UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q  (X)
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended March 31, 2007  or  ( )
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission File Number: 23346  EMAK WORLDWIDE, INC. (Exact name of registrant as specified in its charter)   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 office)
        90048
(Zip Code)
  (323) 932-4300 (Registrants telephone number, including area code)  (Former name, former address and former fiscal year, if changed since last report)  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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx
        No [   ]
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer  [   ]
        Accelerated filer  [   ]
        Non-accelerated filerx
  Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act).  Yes o
        Nox
  Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical date:  Common Stock, $.001 par value, 5,886,229 shares as of May 10, 2007. 
    EMAK WORLDWIDE, INC.  Index To Quarterly Report on Form 10-Q Filed with the Securities and Exchange Commission March 31, 2007  PagePart I.
        Financial InformationItem 1.
        Financial Statements
        3Item 2.
        Management's Discussion and Analysis of Financial Condition and Results of Operations
        18Item 3.
        Quantitative and Qualitative Disclosures About Market Risk
        24Item 4.
        Controls and Procedures
        24Part II.
        Other InformationItem 6.
        Exhibits
        25
  Cautionary Statement  Certain expectations and projections regarding our future performance discussed in this quarterly report 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 our 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. We undertake 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.  2  PART I. FINANCIAL INFORMATION  ITEM 1. FINANCIAL STATEMENTS  EMAK WORLDWIDE, INC.  CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)  ASSETS  December 31,
        
        March 31,2006
        
        2007CURRENT ASSETS:Cash and cash equivalents
        $
        8,677
        
        $
        9,189Restricted cash
        
        1,319
        
        
        1,333Accounts receivable (net of allowances of $1,382 and$1,379 as of December 31, 2006 and March 31, 2007, respectively)
        
        24,327
        
        
        20,910Inventories
        
        6,386
        
        
        7,414Prepaid expenses and other current assets
        
        3,732
        
        
        2,374Total current assets
        
        44,441
        
        
        41,220Fixed assets, net
        
        3,583
        
        
        3,740Goodwill
        
        
        13,136
        
        
        13,141Other intangibles, net
        
        651
        
        
        633Other assets
        
        559
        
        
        542Total assets
        $
        62,370
        
        $
        59,276
  The accompanying notes are an integral part of these condensed consolidated financial statements.  3    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,
        
        March 31,2006
        
        2007CURRENT LIABILITIES:Short-term debt
        $
        --
        
        $
        --Accounts payable
        
        20,238
        
        
        21,269Accrued liabilities
        
        14,240
        
        
        12,571Total current liabilities
        
        34,478
        
        
        33,840LONG-TERM LIABILITIES
        
        2,294
        
        
        2,025Total liabilities
        
        36,772
        
        
        35,865COMMITMENTS AND CONTINGENCIESMandatorily redeemable preferred stock, Series AA senior cumulative convertible,$.001 par value per share, 25,000 issued and outstanding, stated at liquidationpreference of $1,000 per share ($25,000), net of issuance costs
        
        19,041
        
        
        19,041STOCKHOLDERS' EQUITY:Preferred stock, $.001 par value per share, 1,000,000shares authorized, 25,000 Series AA issued and outstanding
        
        --
        
        
        --Common stock, $.001 par value per share, 25,000,000shares authorized, 5,851,663 and 5,853,796 shares outstandingas of December 31, 2006 and March 31, 2007, respectively
        
        --
        
        
        --Additional paid-in capital
        
        33,840
        
        
        34,224Accumulated deficit
        
        (13,225)
        
        
        (15,818)Accumulated other comprehensive income
        
        3,611
        
        
        3,633Less--
        
        
        24,226
        
        
        22,039Treasury stock, 3,167,258 shares, at cost, as ofDecember 31, 2006 and March 31, 2007
        
        (17,669)
        
        
        (17,669)Unearned compensation
        
        --
        
        
        --Total stockholders' equity
        
        6,557
        
        
        4,370Total liabilities, mandatorily redeemable preferred stock and stockholders' equity
        $
        62,370
        
        $
        59,276
  The accompanying notes are an integral part of these condensed consolidated financial statements.  4  EMAK WORLDWIDE, INC.  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)  Three Months EndedMarch 31,2006
        
        2007REVENUE:Revenues from services
        $
        7,095
        $
        5,064Revenues from tangible products and other revenues
        
        35,591
        
        31,184TOTAL REVENUE
        
        42,686
        
        36,248Cost of sales:Cost of services
        
        4,955
        
        3,526Cost of tangible goods sold
        
        27,398
        
        24,759TOTAL COST OF SALES
        
        32,353
        
        28,285Gross profit
        
        10,333
        
        7,963OPERATING EXPENSES:Salaries, wages and benefits
        
        6,855
        
        6,663Selling, general and administrative
        
        4,977
        
        3,757Restructuring charge
        
        606
        
        --Total operating expenses
        
        12,438
        
        10,420Loss from operations
        
        (2,105)
        
        (2,457)OTHER INCOME (EXPENSE), net
        
        34
        
        (17)Loss before provision for income taxes
        
        (2,071)
        
        (2,474)PROVISION FOR INCOME TAXES
        
        17
        
        119NET LOSS
        
        (2,088)
        
        (2,593)PREFERRED STOCK DIVIDENDS
        
        375
        
        --NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
        $
        (2,463)
        $
        (2,593)BASIC LOSS PER SHARE
        $
        (0.42)
        $
        (0.44)BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
        
        5,806,203
        
        5,852,174DILUTED LOSS PER SHARE
        $
        (0.42)
        $
        (0.44)DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
        
        5,806,203
        
        5,852,174
  The accompanying notes are an integral part of these condensed consolidated financial statements.  5  EMAK WORLDWIDE, INC.  CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) (UNAUDITED)  Three Months EndedMarch 31,2006
        
        
        2007NET LOSS
        $
        (2,088)
        
        $
        (2,593)OTHER COMPREHENSIVE INCOME (LOSS):Foreign currency translation adjustments
        
        87
        
        
        18Unrealized (loss) gain on foreign currencyforward contracts
        
        (57)
        
        
        4COMPREHENSIVE LOSS
        $
        (2,058)
        
        $
        (2,571)
  The accompanying notes are an integral part of these condensed consolidated financial statements.  6  EMAK WORLDWIDE, INC.  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)  Three Months EndedMarch 31,2006
        
        
        2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
        
        
        $
        (2,088)
        
        $
        (2,593)Adjustments to reconcile net loss to net cashprovided by (used in) operating activities:Depreciation and amortization
        
        401
        
        
        357Provision for doubtful accounts
        
        --
        
        
        (39)Gain on asset disposal
        
        --
        
        
        (1)Stock-based compensation expense
        
        194
        
        
        416Changes in operating assets and liabilities:Increase (decrease) in cash and cash equivalents:Accounts receivable
        
        5,732
        
        
        3,466Inventories
        
        3,398
        
        
        (1,033)Prepaid expenses and other current assets
        
        (20)
        
        
        1,358Other assets
        
        25
        
        
        18Accounts payable
        
        (3,322)
        
        
        1,029Accrued liabilities
        
        (4,771)
        
        
        (1,698)Long-term liabilities
        
        (213)
        
        
        (269)Net cash (used in) provided by operating activities
        
        (664)
        
