##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 23346
 EMAK WORLDWIDE, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    13-3534145
(I.R.S. Employer
Identification No.)6330 San Vicente Blvd.
Los Angeles, CA
(Address of principal executive offices)
    
    90048
(Zip Code)
 (323) 932-4300
   þ o
  o þ
  o þ




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EMAK WORLDWIDE, INC.
 Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
September 30, 2005
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4.
    
    Controls and Procedures
    
    
    34Part II.
    
    Other InformationItem 6.
    
    Exhibits
    
    
    35Exhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  Cautionary Statement
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
 ASSETS
 December 31,
    
    
    September 30,2004
    
    
    2005CURRENT ASSETS:Cash and cash equivalents
    
    $
    4,406
    
    
    $
    4,909Accounts receivable (net of allowances of $1,733 and
$1,545 as of December 31, 2004 and September 30, 2005, respectively)
    
    
    47,180
    
    
    
    31,402Inventories, net (Note 2)
    
    
    18,763
    
    
    
    16,529Prepaid expenses and other current assets
    
    
    5,466
    
    
    
    5,484Total current assets
    
    
    75,815
    
    
    
    58,324Fixed assets, net
    
    
    5,029
    
    
    
    3,624Goodwill (Notes 2 and 6)
    
    
    41,723
    
    
    
    40,031Other intangibles, net (Notes 2 and 6)
    
    
    3,686
    
    
    
    1,305Other assets
    
    
    7,060
    
    
    
    5,667Total assets
    
    $
    133,313
    
    
    $
    108,951
 
 3




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##### Table of Contents



EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
 December 31,
    
    
    September 30,2004
    
    
    2005CURRENT LIABILITIES:Short-term debt
    
    $
    6,025
    
    
    $
    2,000Accounts payable
    
    
    30,996
    
    
    
    23,991Accrued liabilities
    
    
    20,860
    
    
    
    13,619Total current liabilities
    
    
    57,881
    
    
    
    39,610LONG-TERM LIABILITIES
    
    
    6,621
    
    
    
    3,939Total liabilities
    
    
    64,502
    
    
    
    43,549COMMITMENTS AND CONTINGENCIES (Note 8)Mandatorily redeemable preferred stock, Series AA senior cumulative convertible,
$.001 par value per share, 25,000 issued and outstanding, stated at liquidation
preference of $1,000 per share ($25,000), net of issuance costs
    
    
    22,518
    
    
    
    22,518STOCKHOLDERS EQUITY:Preferred stock, $.001 par value per share, 1,000,000
shares authorized, 25,000 Series AA issued and outstanding
    
    
    
    
    
    
    Common stock, $.001 par value per share, 25,000,000
shares authorized, 5,759,263 and 5,789,192 shares outstanding
as of December 31, 2004 and September 30, 2005, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    27,516
    
    
    
    28,080Retained earnings
    
    
    33,954
    
    
    
    31,596Accumulated other comprehensive income
    
    
    4,972
    
    
    
    2,92766,442
    
    
    
    62,603LessTreasury stock, 3,167,258 shares, at cost, as of
December 31, 2004 and September 30, 2005
    
    
    (17,669
    )
    
    
    (17,669
    )Unearned compensation
    
    
    (2,480
    )
    
    
    (2,050
    )Total stockholders equity
    
    
    46,293
    
    
    
    42,884Total liabilities, mandatorily redeemable preferred stock and stockholders equity
    
    $
    133,313
    
    
    $
    108,951
 
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##### Table of Contents



EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005REVENUES
    
    $
    58,055
    
    
    $
    49,810
    
    
    $
    161,645
    
    
    $
    165,154COST OF SALES
    
    
    45,645
    
    
    
    35,261
    
    
    
    122,232
    
    
    
    121,596Minimum royalty guarantee shortfall gain
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    (2,724
    )Gross profit
    
    
    12,410
    
    
    
    14,948
    
    
    
    39,413
    
    
    
    46,282OPERATING EXPENSES:Salaries, wages and benefits
    
    
    7,986
    
    
    
    8,147
    
    
    
    23,163
    
    
    
    26,134Selling, general and administrative
    
    
    6,087
    
    
    
    5,564
    
    
    
    18,143
    
    
    
    17,192Integration costs
    
    
    
    
    
    
    8
    
    
    
    136
    
    
    
    76Loss on Chicago lease
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    Restructuring charge (gain)
    
    
    (25
    )
    
    
    416
    
    
    
