##### 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 March 31, 2006
 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
    
    13-3534145(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)6330 San Vicente Blvd.Los Angeles, CA
    
    90048(Address of principal executive offices)
    
    (Zip Code)
 (323) 932-4300
   þ o
  o o þ
  o þ




---



##### 



EMAK WORLDWIDE, INC.
 Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
March 31, 2006
 PagePart I.
    
    Financial InformationItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II.
    
    Other InformationItem 6. Exhibits
    
    
    23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  Cautionary Statement
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
 ASSETS
 December 31,
    
    
    March 31,2005
    
    
    2006CURRENT ASSETS:Cash and cash equivalents
    
    $
    6,315
    
    
    $
    3,336Restricted cash
    
    
    
    
    
    
    1,207Accounts receivable (net of allowances of $1,738 and
$1,113 as of December 31, 2005 and March 31, 2006, respectively)
    
    
    29,375
    
    
    
    23,676Inventories, net (Note 2)
    
    
    11,246
    
    
    
    7,877Prepaid expenses and other current assets
    
    
    3,044
    
    
    
    3,336Total current assets
    
    
    49,980
    
    
    
    39,432Fixed assets, net
    
    
    3,571
    
    
    
    3,731Goodwill (Note 2)
    
    
    12,855
    
    
    
    12,878Other intangibles, net (Note 2)
    
    
    712
    
    
    
    690Other assets
    
    
    626
    
    
    
    603Total assets
    
    $
    67,744
    
    
    $
    57,334
 
 3




---



##### 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,
    
    
    March 31,2005
    
    
    2006CURRENT LIABILITIES:Short-term debt
    
    $
    
    
    
    $
    Accounts payable
    
    
    20,118
    
    
    
    16,457Accrued liabilities
    
    
    17,342
    
    
    
    12,738Total current liabilities
    
    
    37,460
    
    
    
    29,195LONG-TERM LIABILITIES
    
    
    3,956
    
    
    
    3,744Total liabilities
    
    
    41,416
    
    
    
    32,939COMMITMENTS AND CONTINGENCIES (Note 6)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, 5,799,442 and 5,836,609 shares outstanding
as of December 31, 2005 and March 31, 2006, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    26,422
    
    
    
    24,823Accumulated deficit
    
    
    (5,918
    )
    
    
    (8,006
    )Accumulated other comprehensive income
    
    
    2,699
    
    
    
    2,72923,203
    
    
    
    19,546LessTreasury stock, 3,167,258 shares, at cost, as of
December 31, 2005 and March 31, 2006
    
    
    (17,669
    )
    
    
    (17,669
    )Unearned compensation
    
    
    (1,724
    )
    
    
    Total stockholders equity
    
    
    3,810
    
    
    
    1,877Total liabilities, mandatorily redeemable preferred stock and stockholders equity
    
    $
    67,744
    
    
    $
    57,344
 
 4




---



##### Table of Contents



EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 Three Months EndedMarch 31,2005
    
    
    2006REVENUES
    
    $
    57,242
    
    
    $
    42,686COST OF SALES
    
    
    42,793
    
    
    
    32,353Gross profit
    
    
    14,449
    
    
    
    10,333OPERATING EXPENSES:Salaries, wages and benefits
    
    
    8,330
    
    
    
    6,855Selling, general and administrative
    
    
    6,002
    
    
    
    4,960Integration costs
    
    
    45
    
    
    
    Restructuring charge
    
    
    583
    
    
    
    606ERP reimplementation costs
    
    
    89
    
    
    
    17Total operating expenses
    
    
    15,049
    
    
    
    12,438Loss from operations
    
    
    (600
    )
    
    
    (2,105
    )OTHER INCOME (EXPENSE), net
    
    
    (105
    )
    
    
    34Loss before provision (benefit) for income taxes
    
    
    (705
    )
    
    
    (2,071
    )PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    (288
    )
    
    
    17Net loss
    
    
    (417
    )
    
    
    (2,088
    )PREFERRED STOCK DIVIDENDS
    
    
    375
    
    
    
    375NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS
    
    $
    (792
    )
    
    $
    (2,463
    )BASIC LOSS PER SHARE
    
    $
    (0.14
    )
    
    $
    (0.42
    )BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,765,938
    
    
    
    5,806,203DILUTED LOSS PER SHARE
    
    $
    (0.14
    )
    
    $
    (0.42
    )DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,765,938
    
    
    
    5,806,203
 
 5




---



##### Table of Contents



EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
 Three Months EndedMarch 31,2005
    
    
    2006NET LOSS
    
    $
    (417
    )
    
    $
    (2,088
    )OTHER COMPREHENSIVE INCOME (LOSS):Foreign currency translation adjustments (Note 2)
    
    
    (647
    )
    
    
    87Unrealized gain (loss) on foreign currency (Note 2)
forward contracts
    
    
    348
    
    
    
    (57
    )COMPREHENSIVE LOSS
    
    $
    (716
    )
    
    $
    (2,058
    )
 
 6




---



##### Table of Contents



EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 Three Months EndedMarch 31,2005
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (417
    )
    
