##### 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 June 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 23346
 EMAK WORLDWIDE, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    13-3534145
(I.R.S. Employer
Identification No.)6330 San Vicente Blvd.
Los Angeles, CA
(Address of principal executive offices)
    
    90048
(Zip Code)
 (323) 932-4300
   þ o
  o þ




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EMAK WORLDWIDE, INC.
 Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
June 30, 2005
 PagePart I. Financial InformationItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30Part II. Other InformationItem 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    32EX-31.1EX-31.2EX-32.1EX-32.2
  Cautionary Statement
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
 ASSETS
 December 31,
    
    June 30,2004
    
    2005CURRENT ASSETS:Cash and cash equivalents
    
    $
    4,406
    
    
    $
    4,887Accounts receivable (net of allowances of $1,733 and
$1,166 as of December 31, 2004 and June 30, 2005, respectively)
    
    
    47,180

    
    
    
    33,638Inventories (Note 2)
    
    
    18,763
    
    
    
    11,799Prepaid expenses and other current assets
    
    
    5,466
    
    
    
    6,227Total current assets
    
    
    75,815
    
    
    
    56,551Fixed assets, net
    
    
    5,029
    
    
    
    3,793Goodwill (Notes 2 and 6)
    
    
    41,723
    
    
    
    41,885Other intangibles, net (Notes 2 and 6)
    
    
    3,686
    
    
    
    3,408Other assets
    
    
    7,060
    
    
    
    5,655Total assets
    
    $
    133,313
    
    
    $
    111,292
 
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##### Table of Contents



EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
 December 31,
    
    June 30,2004
    
    2005CURRENT LIABILITIES:Short-term debt
    
    $
    6,025
    
    
    $
    875Accounts payable
    
    
    30,996
    
    
    
    22,617Accrued liabilities
    
    
    20,860
    
    
    
    16,385Total current liabilities
    
    
    57,881
    
    
    
    39,877LONG-TERM LIABILITIES
    
    
    6,621
    
    
    
    4,134Total liabilities
    
    
    64,502
    
    
    
    44,011COMMITMENTS AND CONTINGENCIES (Note 8)Mandatorily redeemable preferred stock, Series AA senior cumulative convertible,
$.001 par value per share, 25,000 issued and outstanding, stated at liquidation
preference of $1,000 per share ($25,000), net of issuance costs
    
    
    22,518
    
    
    
    22,518STOCKHOLDERS EQUITY:Preferred stock, $.001 par value per share, 1,000,000
shares authorized, 25,000 Series AA issued and outstanding
    
    
    
    
    
    
    Common stock, $.001 par value per share, 25,000,000
shares authorized, 5,759,263 and 5,787,379 shares outstanding
as of December 31, 2004 and June 30, 2005, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    27,516
    
    
    
    27,519Retained earnings
    
    
    33,954
    
    
    
    33,511Accumulated other comprehensive income
    
    
    4,972
    
    
    
    3,17866,442
    
    
    
    64,208LessTreasury stock, 3,167,258 shares, at cost, as of
December 31, 2004 and June 30, 2005
    
    
    (17,669
    )
    
    
    (17,669
    )Unearned compensation
    
    
    (2,480
    )
    
    
    (1,776
    )Total stockholders equity
    
    
    46,293
    
    
    
    44,763Total liabilities, mandatorily redeemable preferred stock and stockholders equity
    
    $
    133,313
    
    
    $
    111,292
 
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##### Table of Contents



EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005REVENUES
    
    $
    51,778
    
    
    $
    58,102
    
    
    $
    103,590
    
    
    $
    115,344COST OF SALES
    
    
    38,015
    
    
    
    43,542
    
    
    
    76,587
    
    
    
    86,335Minimum royalty guarantee shortfall gain
    
    
    
    
    
    
    (2,325
    )
    
    
    
    
    
    
    (2,325
    )Gross profit
    
    
    13,763
    
    
    