    80
    
    
    
    1,318Impairment of assets
    
    
    
    
    
    
    3,431
    
    
    
    
    
    
    
    3,431ERP reimplementation costs
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    124Total operating expenses
    
    
    14,048
    
    
    
    17,588
    
    
    
    41,833
    
    
    
    48,275Loss from operations
    
    
    (1,638
    )
    
    
    (2,640
    )
    
    
    (2,420
    )
    
    
    (1,993
    )OTHER INCOME (EXPENSE), net
    
    
    179
    
    
    
    234
    
    
    
    (181
    )
    
    
    131Loss before benefit for income taxes
    
    
    (1,459
    )
    
    
    (2,406
    )
    
    
    (2,601
    )
    
    
    (1,862
    )BENEFIT FOR INCOME TAXES
    
    
    (566
    )
    
    
    (866
    )
    
    
    (1,012
    )
    
    
    (629
    )NET LOSS
    
    
    (893
    )
    
    
    (1,540
    )
    
    
    (1,589
    )
    
    
    (1,233
    )PREFERRED STOCK DIVIDENDS
    
    
    375
    
    
    
    375
    
    
    
    1,125
    
    
    
    1,125NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS
    
    $
    (1,268
    )
    
    $
    (1,915
    )
    
    $
    (2,714
    )
    
    $
    (2,358
    )BASIC LOSS PER SHARE
    
    $
    (0.22
    )
    
    $
    (0.33
    )
    
    $
    (0.47
    )
    
    $
    (0.41
    )BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,758,888
    
    
    
    5,788,042
    
    
    
    5,752,287
    
    
    
    5,779,727DILUTED LOSS PER SHARE
    
    $
    (0.22
    )
    
    $
    (0.33
    )
    
    $
    (0.47
    )
    
    $
    (0.41
    )DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,758,888
    
    
    
    5,788,042
    
    
    
    5,752,287
    
    
    
    5,779,727
 
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EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005NET LOSS
    
    $
    (893
    )
    
    $
    (1,540
    )
    
    $
    (1,589
    )
    
    $
    (1,233
    )OTHER COMPREHENSIVE INCOME (LOSS):Foreign currency translation adjustments (Note 2)
    
    
    (93
    )
    
    
    (581
    )
    
    
    227
    
    
    
    (2,411
    )Unrealized gain (loss) on foreign currency
forward contracts (Note 2)
    
    
    (267
    )
    
    
    330
    
    
    
    (61
    )
    
    
    366COMPREHENSIVE LOSS
    
    $
    (1,253
    )
    
    $
    (1,791
    )
    
    $
    (1,423
    )
    
    $
    (3,278
    )
 
 6




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EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 Nine Months EndedSeptember 30,2004
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,589
    )
    
    $
    (1,233
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,529
    
    
    
    1,684Provision for doubtful accounts
    
    
    147
    
    
    
    (75
    )Gain on disposal of fixed assets
    
    
    
    
    
    
    (17
    )Tax benefit from exercise of stock options
    
    
    65
    
    
    
    Amortization of restricted stock
    
    
    621
    
    
    
    769Minimum royalty guarantee shortfall gain
    
    
    
    
    
    
    (2,724
    )Impairment of assets
    
    
    
    
    
    
    3,431Other
    
    
    (13
    )
    
    
    Changes in operating assets and liabilities, net of effect of acquisition:Increase (decrease) in cash and cash equivalents:Accounts receivable
    
    
    1,948
    
    
    
    14,880Inventories
    
    
    (3,408
    )
    
    
    2,107Prepaid expenses and other current assets
    
    
    (1,195
    )
    
    
    (141
    )Other assets
    
    
    (556
    )
    
    
    1,045Accounts payable
    
    
    497
    
    
    
    (6,550
    )Accrued liabilities
    
    
    (2,926
    )
    
    
    (4,580
    )Long-term liabilities
    
    
    (758
    )
    
    
    (682
    )Net cash provided by (used in) operating activities
    
    
    (5,638
    )
    
    
    7,914CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of fixed assets
    
    
    (1,080
    )
    
    
    (1,289
    )Proceeds from sale of fixed assets
    
    
    20
    
    
    
    992Refund for purchase of Upshot
    
    
    
    
    
    
    75Payment for purchase of Megaprint Group
    
    
    (4,614
    )
    
    
    (1,908
    )Payment for purchase of Johnson Grossfield
    
    
    
    
    