        
        1,011CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of fixed assets
        
        (469)
        
        
        (494)Restricted cash
        
        (1,207)
        
        
        --Proceeds from sale of fixed assets
        
        5
        
        
        1Payment for purchase of Megaprint Group
        
        (313)
        
        
        --Net cash used in investing activities
        
        (1,984)
        
        
        (493)CASH FLOWS FROM FINANCING ACTIVITIES:Payment of preferred stock dividends
        
        (375)
        
        
        --Net cash used in financing activities
        
        (375)
        
        
        --Net increase (decrease) in cash and cash equivalents
        
        (3,023)
        
        
        518Effects of exchange rate changes on cash and cash equivalents
        
        44
        
        
        (6)CASH AND CASH EQUIVALENTS, beginning of period
        
        6,315
        
        
        8,677CASH AND CASH EQUIVALENTS, end of period
        $
        3,336
        
        $
        9,189SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:CASH PAID FOR:Interest paid
        $
        59
        
        $
        34Income taxes refunded, net
        $
        (333)
        
        $
        (1,276)
  The accompanying notes are an integral part of these condensed consolidated financial statements.  7  EMAK WORLDWIDE, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)  NOTE 1  -  ORGANIZATION AND BUSINESS  EMAK Worldwide, Inc., a Delaware corporation and subsidiaries (the Company or EMAK), is a leading global marketing services company. The Company designs and executes marketing programs providing measurable results for its clients. EMAK has expertise in the areas of: strategic planning and research, entertainment marketing, design and manufacturing of custom promotional products, promotional marketing, event marketing, collaborative marketing, retail design, environmental branding, sweepstakes & games, licensing and package design. EMAK is headquartered in Los Angeles, with operations in Chicago, Frankfurt, London, Paris, Amsterdam and Hong Kong. The Company primarily sells to customers in the United States and Europe. The Companys functional currency is the U.S. dollar.  NOTE 2  -  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments considered necessary for fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results for a full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.  Net Income Per Share  Basic net income (loss) per share (EPS) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during each period. Net income (loss) available to common stockholders represents reported net income (loss) less preferred stock dividend requirements.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS includes in-the-money options using the treasury stock method and also includes the assumed conversion of preferred stock using the if-converted method. During a loss period, the assumed exercise of in-the-money stock options and the assumed conversion of preferred stock have an anti-dilutive effect. As a result, these shares are not included with the weighted average shares outstanding used in the calculation of diluted loss per share for the three months ended March 31, 2006 and 2007.  Options and warrants to purchase 2,509,803 and 1,963,736 shares of common stock, $.001 par value per share (the Common Stock), as of March 31, 2006 and 2007, respectively, were excluded from the computation of diluted EPS as they would have
been anti-dilutive. For the three months ended March 31, 2006, preferred stock convertible into 1,694,915 shares of Common Stock was excluded in the computation of diluted EPS as they would have been anti-dilutive. For the three months ended March 31, 2007, preferred stock convertible into 2,777,778 shares of Common Stock was excluded from the computation of diluted EPS as they would have been anti-dilutive. Excluded from the computation of diluted EPS are restricted stock units of 230,461 and 141,001 units for the three months ended March 31, 2006 and 2007, respectively, as they would have been anti-dilutive.  8  The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computation for loss available to common shareholders and other disclosures required by SFAS No. 128, Earnings per Share Emerging Issues Task Force Issue No. 03-6, Participating Securities and the Two-Class Method under SFAS No. 128, Earnings Per Share.  For the Three Months Ended March 31,2006
        
        2007Loss
        
        Shares
        
        Per Share
        
        Loss
        
        Shares
        
        Per Share(Numerator)
        
        (Denominator)
        
        Amount
        
        (Numerator)
        
        (Denominator)
        
        AmountBasic EPS:Loss available tocommon stockholders
        $
        (2,463)
        
        5,806,203
        
        $
        (0.42)
        
        $
        (2,593)
        
        5,852,174
        
        $
        (0.44)Effect of dilutive securities:Options and warrants
        
        --
        
        --
        
        
        
        
        
        --
        
        --Convertbile preferred stock
        
        --
        
        
        
        
        
        
        
        --Restricted stock units
        
        --
        
        --
        
        
        
        
        
        --
        
        --Dilutive EPS:Loss available tocommon stockholders
        $
        (2,463)
        
        5,806,203
        
        $
        (0.42)
        
        $
        (2,593)
        
        5,852,174
        
        $
        (0.44)
  Restricted Cash  During the first quarter of 2006, the Companys Logistix (U.K.) subsidiary entered into an agreement with Hong Kong Shanghai Bank Corp. (HSBC), under which HSBC issued a guarantee of up to 1,000 EURO (approx $1,333) to one of Logistixs vendors in exchange for the deposit of the same amount into an interest bearing restricted cash account with HSBC. Logistix (U.K.) does not have access to the cash until the guarantee expires in the first half of 2007. The guarantee from HSBC enabled Logistix (U.K.) to secure more favorable payment terms from a new vendor supplying significant quantities of goods.  Supplemental Cash Flow Information  During 2006, the Company issued 36,142 shares with a market value of $306 as a partial payment of contractual bonuses for two executives. The contractual bonuses earned by the two executives for 2005 performance totaled $1,224 and were recorded as accrued liabilities in the Companys consolidated balance sheet as of December 31, 2005. Under the terms of the employment agreements, such bonuses are payable 25% in common stock and the remainder in cash. The cash portion of the bonuses was also paid in March 2006.  Inventories  Inventories consist of (a) production-in-process which primarily represents tooling costs which are deferred and amortized over the life of the related promotional program (which is typically less than six months) products and deferred costs on service contracts for which revenue has been deferred and (b) purchased finished goods held for sale to customers and purchased finished goods in transit to customers distribution centers.  Inventories are stated at the lower of average cost or market. As of December 31, 2006 and March 31, 2007, inventories consisted of the following:  December 31,
        
