Equity Marketing, Inc.

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Equity Marketing, Inc.

131 South Rodeo Drive
Beverly Hills, California 90212
U.S.A.
(310) 887-4300
Fax: (310) 887-4400
Web site: http://www.emak.com

Public Company
Incorporated: 1983
Employees: 157
Sales: $146.51 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: EMAK
SICs: 3944 Games, Toys & Children’s Vehicles, Except Dolls & Bicycles; 3069 Fabricated Rubber Products, Not Elsewhere Classified; 3942 Dolls & Stuffed Toys

Equity Marketing, Inc. is a producer of toys and other products which are largely based on animated characters from motion pictures and television programs, as well as from the world of sports. Through its Equity Promotions division, the company produces licensed toys which are sold or given away by the company’s customers in special promotional campaigns. The company’s Equity Toys division manufactures toys that are sold by retailers, including such national chains as Toys “R” Us and Wal-Mart. Equity has relationships with major entertainment companies such as Disney, Twentieth Century Fox, and Universal Studios, as well as The Public Broadcasting System (PBS) and The National Association of Stock Car Auto Racing (NASCAR), to manufacture licensed products. Its clients include Burger King, Shell Oil, Pepperidge Farm, Coca-Cola/Latin America, Kellogg’s/Latin America, and a number of others. Equity has shown steady annual growth since its founding, and continues to diversify its product line and customer base each year.

Beginnings

Equity Marketing’s origins date to 1983, when it was created as a small division of a New York-based travel incentive firm, Marketing Equities International, which promoted free trips for airlines. In 1984, Equity did its first premium promotion campaign for Arby’s restaurants, and a year later was involved with a promotion involving Cabbage Patch characters for Coca-Cola. Two years later the company established a relationship with Burger King which would prove to be a key factor in Equity’s success. The first Burger King promotional campaign, for the film Thundercats, shipped 13 million toys and was Equity’s biggest success to date. Over the next several years other successful campaigns involved Looney Tunes characters manufactured for Arby’s, a Burger King promotion using the television character Alf, and Indiana Jones premiums produced for Pepsi. The company was involved in all aspects of the promotional campaign, from looking for entertainment material to license, to executing the design, to consulting on the advertising and packaging. Manufacturing was contracted out.

Equity’s business was built upon the synergy that existed between entertainment producers and retailers or restaurateurs. The latter would use the concept of giving away or selling toys depicting characters from popular films or television programs to bring customers through the door. They would promote such an offer through massive advertising campaigns, which would in turn benefit the entertainment product by helping create a “buzz” around the release of a movie or by providing added exposure to a particular television program. The campaign would also benefit the retail business or restaurant by increasing its market share and customer loyalty, and by convincing its customers that the business was giving them extra value for their money, offering special, collectible premiums not available anywhere else. The promotional products business was estimated to be worth $70 billion in the United States, with no particular company dominating the field.

In 1989, Equity was purchased from Marketing Equities by several investors, including senior executive Stephen Robeck. Within a year, the company had signed an exclusive agreement to use characters from “The Simpsons,” the popular animated television series, and launched a highly successful Simpsons-based promotion for Burger King. In 1990, Don Kurz was hired into the company’s management team, and a year later he and Robeck purchased Equity from the majority owner in a leveraged buyout, and began to run the company as co-CEOs. The following year Equity’s annual sales more than doubled, going from 1991’s total of $15.3 million to more than $35 million. Equity’s biggest customer at this point was Burger King, which accounted for close to 85 percent of sales. While this relationship had been an important factor in Equity’s success, it also was potentially dangerous, were something to happen to Burger King or the two companies’ compatibility. In any event, Equity continued to benefit from it, with a major “wrist watch self-liquidator” promotion in 1993 for Burger King based on the film The Nightmare Before Christmas. That same year, Equity opened an office in Hong Kong to coordinate the manufacture of its products, which was generally done in the Far East, and entered an agreement with Tycoon Enterprises, a Mexican licensing agent, to begin a joint marketing effort in that country.

1994: Initial Public Offering

Equity’s first decade had followed a steady curve of upward growth, and co-CEOs Robeck and Kurz decided to take Equity public, with an offering of stock on the NASDAQ exchange in February 1994. The two CEOs retained ownership of some 60 percent of the stock between them. That same year, the company moved from New York to Beverly Hills, a strategic decision intended to provide a higher profile for Equity among the California-based film and television companies which were its greatest sources of product licenses. Indeed, the company soon reached an agreement with Warner Brothers to manufacture toys for overseas retail distribution, based on the perennially popular Looney Tunes cartoon characters. This was Equity’s first venture into retail toy sales. Another big success in 1994 was a promotional campaign for Burger King based on the hit Disney movie The Lion King. Some 30 million toys were ordered, and the demand was so great that an additional 20 million were requested. The promotional toy business had smaller profit margins than retail sales, but it involved less risk for the company, with no worries about returns of unsold merchandise if the entertainment programming the products were tied to was a failure. After a decade in business, Equity had an established reputation for good product design, as well as for timely manufacturing, something extremely critical when products were being given away in conjunction with a national advertising campaign. In over 100 consecutive contracts, Equity had not missed a single deadline.

Because Equity management and stock market analysts had increasingly been concerned about the company’s heavy dependence on Burger King, efforts were being made to boost sales to other customers. Business relationships were developed with a number of companies in Latin America, and sales to that region leapt from nothing in 1993 to $11 million a year later. Sales to Burger King decreased from 85 to 70 percent of total revenues during that time period, and Equity’s co-CEOs declared a figure of less than 50 percent to be their goal for the future. The year 1995 saw Equity’s success continue unabated, with the big promotion for Burger King being the Disney movie Toy Story, and new Latin American contracts including Space Jam toys for Kellogg’s and Power Ranger figures for Coca-Cola. Annual sales hit a new high of $84 million.