    
    (148
    )Net cash used in investing activities
    
    
    (5,674
    )
    
    
    (2,278
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    863
    
    
    
    Payment of preferred stock dividends
    
    
    (1,125
    )
    
    
    (1,125
    )Purchase of treasury stock
    
    
    (211
    )
    
    
    Repayment of short-term debt
    
    
    
    
    
    
    (4,025
    )Proceeds from exercise of stock options
    
    
    538
    
    
    
    115Net cash used in financing activities
    
    
    65
    
    
    
    (5,035
    )Net increase (decrease) in cash and cash equivalents
    
    
    (11,247
    )
    
    
    601Effects of exchange rate changes on cash and cash equivalents
    
    
    13
    
    
    
    (98
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    19,291
    
    
    
    4,406CASH AND CASH EQUIVALENTS, end of period
    
    $
    8,057
    
    
    $
    4,909SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:CASH PAID FOR:Interest
    
    $
    148
    
    
    $
    324Income taxes, net of refunds
    
    $
    77
    
    
    $
    (118
    )
 
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EMAK WORLDWIDE, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 NOTE 1    ORGANIZATION AND BUSINESS
  NOTE 2    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Net Income Per Share
   8




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For the Three Months Ended September 30,2004
    
    
    2005Loss
    
    
    Shares
    
    
    Per Share
    
    
    Loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS:Loss available to
common stockholders
    
    $
    (1,268
    )
    
    
    5,758,888
    
    
    $
    (0.22
    )
    
    $
    (1,915
    )
    
    
    5,788,042
    
    
    $
    (0.33
    )Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive EPS:Loss available to common
stockholders
    
    $
    (1,268
    )
    
    
    5,758,888
    
    
    $
    (0.22
    )
    
    $
    (1,915
    )
    
    
    5,788,042
    
    
    $
    (0.33
    )
 For the Nine Months Ended September 30,2004
    
    
    2005Loss
    
    
    Shares
    
    
    Per Share
    
    
    Loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS:Loss available to
common stockholders
    
    $
    (2,714
    )
    
    
    5,752,287
    
    
    $
    (0.47
    )
    
    $
    (2,358
    )
    
    
    5,779,727
    
    
    $
    (0.41
    )Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive EPS:Loss available to common
stockholders
    
    $
    (2,714
    )
    
    
    5,752,287
    
    
    $
    (0.47
    )
    
    $
    (2,358
    )
    
    
    5,779,727
    
    
    $
    (0.41
    )
 Inventories
  December 31,
    
    
    September 30,2004
    
    
    2005Production-in-process
    
    $
    861
    
    
    $
    2,238Finished goods
    
    
    17,902
    
    
    
    14,291Total inventories, net
    
    $
    18,763
    
    
    $
    16,529
 Foreign Currency Translation
   9




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Derivative Instruments
      Goodwill and Other Intangibles
   10




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Royalties
   Stock-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net loss  as reported
    
    $
    (893
    )
    
    $
    (1,540
    )
    
    $
    (1,589
    )
    
    $
    (1,233
    )Plus:Stock-based compensation expense, net
of tax, included in reported net loss
    
    
    126
    
    
    
    189
    
    
    
    316
    
    
    
    462Less:Compensation expense (a)
    
    
    245
    
    
    
    264
    
    
    
    758
    
    
    
    503Net loss  pro forma
    
    $
    (1,012
    )
    
    $
    (1,615
    )
    
    $
    (2,031
    )
    
    $
    (1,274
    )Loss per share:Basic loss per share, as reported
    
    $
    (0.22
    )
    
    $
    (0.33
    )
    
    $
    (0.47
    )
    
    $
    (0.41
    )Pro forma basic loss per share
    
    $
    (0.24
    )
    
    $
    (0.34
    )
    
    $
    (0.55
    )
    
    $
    (0.42
    )Diluted loss per share, as reported
    
    $
    (0.22
    )
    
    $
    (0.33
    )
    
    $
    (0.47
    )
    
    $
    (0.41
    )Pro forma diluted loss per share
    
    $
    (0.24
    )
    
    $
    (0.34
    )
    
    $
    (0.55
    )
    
    $
    (0.42
    )
 
 (a)
    
    Determined under fair value based method for all awards, net of tax. 11




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ERP reimplementation costs
  Recent Accounting Pronouncements
      12




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NOTE 3  LINE OF CREDIT
      NOTE 4  RESTRUCTURING
   13




