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CORPORATE FOCUS — Promotion Firm’s Reliance On One Client Is a Concern

Burger King Corp. has been a blessing and a curse for Los Angeles-based Equity Marketing Inc., which creates Pokemon-related toys and other promotional products for the fast-food chain.

Burger King accounted for about 80 percent of Equity’s $227 million in revenues last year, and Pokemon turned out to be the biggest fast-food promotion ever.

That’s the good news. The bad news is that some investors and analysts are wary of Equity’s heavy dependence on Burger King. Equity’s stock was trading at around $11.50 last week, down from its 52-week high of $19.44 last November.

“They weren’t able to expand outside of Burger King in 1999, and Burger King blew away their expectations,” said Brett Hendrickson, an analyst at B. Riley & Co., who gives Equity a “buy” rating.

Despite its success with Burger King, the promotional-products provider is looking to diversify beyond its primary customer, with new clients and a push for Internet-related business, as well as planned acquisitions this year.

Equity, one of the largest players in the $85 billion marketing services business, designs and markets a variety of toys, gifts and other products based primarily on Hollywood-related characters from such shows as “The Flintstones” and “Teletubbies.” Burger King, Coca-Cola Co., Exxon Co. and Sunoco Inc. have used the products in their promotional campaigns.

“They dominate this business,” Hendrickson said of Equity. “Their business will continue to grow and they’ll continue to gain market share.”

Last year, Equity’s net income increased to $9.41 million ($1.46 per diluted share), up from a net loss of $5.99 million (98 cents) in 1998. (The 1998 losses were due mainly to lackluster sales of toys based on “Godzilla” and “Babe: Pig in the City,” inventory write-downs and discounts to retailers.) Net income for the first quarter ended March 31 was $1.29 million (20 cents), vs. a net loss of $265,000 (4 cents) for the year-earlier quarter.

“We feel our performance history and prospects going forward justify a higher stock price, but that’s something we can’t control,” said Chairman and Chief Executive Donald Kurz. “Our focus is 100 percent on our business, and as long as we keep doing that and performing, we’re confident our stock will follow our performance.”

Kurz agreed that Equity has been hurt by its dependence on one major customer, but he said he’d like investors to focus on Equity’s outstanding performance for Burger King.

“Our strategy is to continue to invest in Burger King and service them and simultaneously grow other business,” Kurz said.

That growth strategy was the main reason for Crown Capital Group’s $25 million capital infusion into Equity, announced at the end of March. Equity plans to invest in new business development and selective acquisitions.

With the growth in “clicks and mortar,” Equity hopes to make a smooth transition to building its virtual promotions business driving traffic to Web sites with promotions, sweepstakes, discounts and other incentives, Hendrickson said. Last week, funschool.com, one of the top Web sites for children, appointed Equity as its marketing agency.

“This will be a breakout year in diversifying away from Burger King,” Hendrickson said. “It’s putting a lot of resources into pitching new business on the Internet and virtual promotions.”

Dennis McAlpine, an analyst at Ryan, Beck & Co., is giving Equity a “hold” rating until he sees evidence that the company is in fact diversifying, which he noted is “easier said than done.” Also, Equity has not had a history of making big acquisitions.

“While we expect the company will make such acquisitions eventually, we believe the stock will continue to be under a cloud until that actually happens,” McAlpine said in a recent report.

Equity should not only diversify, but also pray for better luck with its movie co-promotions going forward. Its unlucky streak started a couple of years ago, when it created promotional toys for what were supposed to be blockbuster movies, “Godzilla” and the sequel to “Babe.”

“One was a pig and one a dinosaur and they both turned out to be turkeys,” McAlpine said of the box-office disappointments.

The toys didn’t sell as anticipated and Equity, which had paid hefty licensing fees, was saddled with inventory problems.

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