    16,885
    
    
    
    27,003
    
    
    
    31,334OPERATING EXPENSES:Salaries, wages and benefits
    
    
    7,900
    
    
    
    9,657
    
    
    
    15,177
    
    
    
    17,987Selling, general and administrative
    
    
    6,160
    
    
    
    5,626
    
    
    
    12,056
    
    
    
    11,628Integration costs
    
    
    93
    
    
    
    23
    
    
    
    136
    
    
    
    68Loss on Chicago lease
    
    
    311
    
    
    
    
    
    
    
    311
    
    
    
    Restructuring charge
    
    
    105
    
    
    
    319
    
    
    
    105
    
    
    
    902ERP reimplementation costs
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    102Total operating expenses
    
    
    14,569
    
    
    
    15,638
    
    
    
    27,785
    
    
    
    30,687Income (loss) from operations
    
    
    (806
    )
    
    
    1,247
    
    
    
    (782
    )
    
    
    647OTHER INCOME (EXPENSE), net
    
    
    (68
    )
    
    
    2
    
    
    
    (360
    )
    
    
    (103
    )Income (loss) before provision (benefit) for income taxes
    
    
    (874
    )
    
    
    1,249
    
    
    
    (1,142
    )
    
    
    544PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    (344
    )
    
    
    525
    
    
    
    (446
    )
    
    
    237NET INCOME (LOSS)
    
    
    (530
    )
    
    
    724
    
    
    
    (696
    )
    
    
    307PREFERRED STOCK DIVIDENDS
    
    
    375
    
    
    
    375
    
    
    
    750
    
    
    
    750NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS
    
    $
    (905
    )
    
    $
    349
    
    
    $
    (1,446
    )
    
    $
    (443
    )BASIC INCOME (LOSS) PER SHARE
    
    $
    (0.16
    )
    
    $
    0.06
    
    
    $
    (0.25
    )
    
    $
    (0.08
    )BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,758,370
    
    
    
    5,785,202
    
    
    
    5,739,603
    
    
    
    5,775,570DILUTED INCOME (LOSS) PER SHARE
    
    $
    (0.16
    )
    
    $
    0.06
    
    
    $
    (0.25
    )
    
    $
    (0.08
    )DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,758,370
    
    
    
    6,005,326
    
    
    
    5,739,603
    
    
    
    5,775,570
 
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EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005NET INCOME (LOSS)
    
    $
    (530
    )
    
    $
    724
    
    
    $
    (696
    )
    
    $
    307OTHER COMPREHENSIVE INCOME (LOSS):Foreign currency translation adjustments (Note 2)
    
    
    (202
    )
    
    
    (1,183
    )
    
    
    320
    
    
    
    (1,830
    )Unrealized gain (loss) on foreign currency
forward contracts (Note 2)
    
    
    (83
    )
    
    
    (312
    )
    
    
    206
    
    
    
    36COMPREHENSIVE LOSS
    
    $
    (815
    )
    
    $
    (771
    )
    
    $
    (170
    )
    
    $
    (1,487
    )
 
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EMAK WORLDWIDE, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 Six Months EndedJune 30,2004
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (696
    )
    
    $
    307Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    987
    
    
    
    1,129Provision for doubtful accounts
    
    
    110
    
    
    
    15(Gain) loss on disposal of fixed assets
    
    
    (8
    )
    
    
    10Tax benefit from exercise of stock options
    
    
    65
    
    
    
    Amortization of restricted stock
    
    
    311
    
    
    
    483Minimum royalty guarantee shortfall gain
    
    
    
    
    
    
    (2,325
    )Changes in operating assets and liabilities, net of effect of acquisition:Increase (decrease) in cash and cash equivalents:Accounts receivable
    
    
    9,487
    
    
    
    12,715Inventories
    
    
    1,621
    
    
    
    6,845Prepaid expenses and other current assets
    
    
    (829
    )
    