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NOTE 5  SEGMENTS
    14




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Industry Segments
 As of and For the Three Months Ended September 30, 2004Marketing
    
    
    ConsumerServices
    
    
    Products
    
    
    Corporate
    
    
    TotalTotal revenues
    
    $
    50,717
    
    
    $
    7,338
    
    
    $
    
    
    
    $
    58,055Segment income (loss) before provision (benefit)
for income taxes
    
    $
    3,726
    
    
    $
    (347
    )
    
    $
    (4,838
    )
    
    $
    (1,459
    )Provision (benefit) for income taxes
    
    
    1,461
    
    
    
    (132
    )
    
    
    (1,895
    )
    
    
    (566
    )Net income (loss)
    
    $
    2,265
    
    
    $
    (215
    )
    
    $
    (2,943
    )
    
    $
    (893
    )Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    144
    
    
    $
    144Depreciation and amortization
    
    $
    89
    
    
    $
    
    
    
    $
    453
    
    
    $
    542Total assets
    
    $
    93,886
    
    
    $
    9,626
    
    
    $
    22,828
    
    
    $
    126,340
 As of and For the Three Months Ended September 30, 2005Marketing
    
    
    ConsumerServices
    
    
    Products
    
    
    Corporate
    
    
    TotalTotal revenues
    
    $
    41,754
    
    
    $
    8,056
    
    
    $
    
    
    
    $
    49,810Segment income (loss) before provision (benefit)
for income taxes
    
    $
    1,375
    
    
    $
    436
    
    
    $
    (4,217
    )
    
    $
    (2,406
    )Provision (benefit) for income taxes
    
    
    (433
    )
    
    
    15
    
    
    
    (448
    )
    
    
    (866
    )Net income (loss)
    
    $
    1,808
    
    
    $
    421
    
    
    $
    (3,769
    )
    
    $
    (1,540
    )Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    297
    
    
    $
    297Depreciation and amortization
    
    $
    99
    
    
    $
    
    
    
    $
    456
    
    
    $
    555Total assets
    
    $
    75,830
    
    
    $
    13,424
    
    
    $
    19,697
    
    
    $
    108,951
 As of and For the Nine Months Ended September 30, 2004Marketing
    
    
    ConsumerServices
    
    
    Products
    
    
    Corporate
    
    
    TotalTotal revenues
    
    $
    144,400
    
    
    $
    17,245
    
    
    $
    
    
    
    $
    161,645Segment income (loss) before provision (benefit)
for income taxes
    
    $
    12,971
    
    
    $
    (1,186
    )
    
    $
    (14,386
    )
    
    $
    (2,601
    )Provision (benefit) for income taxes
    
    
    5,046
    
    
    
    (461
    )
    
    
    (5,597
    )
    
    
    (1,012
    )Net income (loss)
    
    $
    7,925
    
    
    $
    (725
    )
    
    $
    (8,789
    )
    
    $
    (1,589
    )Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    1,080
    
    
    $
    1,080Depreciation and amortization
    
    $
    249
    
    
    $
    
    
    
    $
    1,280
    
    
    $
    1,529Total assets
    
    $
    93,886
    
    
    $
    9,626
    
    
    $
    22,828
    
    
    $
    126,340
 As of and For the Nine Months Ended September 30, 2005Marketing
    
    
    ConsumerServices
    
    
    Products
    
    
    Corporate
    
    
    TotalTotal revenues
    
    $
    146,064
    
    
    $
    19,090
    
    
    $
    
    
    
    $
    165,154Segment income (loss) before provision (benefit)
for income taxes
    
    $
    10,471
    
    
    $
    1,773
    
    
    $
    (14,106
    )
    
    $
    (1,862
    )Provision (benefit) for income taxes
    
    
    3,534
    
    
    
    598
    
    
    
    (4,761
    )
    
    
    (629
    )Net income (loss)
    
    $
    6,937
    
    
    $
    1,175
    
    
    $
    (9,345
    )
    
    $
    (1,233
    )Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    1,289
    
    
    $
    1,289Depreciation and amortization
    
    $
    312
    
    
    $
    
    
    
    $
    1,372
    
    
    $
    1,684Total assets
    
    $
    75,830
    
    
    $
    13,424
    
    
    $
    19,697
    
    
    $
    108,951
 15




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NOTE 6  ACQUISITIONS
   Net current assets
    