        March 31,2006
        
        2007Production-in-process
        $
        1,171
        
        $
        1,758Finished goods
        
        5,215
        
        
        5,656Total inventories
        $
        6,386
        
        $
        7,414
  Foreign Currency Translation  Net foreign exchange gains or losses resulting from the translation of foreign subsidiaries accounts whose functional currency is not the United States dollar are recognized as a component of accumulated other comprehensive income (loss) in stockholders equity. For such subsidiaries, accounts are translated into United States dollars at the following rates of exchange: assets and liabilities at period-end exchange rates, equity accounts at historical rates, and income and expense accounts at average exchange rates during the period.  9  For subsidiaries with transactions denominated in currencies other than their functional currency, net foreign exchange transaction gains or losses are included in determining net income (loss). Transaction gains (losses) included in net loss for the three months ended March 31, 2006 and 2007 were $41 and $(19), respectively.  Derivative Instruments  The Company follows SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 as amended, requires that an entity recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.  The Company designates its derivatives based upon criteria established by SFAS No. 133. For a derivative designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative designated as a cash flow hedge, the effective portion of the derivatives gain or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.  The Company uses derivatives to manage exposures to foreign currency. The Companys objective for holding derivatives is to decrease the volatility of earnings and cash flows associated with changes in foreign currency. The Company enters into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on foreign currency receivables, investments, and payables. The gains and losses on the foreign exchange forward contracts offset the transaction gains and losses on the foreign currency receivables, investments, and payables recognized in earnings. The Company does not enter into foreign exchange forward contracts for trading purposes. Gains and losses on the contracts are included in other income (expense) in the condensed consolidated statements of operations and offset foreign exchange gains or losses from the revaluation of intercompany balances or other
current assets, investments, and liabilities denominated in currencies other than the functional currency of the reporting entity. The Companys foreign exchange forward contracts related to current assets and liabilities generally range from one to eleven months in original maturity.  The Companys Logistix (U.K.) subsidiary entered into foreign currency forward contracts aggregating 993 GBP to sell Euros in exchange for British pounds and United States dollars and to sell British pounds in exchange for United States dollars. The contracts will expire by August 2007. At March 31, 2007, the foreign currency forward contracts had an estimated fair value of (9) GBP. The fair value of the foreign currency forward contracts is recorded in accrued liabilities in the accompanying condensed consolidated balance sheet as of March 31, 2007. The unrealized loss on the contracts is reflected in accumulated other comprehensive income.  Income Taxes  The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  On January 1, 2007, the Company adopted the Financial Accounting Standards Boards (FASB) Interpretation Number 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarified the accounting for uncertainty in an enterprises financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires management to evaluate its open tax positions that exist on the date of initial adoption in each jurisdiction. The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing FIN 48.  When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of  10  the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  The Companys policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter. The Companys effective tax rate differs from the federal statutory rate primarily due to losses sustained for which no tax benefit has been recognized. As of January 1, 2007, the Company had a valuation allowance equal to its total net deferred tax assets due to the uncertainty of ultimately realizing tax benefits of approximately $15,243.  The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003. State jurisdictions that remain subject to examination range from 2002 to 2005. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.  Goodwill and Other Intangibles  The change in the carrying amount of goodwill from $13,136 as of December 31, 2006 to $13,141 as of March 31, 2007 reflects an increase due to a $5 foreign currency translation adjustment. $8,245 of the goodwill balance relates to the Agency Services segment and $4,896 relates to the Promotional Products segment.  The change in the carrying amount of identifiable intangibles from $651 as of December 31, 2006 to $633 as of March 31, 2007 reflects: a decrease of $19 for amortization expense and an increase due to a foreign currency translation adjustment of $1. The identifiable intangibles are subject to amortization and are reflected as other intangibles in the condensed consolidated balance sheets.  On March 31, 2006, the Company released 180 GBP ($313) to the former shareholders of Megaprint Group Limited (acquired November 10, 2004) related to a purchase price holdback under the terms of the Stock Purchase Agreement between the Company and Megaprint Group Limited. The holdback was recorded as an accrued liability as of the acquisition date.  Recent Accounting Pronouncements  In January 2007, the Company adopted the Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 (FIN 48). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements. FIN 48 requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. The adoption of this Interpretation did not have an impact on the Companys financial position and results of operations.  In September 2006, the Financial Accounting Standards Board, or FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors requests expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157
clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entitys own data. Fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its results of operations and financial position.  In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for us as of January 1, 2008. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its results of operations or financial position.  11   NOTE 3  SHORT-TERM DEBT  On March 29, 2006, the Company entered into a credit facility (the Facility) with Bank of America. The maturity date of the Facility is March 29, 2009. The Facility is collateralized by substantially all of the Companys assets and provides for a line of credit of up to $25,000 with borrowing availability determined by a formula based on qualified assets. Interest on outstanding borrowings will be based on either a fixed rate equivalent to LIBOR plus an applicable spread of between 2.50 and 3.00 percent or a variable rate equivalent to the banks reference rate plus an applicable spread of between 0.75 and 1.25 percent. The Company is also required to pay an unused line fee of between 0.375 and 0.50 percent per annum and certain letter of credit fees. The applicable spread is based on the levels of borrowings relative to qualified assets. The Facility also requires the
Company to comply with certain restrictions and covenants as amended from time to time. The Facility may be used for working capital and other corporate financing purposes. The Facility does not permit the payment of dividends on Series AA Preferred Stock for 2006. As of December 31, 2006 and March 31, 2007, the marginal interest rate on available borrowings under the Facility was 9.0%. As of March 31, 2007, the Company was in compliance with the restrictions and covenants. As of March 31, 2007, $0 was outstanding under the Facility.  Letters of credit outstanding under the Companys prior credit facility and the Facility as of December 31, 2006 and March 31, 2007 totaled $310.  NOTE 4  RESTRUCTURING AND MINIMUM ROYALTY GUARANTEE SHORTFALLS  In 2004, the Company finalized a decision to pursue the wind-down of a substantial majority of its Consumer Products business.  The Company s determination was to significantly scale back this business during 2005 while exiting a substantial majority of the business permanently as soon as is feasible. As a result of the wind-down, in the fourth quarter of 2004, the Company recorded a pre-tax charge of $7,722 relating to minimum royalty guarantee shortfalls on several Consumer Products licenses. This charge was determined based on contractual commitments as of December 31, 2004 and reflected our decision not to fully exploit these licenses. Approximately $3,000 of this pre-tax charge was non-cash for write-offs of long-term royalty advances. The charge was recorded as minimum royalty guarantee shortfalls in the consolidated statement of operations for the year ended December 31, 2004.  On May 18, 2005, the Company reached a settlement with one of its licensors affecting several licenses. Under the terms of the settlement, the Company agreed to forgo our rights to certain licensed properties for 2006 and 2007 in exchange for a reduction in the overall royalty guarantees.  The Company retained product distribution rights under the licenses for 2005. As a result of this settlement, our overall commitment for royalty guarantees was reduced by approximately $4,000. The Company paid the licensor a total of $1,800 through March 31, 2006. As a result of this settlement and higher than expected Scooby-Doo revenues that exceeded our initial estimates, $2,837 of the 2004 charge for minimum royalty guarantee shortfalls was reversed during 2005.  In 2006, the Company reached a settlement with a different licensor which resulted in a reversal of $88. These reversals were recorded as minimum
royalty guarantee shortfall gains in the consolidated statements of operations for the year ended December 31, 2005 and 2006.  In 2005, in connection with the Consumer Products wind-down, the Company incurred a charge for one-time employee termination benefits and other costs totaling approximately $746.  In 2006, the Company recorded an additional charge of $38 for employee termination costs.  The entire amount is attributable to the Consumer Products segment.  In 2005, the Company eliminated several centralized corporate positions as a result of a realignment of centralized resources. As a result, the Company incurred a charge for one-time employee termination benefits and other costs totaling approximately $622 in 2005. In 2006, the Company incurred an additional $58 for employee termination benefits. The entire amount is attributable to the corporate segment.  In 2005, the Company eliminated several positions at Logistix (U.K.) as a result of a less than optimal staff utilization rate resulting from a decrease in revenues. In connection with this decision, the Company incurred charges for one-time employee termination benefits and other costs totaling $568. In 2006, the Company recorded an additional charge of $17 for employee termination costs.  The entire amount is attributable to the Promotional Products segment.  In 2005, the Company made a decision to reorganize and consolidate SCI Promotions offices in Ontario, California with its Los Angeles office. The Company recorded a charge for one-time employee termination benefits and other costs totaling $640 in 2005. In 2006, the Company incurred an additional $723 for employee termination benefits and other costs. The entire amount is attributable to the Promotional Products segment.  In 2006, in connection with its decision to consolidate the SCI Promotion, Pop Rocket and Megaprint Group agencies into Logistix, the Company made a decision to eliminate two senior management positions. The Company recorded a charge for one-time employee termination benefits and other costs totaling $283. The entire amount is attributable to the Promotional Products segment.  12  In 2006, the Company made a decision to reorganize its Hong Kong office to better align our operations with the current business needs. As a result, the Company recorded a charge of $94 for one-time termination benefits associated with staff reductions in the Companys Hong Kong office.  The following table summarizes activity in the Companys restructuring reserve.  Pop Rocket
        Centralized Corporate
        Logistix (U.K.)
        SCI Promotion
        Logistix Consolidation
        Hong Kong
        TotalOriginal charge
        $
        746
        $
        622
        $
        568
        $
        640
        $
        -
        $
        -
        $
        2,576Utilization in 2005
        