    
    (981
    )Other assets
    
    
    (1,012
    )
    
    
    1,170Accounts payable
    
    
    (4,141
    )
    
    
    (7,930
    )Accrued liabilities
    
    
    (4,188
    )
    
    
    (3,446
    )Long-term liabilities
    
    
    (433
    )
    
    
    (487
    )Net cash provided by operating activities
    
    
    1,274
    
    
    
    7,505CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of fixed assets
    
    
    (936
    )
    
    
    (992
    )Proceeds from sale of fixed assets
    
    
    9
    
    
    
    976Purchase of marketable securities
    
    
    (1,300
    )
    
    
    Refund for purchase of Upshot
    
    
    
    
    
    
    75Payment for purchase of Megaprint Group
    
    
    (4,614
    )
    
    
    (892
    )Payment for purchase of Johnson Grossfield
    
    
    
    
    
    
    (148
    )Net cash used in investing activities
    
    
    (6,841
    )
    
    
    (981
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment of preferred stock dividends
    
    
    (1,125
    )
    
    
    (750
    )Purchase of treasury stock
    
    
    (211
    )
    
    
    Repayment of short-term debt
    
    
    
    
    
    
    (5,150
    )Proceeds from exercise of stock options
    
    
    538
    
    
    
    115Net cash used in financing activities
    
    
    (798
    )
    
    
    (5,785
    )Net increase (decrease) in cash and cash equivalents
    
    
    (6,365
    )
    
    
    739Effects of exchange rate changes on cash and cash equivalents
    
    
    22
    
    
    
    (258
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    19,291
    
    
    
    4,406CASH AND CASH EQUIVALENTS, end of period
    
    $
    12,948
    
    
    $
    4,887SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:CASH PAID FOR:Interest
    
    $
    102
    
    
    $
    241Income taxes, net of refunds
    
    $
    7
    
    
    $
    (502
    )
 
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EMAK WORLDWIDE, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 NOTE 1    ORGANIZATION AND BUSINESS
  NOTE 2    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Net Income Per Share
   8




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For the Three Months Ended June 30,2004
    
    2005Loss
    
    Shares
    
    Per Share
    
    Income
    
    SharesPer
    
    Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS:Income (loss) available to
common stockholders
    
    $
    (905
    )
    
    
    5,758,370
    
    
    $
    (0.16
    )
    
    $
    349
    
    
    
    5,785,202
    
    
    $
    0.06Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,714Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199,410Dilutive EPS:Income (loss) available to common
stockholders
    
    $
    (905
    )
    
    
    5,758,370
    
    
    $
    (0.16
    )
    
    $
    349
    
    
    
    6,005,326
    
    
    $
    0.06
 For the Six Months Ended June 30,2004
    
    2005Loss
    
    Shares
    
    Per Share
    
    Loss
    
    SharesPer
    
    Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS:Loss available to
common stockholders
    
    $
    (1,446
    )
    
    
    5,739,603
    
    
    $
    (0.25
    )
    
    $
    (443
    )
    
    
    5,775,570
    
    
    $
    (0.08
    )Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive EPS:Loss available to common
stockholders
    
    $
    (1,446
    )
    
    
    5,739,603
    
    
    $
    (0.25
    )
    
    $
    (443
    )
    
    
    5,775,570
    
    
    $
    (0.08
    )
 Inventories
  December 31,
    
    June 30,2004
    
    2005Production-in-process
    
    $
    861
    
    
    $
    1,090Finished goods
    
    
    17,902
    
    
    
    10,709$
    18,763
    
    
    $
    11,799
 Foreign Currency Translation
   9




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Derivative Instruments
       Goodwill and Other Intangibles
   10




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Royalties
   Stock-Based Compensation
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Net income (loss)  as reported
    
    $
    (530
    )
    
    $
    724
    
    
    $
    (696
    )
    
    $
    307Plus:Stock-based compensation expense, net of tax, included in reported
net income (loss)
    