    $
    2,758Property, plant and equipment
    
    
    8Other non-current assets
    
    
    7Net current liabilities
    
    
    (1,214
    )Estimated fair value, net assets acquired
    
    
    1,559Goodwill
    
    
    1,449Other intangible assets
    
    
    2,393Total purchase price
    
    $
    5,401
   16




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Net current assets
    
    $
    8,512Property, plant and equipment
    
    
    1,265Net current liabilities
    
    
    (7,995
    )Estimated fair value, net assets acquired
    
    
    1,782Goodwill
    
    
    3,887Other intangible assets
    
    
    338Total purchase price
    
    $
    6,007
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2004Pro forma revenues
    
    $
    61,381
    
    
    $
    171,554Pro forma net loss
    
    $
    (762
    )
    
    $
    (1,363
    )Pro forma basic loss per share
    
    $
    (0.20
    )
    
    $
    (0.43
    )Pro forma diluted loss per share
    
    $
    (0.20
    )
    
    $
    (0.43
    )
  17




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NOTE 7  MANDATORILY REDEEMABLE PREFERRED STOCK
        18




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NOTE 8COMMITMENTS AND CONTINGENCIES
 Operating Leases
  Year2005 (remainder of)
    
    $
    1,2342006
    
    
    4,8012007
    
    
    4,4722008
    
    
    3,9572009
    
    
    3,791Thereafter
    
    
    2,699Total
    
    $
    20,954
  Guaranteed Royalties
 Year2005 (remainder of)
    
    $
    1,4882006
    
    
    1,1212007
    
    
    330Total
    
    $
    2,939
   Employment Agreements
 Year2005 (remainder of)
    
    $
    5522006
    
    
    1,0152007
    
    
    4662008
    
    
    2002009
    
    
    200Thereafter
    
    
    1,600Total
    
    $
    4,033
  19




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NOTE 9SUBSEQUENT EVENTS
     20




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Except as expressly indicated or unless the
context otherwise requires, as used herein, EMAK, the
Company, we, our, or us, means EMAK Worldwide, Inc., a Delaware corporation and its
subsidiaries. Unless otherwise specifically indicated, all dollar amounts herein are expressed in
thousands.
 Organization and Business
        Overview
  21




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
    
    Our Equity Marketing agency, performed well during the quarter, despite a decrease in
revenues as compared to the prior year quarter resulting from certain low margin logistical
services that we decided not to pursue this year. During the third quarter we executed
three domestic premium programs and three international premium programs. We are seeing
the continuation of a trend of higher unit volumes for domestic as well as international
programs as a result of recent improvements in Burger King system sales of Kids Meals.
    
    The performance of our Upshot agency continues to improve as a result of significant
new business wins earlier in the year. In March 2005, Upshot was one of two agencies of
record selected for the promotional business of Miller Brewing Company. In its new role,
Upshot began providing promotional work for most of Millers beer brand portfolio including
trademark brands such as Miller Lite and Miller Genuine Draft in the U.S., beginning in
April 2005.
    22




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Results of Operations
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    78.6
    
    
    
    70.8
    
    
    
    75.6
    
    
    
    73.6Minimum royalty shortfall gain
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    (1.6
    )Gross profit
    
    
    21.4
    
    
    
    30.0
    
    
    
    24.4
    
    
    
    28.0Operating expenses:Salaries, wages and benefits
    
    
    13.8
    
    
    
    16.4
    
    
    
    14.3
    
    
    
    15.8Selling, general and administrative
    
    
    10.4
    
    
    
    11.2
    
    
    
    11.2
    
    
    
    10.4Integration costs
    
    
    
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.0Loss on Chicago lease
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    Restructuring charge
    
    
    
    
    
    
    0.8
    
    
    
    0.1
    
    
    
    0.8Impairment of assets
    
    
    
    
    
    
    6.9
    
    
    
    
    
    
    
    2.1ERP reimplementation costs
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.1Total operating expenses
    
    
    24.2
    
    
    
    35.3
    
    
    
    25.9
    
    
    
    29.2Loss from operations
    
    
    (2.8
    )
    
    
    (5.3
    )
    
    
    (1.5
    )
    
    
    (1.2
    )Other income (expense), net
    
    
    0.3
    
    
    
    0.5
    
    
    
    (0.1
    )
    
    
    0.1Loss before benefit for income taxes
    
    
    (2.5
    )
    
    
    (4.8
    )
    
    
    (1.6
    )
    
    
    (1.1
    )Benefit for income taxes
    
    
    (1.0
    )
    