        (513)
        
        (261)
        
        (137)
        
        (110)
        
        -
        
        -
        
        (1,021)Reserve at December 31, 2005
        
        233
        
        361
        
        431
        
        530
        
        -
        
        -
        
        1,555Additional charge
        
        -
        
        165
        
        78
        
        363
        
        -
        
        -
        
        606Utilization
        
        (164)
        
        (235)
        
        (4)
        
        (306)
        
        -
        
        -
        
        (709)Reserve at March 31, 2006
        
        69
        
        291
        
        505
        
        587
        
        -
        
        -
        
        1,452Additional charge
        
        51
        
        -
        
        6
        
        426
        
        283
        
        -
        
        766Utilization
        
        (83)
        
        (155)
        
        (318)
        
        (589)
        
        (37)
        
        -
        
        (1,182)Reserve at June 30, 2006
        
        37
        
        136
        
        193
        
        424
        
        246
        
        -
        
        1,036Partial reversal of previously recorded one-time employee termination benefits and other related costs
        
        (13)
        
        (107)
        
        (31)
        
        (5)
        
        -
        
        -
        
        (156)Additional charge
        
        -
        
        -
        
        -
        
        -
        
        -
        
        94
        
        94Utilization
        
        (24)
        
        (29)
        
        (40)
        
        (236)
        
        (134)
        
        (94)
        
        (557)Reserve at September 30, 2006
        
        -
        
        -
        
        122
        
        183
        
        112
        
        -
        
        417Partial reversal of previously recorded one-time employee termination benefits and other related costs
        
        -
        
        -
        
        (36)
        
        (61)
        
        -
        
        -
        
        (97)Utilization
        
        -
        
        -
        
        (65)
        
        (113)
        
        (90)
        
        -
        
        (268)Reserve at December 31, 2006
        
        -
        
        -
        
        21
        
        9
        
        22
        
        -
        
        52Utilization
        
        -
        
        -
        
        (21)
        
        (6)
        
        -
        
        -
        
        (27)Reserve at March 31, 2007
        $
        -
        $
        -
        $
        -
        $
        3
        $
        22
        $
        -
        $
        25
  NOTE 5 -- SEGMENTS  The Company has identified three reportable segments through which it conducts its operations: Agency Services, Promotional Products and Consumer Products. This reflects the structure and format of internal management reports provided to the chief operating decision maker. The factors for determining the reportable segments were based on the distinct nature of their operations. Each segment is responsible for executing a unique business strategy. The Agency Services segment provides various services such as strategic planning and research, entertainment marketing, promotion, event marketing, collaborative marketing, retail design, and environmental branding. The Agency Services segment is a service-based business whose revenues are derived either from fees for hours worked or from fixed price retainer contracts. The Promotional Products segment designs and contracts for the manufacture of promotional products
used as free premiums or sold in conjunction with the purchase of other items at a retailer or quick service restaurant. Promotional Products are used for marketing purposes by both the companies sponsoring the promotions and the licensors of the entertainment properties on which the promotional programs are often based. The Promotional Products segment manufactures product to order and derives its revenues primarily from the sale of such product to its clients. The Consumer Products segment designs and contracts for the manufacture of toys and other consumer products for sale to major mass market and specialty retailers, who in turn sell the products to consumers.  Earnings of industry segments and geographic areas exclude interest income, interest expense, depreciation expense, integration costs, and other unallocated corporate expenses. Income taxes are allocated to segments on the basis of operating results. Identified assets are those assets used in the operations of the segments and include inventory, receivables, goodwill and other intangibles. Corporate assets consist of cash, certain corporate receivables, fixed assets, and certain trademarks.  13  The primary measure of segment profit or loss reviewed by the chief operating decision maker is segment income (loss) from operations.  Industry Segments  As of and For the Three Months Ended March 31, 2006Agency
        
        Promotional
        
        ConsumerServices
        
        Products
        
        Products
        
        Corporate
        
        TotalTotal revenues
        
        $
        8,295
        $
        31,886
        $
        2,505
        $
        --
        $
        42,686Segment income (loss)from operations
        $
        1,276
        $
        1,507
        $
        (26)
        $
        (4,862)
        $
        (2,105)Fixed asset additions
        $
        --
        $
        --
        $
        --
        $
        469
        $
        469Depreciation and amortization
        $
        --
        $
        29
        $
        --
        $
        372
        $
        401Total assets
        
        $
        14,328
        $
        27,522
        $
        3,261
        $
        13,958
        $
        59,069As of and For the Three Months Ended March 31, 2007Agency
        
        Promotional
        
        ConsumerServices
        
        Products
        
        Products
        
        Corporate
        
        TotalTotal revenues
        
        $
        6,559
        $
        27,921
        $
        1,768
        $
        --
        $
        36,248Segment income (loss)from operations
        $
        654
        $
        730
        $
        468
        $
        (4,309)
        $
        (2,457)Fixed asset additions
        $
        --
        $
        --
        $
        --
        $
        494
        $
        494Depreciation and amortization
        $
        --
        $
        18
        $
        --
        $
        339
        $
        357Total assets
        
        $
        13,408
        $
        26,471
        $
        2,214
        $
        17,183
        $
        59,276
  NOTE 6COMMITMENTS AND CONTINGENCIES  Operating Leases The Company has operating leases for its properties and equipment, which expire at various dates through 2014.  Future minimum lease payments under non-cancelable operating leases as of March 31, 2007 are as follows:  Year2007 (remainder of)
        $
        3,1032008
        
        3,9812009
        
        3,7952010
        
        6652011
        
        546Thereafter
        
        1,112Total
        $
        13,202
  Aggregate rental expenses for operating leases were $824 and $782 for the three months ended March 31, 2006 and 2007, respectively.  14   Guaranteed Royalties For the three months ended March 31, 2006 and 2007, the Company incurred $276 and $265, respectively, in royalty expense. As of March 31, 2007, the Company has committed to pay total minimum guaranteed royalties as follows:  Year2007 (remainder of)
        $
        1302008
        
