as the top audit officer for the corporation’s North American operations and later as the Vice President, Finance and Administration for Def Jam Records, a PolyGram subsidiary. Mr. Madden began his career with Ernst & Young in New York, where he worked for eight years, from September 1986 to April 1994. Mr. Madden received his master’s in business administration from New York University and his bachelor’s degree from Albany State University.

Leland P. Smith joined Equity Marketing in 1998 as Senior Vice President, General Counsel and Secretary. He is responsible for the company’s legal, human resources and board administration functions. Mr. Smith was previously Assistant General Counsel for Mattel,

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Inc., and an associate in the corporate department with Riordan & McKinzie. He holds a bachelor’s degree from Amherst College and a juris doctor and a master’s in business administration from the University of Southern California.

Sanford R. Climan is Managing Director of Entertainment Media Ventures, a Los Angeles-based venture capital fund focused on investment in the areas of technology and media. He has been an Equity Marketing director since 1998. From June 1997 through February 1999, he was a senior executive with Creative Artists Agency (“CAA”). From October 1995 through May 1998, he was an Executive Vice President for Universal Studios and, from June 1986 through September 1995, he was a senior executive with CAA. Mr. Climan holds a bachelor’s degree from Harvard College, a master’s of science in health policy and management from Harvard School of Public Health and a master’s in business administration from Harvard Business School.

Jonathan D. Kaufelt, a prominent tax and business attorney, has been an Equity Marketing director since November 2000. Mr. Kaufelt most recently led the business and tax department at Armstrong, Hirsch, Jackoway, Tyerman & Wertheimer, P.C., a leading entertainment law firm in Los Angeles. He joined the firm in 1986, after nine years at two New York law firms — Kay, Collyer & Boose from 1982 to 1986 and Simpson, Thacher & Bartlett from 1977 to 1982. Mr. Kaufelt earned a juris doctor from Georgetown University, a master of laws in taxation from New York University and a bachelor’s degree from the University of Pennsylvania. He serves on the board of Planned Parenthood of Los Angeles and as a trustee of Rutgers Preparatory School in Somerset, New Jersey.

Mitchell H. Kurz is the Chairman and founder of Kurz and Friends, a consulting company to the global advertising and marketing services business. He has been an Equity Marketing director since March 1999. Mr. Kurz retired from Young & Rubicam Inc. in December 1998, following a 24-year career during which he held numerous executive positions. His most recent position at Young & Rubicam was Chairman of client services, where he oversaw key global client relationships representing approximately 50% of the company’s annual revenues. From 1996 to 1998, he was President and Chief Operating Officer of Young & Rubicam Advertising, and from 1992 to 1996, he was Worldwide Chief Executive Officer of Wunderman Cato Johnson, a Young & Rubicam operating unit. Mr. Kurz received his master’s in business administration from Harvard Business School and his bachelor’s degree from Dartmouth College. Mr. Kurz is the brother of Donald A. Kurz, the Company’s Chairman and Chief Executive Officer.

Alfred E. Osborne, Jr. is the founder and director of the Harold Price Center for Entrepreneurial Studies at UCLA’s Anderson Graduate School of Management. He has been an Equity Marketing director since December 2000. Dr. Osborne joined UCLA in 1972, serves as a management professor, and has served as an Associate Dean and the Director of the MBA program before founding the Harold Price Center for Entrepreneurial Studies in 1987. During that time, he was also the Brookings Institution Economic Policy Fellow at the Securities and Exchange Commission. He is currently on the Boards of Directors of Nordstrom, Inc. and K2, Inc., and is an individual general partner of Technology Funding Venture Partners V and a trustee of the WM Group of Funds. Dr. Osborne holds a doctorate in business-economics, a master’s in business administration, a master’s in economics and a bachelor’s degree all from Stanford University.

Bruce Raben is a managing director with CIBC World Markets, an investment banking firm. He has been an Equity Marketing director since 1993. From 1990 through 1995, he was an Executive Vice President with Jeffries & Company, an investment-banking firm. Mr. Raben received a bachelor’s degree from Vassar College and a master’s in business administration from Columbia University Graduate School of Business.

Stephen P. Robeck has been an Equity Marketing director since 1989 and is currently pursuing other business interests. From January 1999 through December 2001, he served as a consultant to the Company. He was elected Chairman and Co-Chief Executive officer in September 1991 and served in that role through December 1998. Between 1987 and September 1991, he served as Chief Operating Officer. Mr. Robeck received his bachelor’s degree from Lake Forest College.

Jason Ackerman has been a Managing Director of Crown Capital Group since 1997. He has been an Equity Marketing director since September 2001. Prior to joining Crown Capital Group, he was a Senior Vice President in the Corporate Finance Department of Donaldson Lufkin & Jenrette (“DLJ”), in the Los Angeles office. At DLJ, he specialized in high yield financings and financial restructurings for corporate clients, primarily in the supermarket and specialty retail industries. Before joining DLJ in 1990, he served one year at Drexel Burnham Lambert as a financial analyst in the Corporate Finance Department. Mr. Ackerman received his bachelor’s degree from Boston University.

Jeffrey S. Deutschman has been a Managing Director of Crown Capital Group since 1997. He has been an Equity Marketing director since March 2000. Prior to joining Crown, he was a Partner at Aurora Capital Partners, a leveraged buyout fund, from 1992 through 1995, a Partner at Deutschman, Clayton & Company, an investment firm engaged in management buyout transactions, from 1987 through 1991 and a Principal at Spectrum Group, Inc., which specialized in leveraged acquisitions, from 1981 through 1986. Mr. Deutschman received a master’s in business administration from UCLA’s Anderson Graduate School of Management and his bachelor’s degree from Columbia University.