    
    137
    
    
    
    166
    
    
    
    190
    
    
    
    273Less:Compensation expense (a)
    
    
    326
    
    
    
    155
    
    
    
    513
    
    
    
    239Net income (loss)  pro forma
    
    $
    (719
    )
    
    $
    735
    
    
    $
    (1,019
    )
    
    $
    341Income (loss) per share:Basic income (loss) per share, as reported
    
    $
    (0.16
    )
    
    $
    0.06
    
    
    $
    (0.25
    )
    
    $
    (0.08
    )Pro forma basic income (loss) per share
    
    $
    (0.19
    )
    
    $
    0.06
    
    
    $
    (0.31
    )
    
    $
    (0.07
    )Diluted income (loss) per share, as reported
    
    $
    (0.16
    )
    
    $
    0.06
    
    
    $
    (0.25
    )
    
    $
    (0.08
    )Pro forma diluted income (loss) per share
    
    $
    (0.19
    )
    
    $
    0.06
    
    
    $
    (0.31
    )
    
    $
    (0.07
    )
 
 (a)
    
    Determined under fair value based method for all awards, net of tax. 11




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ERP reimplementation costs
  Recent Accounting Pronouncements
     NOTE 3  LINE OF CREDIT
  12




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NOTE 4  RESTRUCTURING
   NOTE 5  SEGMENTS
   13




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Industry Segments
 As of and For the Three Months Ended June 30, 2004Marketing
    
    ConsumerServices
    
    Products
    
    Corporate
    
    TotalTotal revenues
    
    $
    47,195
    
    
    $
    4,583
    
    
    $
    
    
    
    $
    51,778Segment income (loss) before provision (benefit)
for income taxes
    
    $
    4,938
    
    
    $
    (716
    )
    
    $
    (5,096
    )
    
    $
    (874
    )Provision (benefit) for income taxes
    
    
    1,946
    
    
    
    (282
    )
    
    
    (2,008
    )
    
    
    (344
    )Net income (loss)
    
    $
    2,992
    
    
    $
    (434
    )
    
    $
    (3,088
    )
    
    $
    (530
    )Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    345
    
    
    $
    345Depreciation and amortization
    
    $
    90
    
    
    $
    
    
    
    $
    431
    
    
    $
    521Total assets
    
    $
    82,539
    
    
    $
    8,730
    
    
    $
    29,481
    
    
    $
    120,750
 As of and For the Three Months Ended June 30, 2005Services
    
    Products
    
    Corporate
    
    TotalTotal revenues
    
    $
    53,652
    
    
    $
    4,450
    

    
    $
    
    
    
    $
    58,102Segment income (loss) before provision (benefit)
for income taxes
    
    $
    4,996
    
    
    $
    1,882
    
    
    $
    (5,629
    )
    
    $
    1,249Provision (benefit) for income taxes
    
    
    2,291
    
    
    
    805
    
    
    
    (2,571
    )
    
    
    525Net income (loss)
    
    $
    2,705
    
    
    $
    1,077
    
    
    $
    (3,058
    )
    
    $
    724Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    544
    
    
    $
    544Depreciation and amortization
    
    $
    107
    
    
    $
    
    
    
    $
    454
    
    
    $
    561Total assets
    
    $
    82,975
    
    
    $
    7,776
    
    
    $
    20,541
    
    
    $
    111,292
 As of and For the Six Months Ended June 30, 2004Services
    
    Products
    
    Corporate
    
    TotalTotal revenues
    
    $
    93,683
    
    
    $
    9,907
    
    
    $
    
    
    
    $
    103,590Segment income (loss) before provision (benefit)
for income taxes
    
    $
    9,245
    
    
    $
    (839
    )
    
    $
    (9,548
    )
    
    $
    (1,142
    )Provision (benefit) for income taxes
    
    
    3,585
    
    
    
    (329
    )
    
    
    (3,702
    )
    