        280Total
        $
        410
  NOTE 7STOCK BASED COMPENSATION  The Company has three stock compensation plans, which are more fully described in Note 8 to the Consolidated Financial Statements in its 2006 Annual Report on Form 10-K. Under the plans, the Company has the ability to grant stock options, restricted stock, restricted stock units (RSUs), stock bonuses, stock appreciation rights or performance units. Stock options expire no later than ten years from the date of grant and generally provide for vesting over a period of three or four years from the date of grant. Stock options are granted with exercise prices at or above the fair market value of the Companys common stock on the date of grant.  Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective transition method. Prior to January 1, 2006, the Company applied the recognition and measurement principles of APB Opinion No. 25, and related interpretations in accounting for its employee stock compensation plans. All employee stock options were granted at or above the grant date market price and, accordingly, no compensation expense was recognized in the statements of operations for these employee stock options. Instead, the amount of compensation expense that would have resulted if the Company had applied the fair value recognition provisions of SFAS No. 123 was included as a proforma disclosure in the financial statement footnotes.  In accordance with SFAS No. 123(R), the Company reclassified $1,724 from the unearned compensation line item within stockholders equity to additional paid-in capital. The Company recorded this reclassification upon adoption of SFAS No. 123(R) on January 1, 2006.  Prior to January 1, 2006, the Company presented all benefits of tax deductions resulting from the exercise of share-based compensation as operating cash flows in the statements of cash flows. SFAS No. 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) be classified as financing cash flows. Excess tax benefits reflected as a financing cash inflow totaled $0 during the three months ended March 31, 2006 and 2007. Excess tax benefits reflected as an operating cash inflow totaled $0 during the three months ended March 31, 2006 and 2007.  The Company recognized no compensation expense for stock options during the three months ended March 31, 2006 and 2007. No options were granted during the three months ended March 31, 2006 and 2007.  15   Stock Options  The following is a summary of stock option information and weighted average exercise prices for the Companys stock option plans during the three months ended March 31, 2007:  Number
        
        
        Average Exercise Price
        
        Average Remaining Contractual Term
        
        
        Aggregate Intrinsic ValueOutstanding at January 1, 2007
        1,047,070
        
        $
        12.21Granted
        --
        
        
        --Exercised
        --
        
        
        --Forfeited
        --
        
        
        --Cancelled
        (80,200)
        
        
        13.76Outstanding at March 31, 2007
        966,870
        
        $
        12.09
        
        5.4
        
        $
        --Exercisable at March 31, 2007
        966,870
        
        $
        12.09
        
        5.4
        
        $
        --
  The intrinsic value of stock options is the difference between the current market value and the exercise price. No options were exercised during the three months ended March 31, 2007.  Restricted Stock and Restricted Stock Units  The aggregate fair market value of the Companys restricted stock and RSU grants is being amortized to compensation expense over the vesting period (typically 3 or 4 years). Compensation expense recognized related to grants of restricted stock and RSUs to certain employees and non-employee Board members was $194 and $416 for the three months ended March 31, 2006 and 2007, respectively. As of March 31, 2007, there was $3,680 of unrecognized compensation cost related to unvested restricted stock and RSUs. This cost is expected to be recognized over a weighted average of 2.3 years.  The following table summarizes the number and weighted average grant date fair value of the Companys unvested restricted stock and RSUs as of March 31, 2006:  Weighted AverageGrant DateShares
        
        
        Fair ValueUnvested at January 1, 2007
        516,640
        
        $
        7.01Granted
        36,842
        
        
        5.28Vested
        (20,330)
        
        
        6.70Forfeited
        -
        
        
        -Unvested at March 31, 2007
        533,152
        
        $
        6.90
  NOTE 8MANDATORILY REDEEMABLE PREFERRED STOCK  On June 30, 2006, the Company entered in an Exchange and Extension Agreement with Crown EMAK Partners, LLC (Crown) providing that: (a) the conversion price of the Companys Series AA Senior Cumulative Convertible Preferred Stock (Series AA Stock) would be reduced from $14.75 per share of Common Stock to $9.00 per share of Common Stock; (b) the 6% cumulative perpetual dividend on the $25,000 face value of the Series AA Stock ($1,500 per annum) would be permanently eliminated effective April 1, 2006; (c) the provisions pertaining to election of Series AA directors would be revised to permit the holders of the Series AA Stock to elect two directors except (i) if the number of Common Stock directors exceeds seven or (ii) in situations involving a potential Change of Control (as defined in the Certificate of Designation of Series AA Stock) at a
time when the total number of directors (inclusive of Common Stock directors and Series AA Stock directors) exceeds eight, in either of which instances the holders of the Series AA Stock would be permitted to elect three directors; and (d) the terms of the Common Stock warrants held by Crown which previously expired on March 29 and June 20, 2010 would be extended until March 29 and June 20, 2012 (collectively, the Crown Transaction).  16  At the Companys Annual Meeting held on May 31, 2006, the Companys stockholders approved an amendment to the Certificate of Designation of the Companys Series AA Stock (the Certificate of Designation) in order to permit the closing of the Crown Transaction. The Certificate of Amendment of Certificate of Designation provides for the changes in the rights and preferences of the Series AA Stock.  The Crown Transaction was closed on June 30, 2006.  The Company accounted for the transaction as a modification of equity instruments.  As a result, the decrease in the fair value of the Series AA Stock was recorded as a reduction to mandatorily redeemable preferred stock of $873 with an offset to net income available to common stockholders.  The increased in the value of the common stock warrants was recorded as an increase to additional paid-in capital of $873 with an offset to net income available to common stockholders.  The net impact to income available to common stockholders is zero.  Direct outside costs related to this transaction totaled $157 and were recorded as a reduction to additional paid-in capital.  The Series AA Stock is recorded in the accompanying condensed consolidated balance sheets at its Liquidation Preference net of issuance costs. The issuance costs total approximately $1,951.  17  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, meansEMAK Worldwide, Inc., a Delaware corporation and its subsidiaries. Unless otherwise specifically indicated, all dollar amounts herein are expressed in thousands.  Organization and Business  EMAK Worldwide, Inc., a Delaware corporation and subsidiaries, is a leading global marketing services company. We design and execute marketing programs providing measurable results for our clients. EMAK has expertise in the areas of: strategic planning and research, entertainment marketing, design and manufacturing of custom promotional products, promotional marketing, event marketing, collaborative marketing, retail design, environmental branding, sweepstakes & games, licensing and package design. EMAK is headquartered in Los Angeles, with operations in Chicago, Frankfurt, London, Paris, Amsterdam and Hong Kong. The Company primarily sells to customers in the United States and Europe.  Our Equity Marketing agency services our largest client, Burger King. Equity Marketing serves as Burger Kings primary creative and manufacturing agency for its Kids Meals business. In addition, in the second half of 2004, Equity Marketing expanded its role with Burger King and is now the agency of record for promotional categories outside of the kids segment, including Adult Promotions and Youth & Family Promotions. Equity Marketing operates in both our Promotional Products and Agency Services segments.  Our Logistix agency is an insight driven marketing services agency specializing in product-based solutions. Logistix operates in our Promotional Products, Agency Services and Consumer Products segments.  Our Upshot agency is a strategic marketing agency with expertise in promotional, event and collaborative marketing, retail design and environmental branding. Upshot has experience across a broad array of industries, including apparel, automotive, beer, candy, consumer packaged goods, financial services, greeting cards, home electronics, hospitality, government services, pharmaceuticals, soft drinks, spirits, telecommunications and timeshares. Upshot operates in our Agency Services segment.  Overview  Revenues for the first quarter of 2007 decreased 15.1% or $6,438 to $36,248 as compared to $42,686 recorded in the prior year.  This resulted in a net loss of $2,593 in the current year quarter compared to a net loss of $2,088 in the first quarter of 2006.  This decrease in revenues is primarily due to the timing of our largest clients promotional programs and their associated creative fees.  We expect to capture additional Promotional Products revenues in future quarters.  We recently finalized our agreement with our largest client and retained our role as the primary creative and manufacturing agency of record for both domestic and international programs awarded through September 2008 (which will ship through approximately September 2009).  Our efforts to streamline the organizations cost structure continue to have a visible impact as operating expenses in the first quarter of 2007 are significantly lower than in the first quarter of 2006.  Our operating expenses were $2,018 lower than in the first quarter of 2006 (a decrease of 16.2%).  We have streamlined the organization and established a more efficient operating structure that can be leveraged to support profitable growth.  As we continue our rebuilding efforts in 2007, we are building a healthier new business pipeline, with all of our agencies working to grow with existing clients and forging new client relationships as well.  With modest revenue growth and as a result of the significantly reduced cost structure, we expect to return to profitability this year and to be poised for further improvements in 2008 and beyond.  18  Results of Operations  The following table sets forth, for the periods indicated, the Companys operating results as a percentage of total revenues:  Three Months EndedMarch 31,2006
        