1996: EPI Group Purchased

Equity made its first acquisition of another company in 1996, purchasing EPI Group Limited for approximately $2.9 million. EPI operated in much the same manner as Equity, with divisions devoted to both promotional products and toys. A major customer for EPI was Shell Oil, for whom EPI designed and supplied promotional products, in particular items tied to Shell’s automobile racing endeavors. The company produced, for example, toy cars that were models of vehicles driven on the NASCAR and “Indy car” circuits, sponsored by Shell. These were typically made available as part of a special promotion at gas stations. EPI also manufactured toys for retail sale under the “Friends of...” (The Ocean, The Forest, etc.) name. This line of products was sold through museums, zoos, stores, and catalogs. The EPI purchase was touted by Equity’s co-CEOs as representing “additional progress in our continuing effort to diversify our revenue base by broadening our customer and product mix.” South of the border, Equity formed a new Mexican unit, to further enhance its presence in that country’s developing promotional products market.

Equity also continued to prosper from its relationship with Burger King, being named that company’s “Premiums Agency of Record.” Other highlights from 1996 included a number of licensing deals for high-profile products, including toys based on the video series The Land Before Time and the film The Lost World: Jurassic Park, as well as PBS children’s television series “Wishbone,” “Kratt’s Creatures,” and “Go To Bed, Fred.” A license to produce products based on the 1996 Olympics’ official mascot “Izzy” yielded both promotional products made for Holiday Inn and a line of toys marketed by Equity’s toy division. This type of deal was especially sweet for the company, since creating similar product lines for two markets enabled Equity to save money in some areas of design and manufacturing, and thus make a bigger profit from the license.

Company Perspectives:

The Company’s operating philosophy is as follows: Service our customers with a passion, understanding that they are the basis for all our opportunities. Compete on the basis of superior quality in design and manufacturing at any given customer-determined price point. Provide a challenging, fun and rewarding work environment in order to attract and retain top personnel. Measure all major decisions as to their potential impact on long-term stockholder value. Operate ethically with respect to our customers, stockholders, employees and the communities in which we do business.

The year 1997 saw Equity continuing to expand its operations outside the United States, with sales to the Philippines, South Africa, and Korea, in addition to increases in the company’s share of the market in South and Central America, although sales in the Far East were slow. Shell Oil gave the company its first contract to manufacture promotional products linked to a motion picture, the animated movie Anastasia. Equity let lapse its license to produce Looney Tunes toys, citing the high cost of the license as a factor. However, there were still many other choices of material, with new movie blockbusters continually on the horizon. Licensing deals were signed for both the forthcoming Godzilla movie and the sequel to the hit talking pig film Babe, both set for release in 1998. The company announced that it would be making a plush Babe toy which would cost about $40, and would be programmable, with the toy able to “remember” a child’s name, and ask to be served breakfast or lunch, depending on the time of day. Because these licenses were signed months in advance of the appearance of the motion picture, announcements of forthcoming products were often intentionally vague, not mentioning the name of the film or even the movie studio involved. Equity’s staff also was required to keep designs and contracts under wraps, in order to protect the secrecy of the various licensers and customers and remain ahead of the competition.

1998: Further Acquisitions; Godzilla Disappoints

The year 1997 was another banner one for Equity, and 1998 initially appeared to be just as bright, with three additional companies acquired in the first half of the year. In April, Corinthian Marketing, Inc. was purchased for approximately $8.7 million. Corinthian’s main product line was the Headliners brand of collectible sports figurines. These were plastic toys that had oversized heads which depicted well-known athletes. A new division, Equity Sports, was formed to market Corinthian’s products. Equity’s established lines of toys licensed from NASCAR also were moved into the division. The acquisition gave Equity an opportunity to take advantage of the wider range of sports licenses held by Corinthian, and also to expand Corinthian’s sports merchandising from that company’s collectible toys to include the promotional products which were Equity’s forte.

Equity also purchased a pair of companies in July, for a total outlay of about $15 million. These were U.S. Import and Promotions Co., Inc., of St. Augustine, Florida, and Contract Marketing, Inc., of West Boylston, Massachusetts. Both companies had already established a cooperative relationship in which they worked together to design, manufacture, and distribute promotional products. A major part of the companies’ combined business was the manufacture of collectible toy trucks, generally distributed to motor fuel-related retailers, which complemented Equity’s established toy car lines.

When the movie Godzilla was released in the spring of 1998, Equity had a number of products ready to capitalize on the expected blockbuster, but the film’s reviews and grosses were poor, leaving retailers (and manufacturers) stuck with many unsold toys. When the full effect of the film’s lack of business on its toy division was felt, Equity’s stock price dropped almost 50 percent. As a result, the company announced it was taking steps to move away from being tied to the fortunes of such “event” movies, given their unpredictability. The company also ended its co-CEO setup, with Donald Kurz taking sole possession of that post and becoming chairman of the board, and Stephen Robeck stepping back to the position of consultant and board member.

Despite the Godzilla setback, Equity Marketing was still in a solid position overall, with its many licensing agreements, its established customer base, and its strong position in the still-young Central and South American markets. Its reputation for timeliness and value in the promotional products market was strong, and the company’s annual revenues (and profits) had seen growth for many years running. As American cultural and sports icons became more and more global, and marketing efforts became more and more linked to popular entertainment, the demand for the company’s products appeared certain to grow.