    
    (446
    )Net income (loss)
    
    $
    5,660
    
    
    $
    (510
    )
    
    $
    (5,846
    )
    
    $
    (696
    )Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    936
    
    
    $
    936Depreciation and amortization
    
    $
    160
    
    
    $
    
    
    
    $
    827
    
    
    $
    987Total assets
    
    $
    82,539
    
    
    $
    8,730
    
    
    $
    29,481
    
    
    $
    120,750
 As of and For the Six Months Ended June 30, 2005Services
    
    Products
    
    Corporate
    
    TotalTotal revenues
    
    $
    104,310
    
    
    $
    11,034
    
    
    $
    
    
    
    $
    115,344Segment income (loss) before provision (benefit)
for income taxes
    
    $
    9,096
    
    
    $
    1,337
    
    
    $
    (9,889
    )
    
    $
    544Provision (benefit) for income taxes
    
    
    3,967
    
    
    
    583
    
    
    
    (4,313
    )
    
    
    237Net income (loss)
    
    $
    5,129
    
    
    $
    754
    
    
    $
    (5,576
    )
    
    $
    307Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    992
    
    
    $
    992Depreciation and amortization
    
    $
    213
    
    
    $
    
    
    
    $
    916
    
    
    $
    1,129Total assets
    
    $
    82,975
    
    
    $
    7,776
    
    
    $
    20,541
    
    
    $
    111,292
 14




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##### Table of Contents



NOTE 6  ACQUISITIONS
   Net current assets
    
    $
    2,758Property, plant and equipment
    
    
    8Other non-current assets
    
    
    7Net current liabilities
    
    
    (1,214
    )Estimated fair value, net assets acquired
    
    
    1,559Goodwill
    
    
    1,449Other intangible assets
    
    
    2,393Total purchase price
    
    $
    5,401
   Net current assets
    
    $
    8,512Property, plant and equipment
    
    
    1,265Net current liabilities
    
    
    (7,995
    )Estimated fair value, net assets acquired
    
    
    1,782Goodwill
    
    
    3,887Other intangible assets
    
    
    338Total purchase price
    
    $
    6,007
 15




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2004Pro forma revenues
    
    $
    53,209
    
    
    $
    110,173Pro forma net loss
    
    $
    (865
    )
    
    $
    (601
    )Pro forma basic loss per share
    
    $
    (0.22
    )
    
    $
    (0.24
    )Pro forma diluted loss per share
    
    $
    (0.22
    )
    
    $
    (0.24
    )
  NOTE 7  MANDATORILY REDEEMABLE PREFERRED STOCK
  16




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##### Table of Contents



NOTE 8  COMMITMENTS AND CONTINGENCIES
 Operating Leases
   Year2005 (remainder of)
    
    $
    2,5562006
    
    
    4,7972007
    
    
    4,4702008
    
    
    3,9752009
    
    
    3,860Thereafter
    
    
    2,739Total
    
    $
    22,397
  17




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##### Table of Contents



Guaranteed Royalties
  Year2005 (remainder of)
    
    $
    1,5602006
    
    
    9712007
    
    
    330Total
    
    $
    2,861
   Employment Agreements
  Year2005 (remainder of)
    
    $
    1,0722006
    
    
    4762007
    
    
    3252008
    
    
    2002009
    
    
    200Thereafter
    
    
    1,600Total
    
    $
    3,873
  NOTE 9  SUBSEQUENT EVENTS
    18




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##### 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
   19




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##### Table of Contents




    
    Our Equity Marketing agency, performed well during the quarter. Equity Marketings
revenues grew as compared to the prior year first quarter despite reduced revenues for
certain low margin logistical services that we decided not to pursue this year. During the
second quarter we executed two domestic premium programs, including one very large program
tied to Lucasfilms Star Wars® movies, and two international premium programs. This is
essentially the same number of second quarter promotional programs that we have typically
produced for Burger King. However, we are seeing the continuation of a trend of higher
unit volumes for domestic programs as a result of recent improvements in Burger King system
sales of Kids Meals.
    