        
        2007Revenues
        100.0
        %
        
        100.0
        %Cost of sales
        75.8
        
        
        78.0Gross profit
        24.2
        
        
        22.0Operating expenses:Salaries, wages and benefits
        16.1
        
        
        18.4Selling, general and administrative
        11.6
        
        
        10.3Restructuring charge
        1.4
        
        
        -Total operating expenses
        29.1
        
        
        28.7Loss from operations
        (4.9)
        
        
        (6.7)Other income (expense), net
        -
        
        
        (0.1)Loss before provision for income taxes
        (4.9)
        
        
        (6.8)Provision for income taxes
        -
        
        
        0.4Net loss
        (4.9)
        %
        
        (7.2)
        %
  Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006 (In Thousands):  Revenues  Revenues for the three months ended March 31, 2007 decreased $6,438, or 15.1%, to $36,248 from $42,686 in the comparable period in 2006. Promotional Products revenues decreased $3,965, or 12.4%, to $27,921 primarily as a result of lower revenues at our Equity Marketing agency due to a reduction in unit volumes for promotional programs from its largest client.  Net foreign currency translation had a favorable impact to revenues of approximately $1,093 for Logistix (U.K.) versus the prior year period average exchange rates.  Our Agency Services segment revenues decreased $1,736, or 20.9%, to $6,559. The decrease is attributable to a lower level of billings for direct outside costs, and to lower revenues at our Logistix (U.K.) business as a result of a large program in 2006 that was not repeated in 2007.  This decrease was partially offset by an increase attributable to higher levels of retainer revenues for other existing clients.  Our Consumer Products segment revenues decreased $737, or 29.4%, to $1,768. The decrease is primarily attributable to the wind-down of the non-core business. For the three months ended March 31, 2007, the only remaining license agreement after the wind-down was for Crayola®product.  Our first quarter 2006 Consumer Product revenues were primarily comprised of Crayola®, Baby Einsteinand JoJos Circus product.  Cost of sales and gross profit  Cost of sales decreased $4,068 to $28,285 (78.0% of revenues) for the three months ended March 31, 2007 from $32,353 (75.8% of revenues) in the comparable period in 2006 primarily due to lower sales volume in 2007.  Our gross margin percentage decreased to 22.0% for the three months ended March 31, 2007 from 24.2% in the comparable period for 2006.  The gross profit percentage for our Promotional Products segment for the three months ended March 31, 2007 decreased to 19.7% compared to 23.9% for the comparable period in 2006. This decrease is attributable to the deferral of high margin creative fees due to the timing of certain promotional programs and the impact of a large low-margin promotional program for a European client.  The gross profit percentage for our Agency Services segment for the three months ended March 31, 2007 increased to 27.5% compared to 24.5% for the comparable period in 2006.  This increase is primarily attributable to a lower level of direct outside cost as compared to the same period last year.  Agency Services gross profit includes direct outside costs which fluctuate, making period-over-period comparables of the gross profit percentages difficult.  Typically billings for direct outside costs, which are included in revenues, have very low gross margins. In periods in which segment revenues contain significant direct outside costs, the overall gross profit percentage will be lower.  19  The gross profit percentage for our Consumer Products segment for the three months ended March 31, 2007 increased to 37.4% compared to 27.5% for the comparable period in 2006. This increase in the margin is attributable to a better sales mix of Crayola product and fewer close-out sales of older product lines as compared to the same period last year.  Salaries, wages and benefits  Salaries, wages and benefits decreased $192, or 2.8%, to $6,663 (18.4% of revenues) for the three months ended March 31, 2007 from $6,855 (16.1% of revenues) in the comparable period for 2006. This decrease was primarily attributable to a reduction in personnel as a result of restructuring initiatives designed to streamline operations. This decrease was partially offset by an increase in expense for restricted stock units.  Selling, general and administrative expenses  Selling, general and administrative expenses decreased $1,220, or 24.5%, to $3,757 (10.4% of revenues) for the three months ended March 31, 2007 from $4,977 (11.7% of revenues) in the comparable period for 2006. The decrease is attributable to a reduction in commissions, advertising, freight out and third party warehousing expenses as a result of lower revenues and inventory levels for Consumer Products. The decrease is also attributable to lower insurance expense and occupancy costs resulting from the termination of an office and warehouse lease in Ontario, California.  Restructuring charge  We recorded a restructuring charge of $606 (1.4% of revenues) for the three months ended March 31, 2006. This charge represents severance expenses and other termination costs related to the reorganization of the SCI Promotions agency and the elimination of a centralized management position. See Restructuring and Minimum Royalty Guarantee Shortfalls below.  Other income (expense)  Other income (expense) decreased $51 to $(17) for the three months ended March 31, 2007 from $34 in the comparable period for 2006. The decrease is primarily due to foreign currency losses as a result of the strengthening of the British pound relative to the U.S. dollar.  This decrease was partially offset by an increase in interest income as compared to interest expense the same period in 2006.  Provision for income taxes  The effective tax rate for the three months ended March 31, 2007 was (4.8)% compared to (0.8)% for the same period in 2006. In 2006 and 2007, we recorded a tax provision for our Asia-based operations and recognized no tax provision from our operations in the United States and the United Kingdom due to our valuation allowance.  Net loss  Net loss increased $505 to $(2,593) (7.2% of revenues) in 2007 from $(2,088) ((4.9)% of revenues) in 2006 primarily due to a decrease in gross profit earned on lower revenues in 2007. This decrease was partially offset by a reduction in salaries, wages and benefits and selling, general and administrative expenses as well as a restructuring charge recorded in 2006.  20   Financial Condition and Liquidity  At March 31, 2007, cash and cash equivalents were $9,189, compared to $8,677 as of December 31, 2006. At March 31, 2007, restricted cash was $1,333, compared to $1,319 as of December 31, 2006. The increase in cash and cash equivalents was attributable to cash flows provided by operating activities.  As of March 31, 2007, working capital was $7,380 compared to $9,963 at December 31, 2006. Cash provided by operations for the three months ended March 31, 2007 was $1,011 compared to cash used in operations of $664 in the prior year period. Cash flows provided by operations in the three months ended March 31, 2007 were primarily attributable to collections of receivables. Cash flows used in investing activities for the three months ended March 31, 2007 were $493 compared to $1,984 in the prior year. This decrease is primarily the result of restricted cash used to fund a bank guarantee to a new vendor of our Logistix (U.K.) subsidiary in 2006. Cash flows from financing activities for the three months ended March 31, 2007 were zero compared to cash used of $375 in the prior year for the payment of preferred stock dividends for the three months ended March 31, 2006. The reduction in cash used in financing
activities is due to the elimination of preferred stock dividends effective April 1, 2006 (see Preferred Stock below).  As of March 31, 2007, our net accounts receivable decreased $3,417 to $20,910 from $24,327 at December 31, 2006. The decrease was due to the seasonal nature of our business, as the fourth quarter tends to be the highest volume quarter of the year resulting in our highest accounts receivable levels each year.  As of March 31, 2007, inventories increased $1,028 to $7,414 from $6,386 at December 31, 2006. This increase is attributable to the timing of shipments of products in the Promotional Products segment related to second quarter 2007 programs.  Consumer Products inventories represent 23.6% and 18.3% of total inventories as of December 31, 2006 and March 31, 2007, respectively. Promotional product inventory used in Promotional Products generally has lower risk than Consumer Product inventory, as it usually represents product made to order.  As of March 31, 2007, accounts payable increased $1,031 to $21,269 from $20,238 at December 31, 2006.  This increase is attributable to liabilities related to second quarter 2007 promotional programs.  As of March 31, 2007, accrued liabilities decreased $1,669 to $12,571 from $14,240 at December 31, 2006. This decrease is primarily attributable to the payment of administrative fees collected from distribution companies on behalf of a Promotional Products customer for a large program that occurred in the fourth quarter of 2006.  As of the date hereof, we believe that cash from operations, cash on hand at March 31, 2007 and our credit facility will be sufficient to fund our working capital needs for the next twelve months and for the foreseeable future. The statements set forth herein are forward-looking and actual results may differ materially.  Future minimum annual commitments for guaranteed minimum royalty payments under license agreements, non-cancelable operating leases and employment agreements as of March 31, 2007 are as follows:  2007
        