    
    (1.7
    )
    
    
    (0.6
    )
    
    
    (0.4
    )Net loss
    
    
    (1.5
    )%
    
    
    (3.1
    )%
    
    
    (1.0
    )%
    
    
    (0.7
    )%
 Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004 (In Thousands):
 Revenues
   
 Cost of sales and gross profit
  23




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Salaries, wages and benefits
  Selling, general and administrative expenses
  Integration costs
  Restructuring charge (gain)
  Impairment of assets
  ERP reimplementation costs
  24




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Other income
  Benefit for income taxes
  Net loss
  Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004 (In
Thousands):
 Revenues
   
 Cost of sales and gross profit
    25




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##### Table of Contents




 Salaries, wages and benefits
  Selling, general and administrative expenses
  Integration costs
  Restructuring charge
  Impairment of assets
  ERP reimplementation costs
  Other income (expense)
  26




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Benefit for income taxes
  Net loss
  Financial Condition and Liquidity
         27




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2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalOperating Leases
    
    $
    1,234
    
    
    $
    4,801
    
    
    $
    4,472
    
    
    $
    3,957
    
    
    $
    3,791
    
    
    $
    2,699
    
    
    $
    20,954Guaranteed Royalties
    
    
    1,488
    
    
    
    1,121
    
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,939Employment Agreements
    
    
    552
    
    
    
    1,015
    
    
    
    466
    
    
    
    200
    
    
    
    200
    
    
    
    1,600
    
    
    
    4,033Total
    
    $
    3,274
    
    
    $
    6,937
    
    
    $
    5,268
    
    
    $
    4,157
    
    
    $
    3,991
    
    
    $
    4,299
    
    
    $
    27,926
   Restructuring
     28




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Royalties
   Credit Facilities
     29




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Acquisitions
      30




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Issuance of Preferred Stock
       31




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Subsequent Events
     Recent Accounting Pronouncements
    32




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Cautionary Statements and Risk Factors
 Marketplace Risks
 
    
    Dependence on a single customer, Burger King, which may adversely affect our financial condition and results of operations.
 
    
    Concentration risk associated with accounts receivable. We regularly extend credit to a subsidiary of Burger Kings
purchasing cooperative which accounts for approximately 80% of our sales to the Burger King.
 
    
    Dependence on nonrenewable product orders by Burger King, which promotions are in effect for a limited period of time.
 
    
    Dependence on the popularity of licensed entertainment properties, which may adversely affect our financial condition and
results of operations.
 
    
    Significant quarter-to-quarter variability in revenues and net income, which may result in operating results below the
expectations of securities analysts and investors.
 
    
    Increased competitive pressure, which may affect our sales of products and services.
 
    
    Dependence on foreign manufacturers, which may increase the costs of our products and affect the demand for such products.
 
    
    Variations in product costs due to fluctuations in raw materials prices, including plastic resin.
 Financing Risks
 
    
    Currency fluctuations, which may affect our suppliers and reportable income.
 33




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##### Table of Contents



Other Risks
 
    
    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.
 
    
    Exposure 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.
 
    
    Potential negative impact of past or future acquisitions, which may disrupt our ongoing business, distract senior
management and increase expenses (including risks associated with the financial condition and integration of the
businesses which we acquire).
 
    
    Adverse results of litigation, governmental proceedings or environmental matters, which may lead to increased costs or
interruption in normal business operations.
 
    
    Changes in laws or regulations, both domestically and internationally, including those affecting consumer products or
environmental activities or trade restrictions, which may lead to increased costs.
 
    
    Strike and other labor disputes which may negatively impact the distribution channels for our products.
 
    
    Exposure to liabilities for minimum royalty commitments in connection with license agreements for entertainment properties.
 
    
    Potential negative impact of Severe Acute Respiratory Syndrome (SARS), which could adversely affect our vendors in the
Far East.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
   34




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PART II. OTHER INFORMATION
 
  Exhibit 10.1
    
    Employment agreement dated as of October 3, 2005 between Equity Marketing, Inc. and Kim H. Thomsen.Exhibit 10.2
    
    Employment agreement dated as of October 3, 2005 between Equity Marketing, Inc. and Jonathan Banks.Exhibit 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002.Exhibit 31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002.Exhibit 32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 35




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SIGNATURES
  EMAK Worldwide, Inc.Date
    November 11, 2005
    
    /s/ ZOHAR ZIVZohar ZivSenior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 36