    In March of 2005, our Upshot agency was one of two agencies of record selected for the
promotional business of Miller Brewing Company. In its new role, Upshot began providing
promotional work for most of Millers beer brand portfolio including trademark brands such
as Miller Lite and Miller Genuine Draft in the U.S., beginning in April 2005.
    Results of Operations
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2005
    
    2004
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    73.4
    
    
    
    74.9
    
    
    
    73.9
    
    
    
    74.8Minimum royalty shortfall gain
    
    
    
    
    
    
    (4.0
    )
    
    
    
    
    
    
    (2.0
    )Gross profit
    
    
    26.6
    
    
    
    29.1
    
    
    
    26.1
    
    
    
    27.2Operating expenses:Salaries, wages and benefits
    
    
    15.3
    
    
    
    16.6
    
    
    
    14.7
    
    
    
    15.5Selling, general and administrative
    
    
    11.9
    
    
    
    9.7
    
    
    
    11.7
    
    
    
    10.1Integration costs
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.1Loss on Chicago lease
    
    
    0.6
    
    
    
    
    
    
    
    0.3
    
    
    
    Restructuring charge
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.1
    
    
    
    0.8ERP reimplementation costs
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.1Total operating expenses
    
    
    28.2
    
    
    
    26.9
    
    
    
    26.9
    
    
    
    26.6Income (loss) from operations
    
    
    (1.6
    )
    
    
    2.2
    
    
    
    (0.8
    )
    
    
    0.6Other income (expense), net
    
    
    (0.1
    )
    
    
    0.0
    
    
    
    (0.3
    )
    
    
    (0.1
    )Income (loss) before provision for income taxes
    
    
    (1.7
    )
    
    
    2.2
    
    
    
    (1.1
    )
    
    
    0.5Provision (benefit) for income taxes
    
    
    (0.7
    )
    
    
    0.9
    
    
    
    (0.4
    )
    
    
    0.2Net income (loss)
    
    
    (1.0
    )%
    
    
    1.3
    %
    
    
    (0.7
    )%
    
    
    0.3
    %
 20




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##### Table of Contents



Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004 (In Thousands):
 Revenues
   
 Cost of sales and gross profit
     Salaries, wages and benefits
  Selling, general and administrative expenses
  21




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##### Table of Contents



Integration costs
  Restructuring charge
  ERP reimplementation costs
  Other income (expense)
  Provision (benefit) for income taxes
  Net income (loss)
  Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004 (In Thousands):
 Revenues
  22




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 
 Cost of sales and gross profit
     Salaries, wages and benefits
  Selling, general and administrative expenses
  Integration costs
  Restructuring charge
  23




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##### Table of Contents



ERP reimplementation costs
  Other expense
  Provision (benefit) for income taxes
  Net income (loss)
  Financial Condition and Liquidity
     24




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2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalOperating Leases
    
    $
    2,556
    
    
    $
    4,797
    
    
    $
    4,470
    
    
    $
    3,975
    
    
    $
    3,860
    
    
    $
    2,739
    
    
    $
    22,397Guaranteed Royalties
    
    
    1,560
    
    
    
    971
    
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,861Employment Agreements
    
    
    1,072
    
    
    
    476
    
    
    
    325
    
    
    
    200
    
    
    
    200
    
    
    
    1,600
    
    
    
    3,873Total
    
    $
    5,188
    
    
    $
    6,244
    
    
    $
    5,125
    
    
    $
    4,175
    
    
    $
    4,060
    
    
    $
    4,339
    
    
    $
    29,131
  Restructuring
   Royalties
  25




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Credit Facilities
     Acquisitions
  26




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Issuance of Preferred Stock
     27




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Subsequent Events
    Recent Accounting Pronouncements
    28




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##### Table of Contents



Cautionary Statements and Risk Factors
 Marketplace Risks
 
    
    Dependence on a single customer, Burger King, which may adversely affect our financial condition and results of operations.
    