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Additional information relating to this item appears under the caption “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Company’s Proxy Statement relating to the Company’s 2002 Annual Meeting of Stockholders, which is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information relating to this item appears under the captions “ELECTION OF DIRECTORS”, “EXECUTIVE COMPENSATION AND RELATED MATTERS” and “REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION” in the Company’s Proxy Statement relating to the Company’s 2002 Annual Meeting of Stockholders, which are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information relating to this item appears under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” in the Company’s Proxy Statement relating to the Company’s 2002 Annual Meeting of Stockholders, which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to this item appears under the caption “ELECTION OF DIRECTORS” in the Company’s Proxy Statement relating to the Company’s 2002 Annual Meeting of Stockholders, which is incorporated herein by reference.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K

     (A). List of documents filed as part of this Report.

     Financial Statements:

EQUITY MARKETING, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

			Page
Report of Independent Public Accountants				23
CONSOLIDATED FINANCIAL STATEMENTS:
	Balance Sheets as of December 31, 2000 and 2001			24
	Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001			25
	Statements of Stockholders’ Equity and Mandatory Redeemable Preferred Stock for the Years Ended December 31, 1999, 2000 and 2001			26
	Statements of Comprehensive Income for the Years Ended December 31, 1999, 2000 and 2001			27
	Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001			28
	Notes to Consolidated Financial Statements			29
Supplemental Schedule
	Report of Independent Public Accountants on Schedule II			48
	Schedule II Valuation and Qualifying Accounts			49

Note:

All other supplementary schedules are omitted since they are not applicable or the required information can be obtained from the consolidated financial statements.

		(B). Reports on Form 8-K
		Report on Form 8-K filed with the Securities and Exchange Commission on March 5, 2001 (Item 5 and 7).
		Report on Form 8-K filed with the Securities and Exchange Commission on April 27, 2001 (Item 5 and 7).
		Report on Form 8-K filed with the Securities and Exchange Commission on August 6, 2001 (Item 5 and 7).
		Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2001 (Item 5 and 7).
		Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2001 (Item 7).

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Report of Independent Public Accountants

To Equity Marketing, Inc.:

We have audited the accompanying consolidated balance sheets of Equity Marketing, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders’ equity and mandatory redeemable preferred stock, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Equity Marketing, Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP

Los Angeles, California
February 27, 2002

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EQUITY MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

				December 31,
ASSETS				2000				2001
CURRENT ASSETS:
	Cash and cash equivalents			$	32,405			$	21,935
	Marketable securities				5,100				7,200
	Accounts receivable (net of allowances of $3,090 and $2,336 as of December 31, 2000 and 2001, respectively)				30,137				22,695
	Note receivable				8,322				2,183
	Inventories				11,744				9,337
	Deferred income taxes				3,176				2,436
	Prepaid expenses and other current assets				1,652				2,464
		Total current assets			92,536				68,250
Fixed Assets, net					4,263				4,178
Goodwill, net					12,419				24,690
Other Intangibles, net					40				749
Other Assets					1,284				1,620
		Total assets		$	110,542			$	99,487
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Short-term debt			$	—			$	—
	Accounts payable				18,421				22,114
	Due to customer				11,725				3,928
	Accrued payroll and payroll related costs				3,378				464
	Accrued liabilities				6,872				5,124
		Total current liabilities			40,396				31,630
Deferred Income Taxes					454				590
Long-Term Liabilities					1,402				1,745
		Total liabilities			42,252				33,965
COMMITMENTS AND CONTINGENCIES (Note 10)
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 5,715,293 shares outstanding as of December 31, 2000 and 2001, respectively				—				—
	Additional paid-in capital				18,209				20,050
	Retained earnings				32,863				35,964
	Accumulated other comprehensive income				—				242
					51,072				56,256
Less—
	Treasury stock, 2,207,083 and 2,869,793 shares at cost as of December 31, 2000 and 2001, respectively				(5,777	)			(13,773	)
	Stock subscription receivable				(11	)			—
	Unearned compensation				(43	)			(10	)
		Total stockholders’ equity			45,241				42,473
		Total liabilities and stockholders’ equity		$	110,542			$	99,487

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

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EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

					Years Ended December 31,
					1999				2000				2001
REVENUES					$	227,063			$	232,287			$	144,316
Cost of sales						170,416				172,270				104,129
Gross Profit						56,647				60,017				40,187
OPERATING EXPENSES:
		Salaries, wages and benefits				17,350				17,610				15,924
		Selling, general and administrative				22,829				23,075				18,323
		AmeriServe bankruptcy bad debt expense				1,014				482				—
		Impairment of assets				—				8,504				—
		Logistix integration costs				—				—				192
		Restructuring gains				(604	)			(418	)			—
			Total operating expenses			40,589				49,253				34,439
			Income from operations			16,058				10,764				5,748
OTHER (EXPENSE) INCOME:
		Interest expense				(881	)			(405	)			(249	)
		Interest income				138				1,892				1,695
		Other income (expense)				233				(112	)			(76	)
Income before provision for income taxes						15,548				12,139				7,118
PROVISION FOR INCOME TAXES						6,134				6,797				2,517
	Net income				$	9,414			$	5,342			$	4,601
PREFERRED STOCK DIVIDENDS					$	—			$	956			$	1,500
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS					$	9,414			$	4,386			$	3,101
BASIC INCOME PER SHARE:
	INCOME PER SHARE				$	1.51			$	0.70			$	0.52
	BASIC WEIGHTED AVERAGE SHARES OUTSTANDING					6,227,842				6,275,590				5,996,662
DILUTED INCOME PER SHARE:
	INCOME PER SHARE				$	1.46			$	0.68			$	0.50
	DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING					6,440,738				6,460,557				6,164,154