        2008
        
        2009
        
        2010
        
        2011
        
        Thereafter
        
        TotalOperating Leases
        $
        3,103
        $
        3,981
        $
        3,795
        $
        665
        $
        546
        $
        1,112
        $
        13,202Guaranteed Royalties
        
        130
        
        280
        
        --
        
        --
        
        --
        
        --
        
        410Employment Agreements
        
        2,352
        
        356
        
        --
        
        --
        
        --
        
        --
        
        2,708Total
        $
        5,585
        $
        4,617
        $
        3,795
        $
        665
        $
        546
        $
        1,112
        $
        16,320
  We had no material commitments for capital expenditures at March 31, 2007. Letters of credit outstanding as of December 31, 2006 and March 31, 2007 totaled $310.  Restructuring and Minimum Royalty Guarantee Shortfalls  In 2004, we finalized a decision to pursue the wind-down of a substantial majority of our Consumer Products business. Our determination was to significantly scale back this business during 2005 while exiting a substantial majority of the business permanently as soon as is feasible. As a result of the wind-down, in the fourth quarter of 2004, we recorded a pre-tax charge of $7,722 relating to minimum royalty guarantee shortfalls on several Consumer Products licenses. This charge was determined based on contractual commitments as of December 31, 2004 and reflected our decision not to fully exploit these licenses. Approximately  21  $3,000 of this pre-tax charge was non-cash for write-offs of long-term royalty advances. The charge was recorded as minimum royalty guarantee shortfalls in the consolidated statement of operations for the year ended December 31, 2004.  On May 18, 2005, we reached a settlement with one of our licensors affecting several licenses. Under the terms of the settlement, we agreed to forgo our rights to certain licensed properties for 2006 and 2007 in exchange for a reduction in the overall royalty guarantees. We retained product distribution rights under the licenses for 2005. As a result of this settlement, our overall commitment for royalty guarantees was reduced by approximately $4,000. We paid the licensor a total of $1,800 through March 31, 2006. As a result of this settlement and higher than expected Scooby-Doo revenues that exceeded our initial estimates, $2,837 of the 2004 charge for minimum royalty guarantee shortfalls was reversed during 2005.  In 2006, we reached a settlement with a different licensor which resulted in a reversal of $88. These reversals were recorded as minimum royalty guarantee shortfall gains in the
consolidated statements of operations for the year ended December 31, 2005 and 2006.  In 2005, in connection with the Consumer Products wind-down, we incurred a charge for one-time employee termination benefits and other costs totaling approximately $746.  In 2006, we recorded an additional charge of $38 for employee termination costs.  The entire amount is attributable to the Consumer Products segment.  In 2005, we eliminated several centralized corporate positions as a result of a realignment of centralized resources. As a result, we incurred a charge for one-time employee termination benefits and other costs totaling approximately $622 in 2005. In 2006, we incurred an additional $58 for employee termination benefits. The entire amount is attributable to the corporate segment.  In 2005, we eliminated several positions at Logistix (U.K.) as a result of a less than optimal staff utilization rate resulting from a decrease in revenues. In connection with this decision, we incurred charges for one-time employee termination benefits and other costs totaling $568. In 2006, we recorded an additional charge of $17 for employee termination costs.  The entire amount is attributable to the Promotional Products segment.  In 2005, we made a decision to reorganize and consolidate SCI Promotions offices in Ontario, California with our Los Angeles office. We recorded a charge for one-time employee termination benefits and other costs totaling $640 in 2005. In 2006, we incurred an additional $723 for employee termination benefits and other costs. The entire amount is attributable to the Promotional Products segment.  In 2006, in connection with our decision to consolidate the SCI Promotion, Pop Rocket and Megaprint Group agencies into Logistix, we made a decision to eliminate two senior management positions. We recorded a charge for one-time employee termination benefits and other costs totaling $283. The entire amount is attributable to the Promotional Products segment.  In 2006, we made a decision to reorganize our Hong Kong office to better align our operations with the current business needs. As a result, we recorded a charge of $94 for one-time termination benefits associated with staff reductions in our Hong Kong office.  22  The following table summarizes activity in our restructuring reserve.  Pop Rocket
        Centralized Corporate
        Logistix (U.K.)
        SCI Promotion
        Logistix Consolidation
        Hong Kong
        TotalOriginal charge
        $
        746
        $
        622
        $
        568
        $
        640
        $
        -
        $
        -
        $
        2,576Utilization in 2005
        
        (513)
        
        (261)
        
        (137)
        
        (110)
        
        -
        
        -
        
        (1,021)Reserve at December 31, 2005
        
        233
        
        361
        
        431
        
        530
        
        -
        
        -
        
        1,555Additional charge
        
        -
        
        165
        
        78
        
        363
        
        -
        
        -
        
        606Utilization
        
        (164)
        
        (235)
        