    Concentration risk associated with accounts receivable. We regularly extend credit to a subsidiary of Burger Kings
purchasing cooperative which accounts for approximately 80% of our sales to the Burger King.
    
    Dependence on nonrenewable product orders by Burger King, which promotions are in effect for a limited period of time.
    
    Dependence on the popularity of licensed entertainment properties, which may adversely affect our financial condition and
results of operations.
    
    Significant quarter-to-quarter variability in revenues and net income, which may result in operating results below the
expectations of securities analysts and investors.
    
    Increased competitive pressure, which may affect our sales of products and services.
    
    Dependence on foreign manufacturers, which may increase the costs of our products and affect the demand for such products.
    
    Variations in product costs due to fluctuations in raw materials prices, including plastic resin.
 Financing Risks
 
    
    Currency fluctuations, which may affect our suppliers and reportable income.
 Other Risks
 
    
    Products that we develop or sell may expose us to liability from claims by users of such products for damages including,
but not limited to, bodily injury or property damage. We currently maintain product liability insurance coverage in
amounts that we believe are adequate. There can be no assurance that we will be able to maintain such coverage or obtain
additional coverage on acceptable terms in the future, or that such insurance will provide adequate coverage against all
potential claims.
    
    Exposure to liability for the costs related to product recalls. These costs can include legal expenses, advertising,
collection and destruction of product, and free goods. Our product liability insurance coverage generally excludes such
costs and damages resulting from product recall.
    
    Potential negative impact of past or future acquisitions, which may disrupt our ongoing business, distract senior
management and increase expenses (including risks associated with the financial condition and integration of the
businesses which we acquire).
    
    Adverse results of litigation, governmental proceedings or environmental matters, which may lead to increased costs or
interruption in normal business operations.
    
    Changes in laws or regulations, both domestically and internationally, including those affecting consumer products or
environmental activities or trade restrictions, which may lead to increased costs.
    
    Strike and other labor disputes which may negatively impact the distribution channels for our products.
    
    Exposure to liabilities for minimum royalty commitments in connection with license agreements for entertainment properties.
    
    Potential negative impact of Severe Acute Respiratory Syndrome (SARS), which could adversely affect our vendors in the
Far East.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  29




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ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
   30




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PART II. OTHER INFORMATION
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Votes For
    
    Votes Withheld1. Election of Directors by
holders of Common StockBarrie P. Berg
    
    
    3,784,084
    
    
    
    62,571Howard D. Bland
    
    
    3,781,953
    
    
    
    64,702Jonathan D. Kaufelt
    
    
    3,757,975
    
    
    
    88,680Donald A. Kurz
    
    
    3,690,513
    
    
    
    156,142Alfred E. Osborne Jr.
    
    
    3,782,253
    
    
    
    64,402Stephen P. Robeck
    
    
    3,519,658
    
    
    
    326,9972. Election of Director by
holders of Series A
Preferred Stock
Jeffrey S. Deutschman
    
    
    25,000
    
    
    
    
 Votes For
    
    Votes Against
    
    Abstain3. Proposal to approve
amendments to the
certificate of
designation Series AA
senior cumulative
convertible preferred
stock.
    
    
    3,545,158
    
    
    
    13,621
    
    
    
    1,1404. Proposal to ratify
appointment of
PricewaterhouseCoopers
LLP as independent
registered public
accounting firm
    
    
    5,533,299
    
    
    
    7,621
    
    
    
    650
 
 ITEM 5. OTHER INFORMATION
    31




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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 Chief Financial Officer pursuant to Section 302 of the Sarbanes  Oxley Act of 2002.Exhibit 32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 32




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SIGNATURES
  EMAK Worldwide, Inc.Date August 15, 2005
    /s/ ZOHAR ZIVZohar ZivSenior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 33