    $
    (2,088
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    568
    
    
    
    401Provision for doubtful accounts
    
    
    47
    
    
    
    Gain on asset disposal
    
    
    (5
    )
    
    
    Stock-based compensation expense
    
    
    181
    
    
    
    194Changes in operating assets and liabilities:Increase (decrease) in cash and cash equivalents:Accounts receivable
    
    
    12,979
    
    
    
    5,732Inventories
    
    
    1,755
    
    
    
    3,398Prepaid expenses and other current assets
    
    
    (1,118
    )
    
    
    (345
    )Other assets
    
    
    (176
    )
    
    
    25Accounts payable
    
    
    (6,111
    )
    
    
    (3,322
    )Accrued liabilities
    
    
    (2,642
    )
    
    
    (4,446
    )Long-term liabilities
    
    
    (305
    )
    
    
    (213
    )Net cash provided by (used in) operating activities
    
    
    4,756
    
    
    
    (664
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of fixed assets
    
    
    (448
    )
    
    
    (469
    )Restricted cash
    
    
    
    
    
    
    (1,207
    )Proceeds from sale of fixed assets
    
    
    11
    
    
    
    5Payment for purchase of Megaprint Group
    
    
    
    
    
    
    (313
    )Net cash used in investing activities
    
    
    (437
    )
    
    
    (1,984
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment of preferred stock dividends
    
    
    (375
    )
    
    
    (375
    )Borrowings under line of credit
    
    
    12,800
    
    
    
    Repayment under line of credit
    
    
    (15,941
    )
    
    
    Net cash used in financing activities
    
    
    (3,516
    )
    
    
    (375
    )Net increase (decrease) in cash and cash equivalents
    
    
    803
    
    
    
    (3,023
    )Effects of exchange rate changes on cash and cash equivalents
    
    
    (57
    )
    
    
    44CASH AND CASH EQUIVALENTS, beginning of period
    
    
    4,406
    
    
    
    6,315CASH AND CASH EQUIVALENTS, end of period
    
    $
    5,152
    
    
    $
    3,336SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:CASH PAID FOR:Interest
    
    $
    118
    
    
    $
    59Income tax refunds, net
    
    $
    (434
    )
    
    $
    (333
    )
 
 7




---



##### Table of Contents



EMAK WORLDWIDE, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(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




---



##### Table of Contents



For the Three Months Ended March 31,2005
    
    
    2006Loss
    
    
    Shares
    
    
    Per Share
    
    
    Loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS:Loss available to
common stockholders
    
    $
    (792
    )
    
    
    5,765,938
    
    
    $
    (0.14
    )
    
    $
    (2,463
    )
    
    
    5,806,203
    
    
    $
    (0.42
    )Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive EPS:Loss available to common
stockholders
    
    $
    (792
    )
    
    
    5,765,938
    
    
    $
    (0.14
    )
    
    $
    (2,463
    )
    
    
    5,806,203
    
    
    $
    (0.42
    )
 Restricted Cash
  Supplemental Cash Flow Information
  Change in Accounting Principle
    9




---



##### Table of Contents



Inventories
  December 31,
    
    
    March 31,2005
    
    
    2006Production-in-process
    
    $
    2,483
    
    
    $
    1,770Finished goods
    
    
    8,763
    
    
    
    6,107Total inventories, net
    
    $
    11,246
    
    
    $
    7,877
 Foreign Currency Translation
   Derivative Instruments
      10




---



##### Table of Contents



Goodwill and Other Intangibles
    ERP reimplementation costs
  NOTE 3  LINE OF CREDIT
    11




---



##### Table of Contents



NOTE 4
 RESTRUCTURING
         12




---



##### Table of Contents



NOTE 5  SEGMENTS
    Industry Segments
 As of and For the Three Months Ended March 31, 2005Agency
    
    
    Promotional
    
    
    ConsumerServices
    
    
    Products
    
    
    Products
    
    
    Corporate
    
    
    TotalTotal revenues
    
    $
    4,432
    
    
    $
    46,226
    
    
    $
    6,584
    
    
    $
    
    
    
    $
    57,242Segment income (loss) before
provision (benefit)
for income taxes
    
    $
    618
    
    
    $
    3,482
    
    
    $
    (545
    )
    
    $
    (4,260
    )
    
    $
    (705
    )Fixed asset additions
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    448
    
    
    $
    448Depreciation and amortization
    
    
    
    
    
    $
    106
    
    
    $
    
    
    
    $
    462
    
    
    $
    568Total assets
    
    
    13,013
    
    
    $
    73,044
    
    
    $
    9,442
    
    
    $
    24,015
    
    
    $
    119,514
 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) before
provision (benefit)
for income taxes
    
    $
    1,276
    
    
    $
    415
    
    
    $
    (48
    )
    
    $
    (3,714
    )
    
    $
    (2,071
    )Fixed asset additions
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    469
    
    
    $
    469Depreciation and amortization
    
    
    
    
    
    $
    29
    
    
    $
    
    
    