        (4)
        
        (306)
        
        -
        
        -
        
        (709)Reserve at March 31, 2006
        
        69
        
        291
        
        505
        
        587
        
        -
        
        -
        
        1,452Additional charge
        
        51
        
        -
        
        6
        
        426
        
        283
        
        -
        
        766Utilization
        
        (83)
        
        (155)
        
        (318)
        
        (589)
        
        (37)
        
        -
        
        (1,182)Reserve at June 30, 2006
        
        37
        
        136
        
        193
        
        424
        
        246
        
        -
        
        1,036Partial reversal of previously recorded one-time employee termination benefits and other related costs
        
        (13)
        
        (107)
        
        (31)
        
        (5)
        
        -
        
        -
        
        (156)Additional charge
        
        -
        
        -
        
        -
        
        -
        
        -
        
        94
        
        94Utilization
        
        (24)
        
        (29)
        
        (40)
        
        (236)
        
        (134)
        
        (94)
        
        (557)Reserve at September 30, 2006
        
        -
        
        -
        
        122
        
        183
        
        112
        
        -
        
        417Partial reversal of previously recorded one-time employee termination benefits and other related costs
        
        -
        
        -
        
        (36)
        
        (61)
        
        -
        
        -
        
        (97)Utilization
        
        -
        
        -
        
        (65)
        
        (113)
        
        (90)
        
        -
        
        (268)Reserve at December 31, 2006
        
        -
        
        -
        
        21
        
        9
        
        22
        
        -
        
        52Utilization
        
        -
        
        -
        
        (21)
        
        (6)
        
        -
        
        -
        
        (27)Reserve at March 31, 2007
        $
        -
        $
        -
        $
        -
        $
        3
        $
        22
        $
        -
        $
        25
  Credit Facilities  On March 29, 2006, we entered into a credit facility (the Facility) with Bank of America. The maturity date of the Facility is March 29, 2009. The Facility is collateralized by substantially all of our assets and provides for a line of credit of up to $25,000 with borrowing availability determined by a formula based on qualified assets. Interest on outstanding borrowings will be based on either a fixed rate equivalent to LIBOR plus an applicable spread of between 2.50 and 3.00 percent or a variable rate equivalent to the banks reference rate plus an applicable spread of between 0.75 and 1.25 percent. We are also required to pay an unused line fee of between 0.375 and 0.50 percent per annum and certain letter of credit fees. The applicable spread is based on the levels of borrowings relative to qualified assets. The Facility also requires us to comply with certain
restrictions and covenants as amended from time to time. The Facility may be used for working capital and other corporate financing purposes. The Facility does not permit the payment of dividends on Series AA Preferred Stock in 2006. As of December 31, 2006 and March 31, 2007, the marginal interest rate on available borrowings under the Facility was 9.0%, respectively. As of March 31, 2007, we were in compliance with the restrictions and covenants. As of March 31, 2007, zero was outstanding under the Facility.  Preferred Stock  On June 30, 2006, we entered in an Exchange and Extension Agreement with Crown EMAK Partners, LLC (Crown) providing that: (a) the conversion price of the our Series AA Senior Cumulative Convertible Preferred Stock (Series AA Stock) would be reduced from $14.75 per share of Common Stock to $9.00 per share of Common Stock; (b) the 6% cumulative perpetual dividend on the $25,000 face value of the Series AA Stock ($1,500 per annum) would be permanently eliminated effective April 1, 2006; (c) the provisions pertaining to election of Series AA directors would be revised to permit the holders of the Series AA Stock to elect two directors except (i) if the number of Common Stock directors exceeds seven or (ii) in situations involving a potential Change of Control (as defined in the Certificate of Designation of Series AA Stock) at a time when the total
number of directors (inclusive of Common Stock directors and Series AA Stock directors) exceeds eight, in either of which instances the holders of the Series AA Stock would be permitted to elect three directors; and (d) the terms of the Common Stock warrants held by Crown which previously expired on March 29 and June 20, 2010 would be extended until March 29 and June 20, 2012 (collectively, the Crown Transaction).  23  At our Annual Meeting held on May 31, 2006, our stockholders approved an amendment to the Certificate of Designation of the Companys Series AA Stock (the Certificate of Designation) in order to permit the closing of the Crown Transaction. The Certificate of Amendment of Certificate of Designation provides for the changes in the rights and preferences of the Series AA Stock.  The Crown Transaction was closed on June 30, 2006.  We accounted for the transaction as a modification of equity instruments.  As a result, the decrease in the fair value of the Series AA Stock was recorded as a reduction to mandatorily redeemable preferred stock of $873 with an offset to net income available to common stockholders.  The increased in the value of the common stock warrants was recorded as an increase to additional paid-in capital of $873 with an offset to net income available to common stockholders.  The net impact to income available to common stockholders is zero.  Direct outside costs related to this transaction totaled $157 and were recorded as a reduction to additional paid-in capital.  The Series AA Stock is recorded in the accompanying condensed consolidated balance sheets at its Liquidation Preference net of issuance costs. The issuance costs total approximately $1,951.  Recent Accounting Pronouncements  In January 2007, we adopted the Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 (FIN 48). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements. FIN 48 requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. The adoption of this Interpretation did not have an impact on our financial position and results of operations.  In September 2006, the Financial Accounting Standards Board, or FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors requests expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157
clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entitys own data. Fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of SFAS No. 157 to have a material impact on our results of operations and financial position.  In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company as of January 1, 2008. We do not expect the adoption of SFAS No. 159 to have a material impact on our results of operations or financial position.  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  For quantitative and qualitative disclosures about market risk affecting the Company, see Item 7A Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended December 31, 2006. Our exposure to market risks has not changed materially since December 31, 2006.  ITEM 4. CONTROLS AND PROCEDURES  Evaluation of Disclosure Controls and Procedures  The Companys management, including its Principal Executive Officer and Principal Accounting Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the reporting period covered by this quarterly report on Form 10-Q. Based on such evaluation, the Principal Executive Officer and Principal Accounting Officer have concluded that, as of the  24  end of the period covered by this quarterly report on Form 10-Q, the Companys disclosure controls and procedures are effective such that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commissions rules and forms relating to the Company.  Changes in Internal Control Over Financial Reporting  The Company made no change to its internal control over financial reporting or in other factors that materially affected, or were reasonably likely to have materially affected, its internal control over financial reporting during the quarter ended March 31, 2007.  The Company continues to implement a conversion to new and upgraded financial and human resources information technology systems that is expected to be completed in 2008. The Company has evaluated the effect on its internal control over financial reporting of this conversion and determined that this conversion has not materially affected, and is not reasonably likely to materially affect, as defined in Rule 13a-15(f) promulgated under the Exchange Act, the Companys internal control over financial reporting. The Company has not made any material changes to its internal control over financial reporting or in other factors that could materially affect these controls subsequent to March 31, 2007.  PART II. OTHER INFORMATION  ITEM 6. EXHIBITS  Exhibit 31.1
        Certification of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002.
  Exhibit 31.2
        Certification of Principal Accounting 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 Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  25    SIGNATURES
  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  EMAK Worldwide, Inc.
    Date
        May 15, 2007
        
        /s/ Roy DarRoy Dar
Senior Vice President, Controller
(Principal Accounting Officer)
    26