    $
    372
    
    
    $
    401Total assets
    
    $
    14,328
    
    
    $
    27,522
    
    
    $
    3,261
    
    
    $
    12,223
    
    
    $
    57,334
 13




---



##### Table of Contents



NOTE 6COMMITMENTS AND CONTINGENCIES
 Operating Leases
   Year2006 (remainder of)
    
    $
    3,4302007
    
    
    4,1692008
    
    
    3,9312009
    
    
    3,7912010
    
    
    787Thereafter
    
    
    1,912Total
    
    $
    18,020
  Guaranteed Royalties
  Year2006 (remainder of)
    
    $
    5562007
    
    
    6002008
    
    
    300Total
    
    $
    1,456
  Employment Agreements
  Year2006 (remainder of)
    
    $
    1,8952007
    
    
    1,755Total
    
    $
    3,650
 NOTE 7STOCK BASED COMPENSATION
   14




---



##### Table of Contents



Three Months EndedMarch 31,2005Net loss  as reported
    
    $
    (417
    )Plus:Stock-based compensation expense, net of tax
included in reported net loss
    
    
    107Less:Compensation expense (a)
    
    
    84Net loss  pro forma
    
    $
    (394
    )Loss per share:Basic loss per share, as reported
    
    $
    (0.14
    )Pro forma basic loss per share
    
    $
    (0.13
    )Diluted loss per share, as reported
    
    $
    (0.14
    )Pro forma diluted loss per share
    
    $
    (0.13
    )
 (a) Determined under fair value based method for all awards, net of tax.
 15




---



##### Table of Contents



Stock Options
  Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicNumber
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    ValueOutstanding at January 1, 2006
    
    
    1,733,970
    
    
    $
    12.64Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Canceled
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    1,733,970
    
    
    $
    12.64
    
    
    
    6.24
    
    
    $
    158Exercisable at March 31, 2006
    
    
    1,733,970
    
    
    $
    12.64
    
    
    
    6.24
    
    
    $
    158
  Restricted Stock and Restricted Stock Units
   Weighted AverageGrant DateShares
    
    
    Fair ValueUnvested at January 1, 2006
    
    
    177,110
    
    
    $
    12.00Granted
    
    
    
    
    
    
    Vested
    
    
    (7,065)
    
    
    $
    9.50Forfeited
    
    
    (15,812
    )
    
    $
    12.16Unvested at March 31, 2006
    
    
    154,233
    
    
    $
    12.10
 16




---



##### Table of Contents



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
  ®
  ® ®
  
    
    To properly position our agencies for relevance with our clients;
    
    To leverage the expertise of our employees;
    
    To consistently drive sustainable growth; and
    
    To effectively manage our operating expenses.
 17




---



##### Table of Contents



Results of Operations
  Three MonthsEnded March 31,2005
    
    
    2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    74.8
    
    
    
    75.8Gross profit
    
    
    25.2
    
    
    
    24.2Operating expenses:Salaries, wages and benefits
    
    
    14.5
    
    
    
    16.1Selling, general and administrative
    
    
    10.5
    
    
    
    11.6Integration costs
    
    
    0.1
    
    
    
    Restructuring charge
    
    
    1.0
    
    
    
    1.4ERP reimplementation costs
    
    
    0.2
    
    
    
    0.0Total operating expenses
    
    
    26.3
    
    
    
    29.1Loss from operations
    
    
    (1.1
    )
    
    
    (4.9
    )Other income (expense), net
    
    
    (0.2
    )
    
    
    0.0Loss before provision (benefit) for income taxes
    
    
    (1.3
    )
    
    
    (4.9
    )Provision (benefit) for income taxes
    
    
    (0.5
    )
    
    
    0.0Net loss
    
    
    (0.8
    )%
    
    
    (4.9
    )%
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005 (In Thousands):
 Revenues
   ® 
 Cost of sales and gross profit
    18




---



##### Table of Contents



®
 Salaries, wages and benefits
  Selling, general and administrative expenses
  Integration costs
  Restructuring charge
  ERP reimplementation costs
  Other income (expense)
  Provision (benefit) for income taxes
  19




---



##### Table of Contents



Net loss
  Financial Condition and Liquidity
         2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalOperating Leases
    
    $
    3,430
    
    
    $
    4,169
    
    
    $
    3,931
    
    
    $
    3,791
    
    
    $
    787
    
    
    $
    1,912
    
    
    $
    18,020Guaranteed Royalties
    
    
    556
    
    
    
    600
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,456Employment Agreements
    
    
    1,895
    
    
    
    1,755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,650Total
    
    $
    5,881
    
    
    $
    6,524
    
    
    $
    4,231
    
    
    $
    3,791
    
    
    $
    787
    
    
    $
    1,912
    
    
    $
    23,126
  20




---



##### Table of Contents



Restructuring
         21




---



##### Table of Contents



Credit Facilities
   
 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
   22




---



##### Table of Contents



PART II. OTHER INFORMATION
 
  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.
 23




---



##### Table of Contents



SIGNATURES
  EMAK Worldwide, Inc.Date May 15, 2006
    
    /s/ Roy DarRoy DarVice President, Controller(Principal Accounting Officer)
 24