##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from to
 Commission File Number 0-23346
 EMAK WORLDWIDE, INC.
  Delaware
    
    13-3534145(State of or other jurisdiction of
incorporation or organization)
    
    (I.R.S. employer identification No.)
 6330 SAN VICENTE BLVD.
LOS ANGELES, CALIFORNIA 90048
 (323) 932-4300
  Title of each Class
    
    Name of each exchange on which registeredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act:
    
    Common Stock, $0.001 par value(Title of class)
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




---



##### 



EMAK WORLDWIDE, INC.
 INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION  YEAR ENDED DECEMBER 31, 2005
 ITEMS IN FORM 10-K
 PagePart IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    7Item 1B. Unresolved Staff Comments
    
    
    10Item 2. Properties
    
    
    10Item 3. Legal Proceedings
    
    
    10Item 4. Submission of Matters to a Vote of Security Holders
    
    
    10Part IIItem 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    10Item 6. Selected Financial Data
    
    
    11Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operation
    
    
    12Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 8. Financial Statements and Supplementary Data
    
    
    31Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
    
    
    60Item 9A. Controls and Procedures
    
    
    60Item 9B. Other Information
    
    
    60Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    60Item 11. Executive Compensation
    
    
    60Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    60Item 13. Certain Relationships and Related Transactions
    
    
    61Item 14. Principal Accountant Fees and Services
    
    
    61Part IVItem 15. Exhibits, Financial Statement Schedules
    
    
    61EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 10.7EXHIBIT 10.8EXHIBIT 10.9EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
    1




---



##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
  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.
 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.
   Our History and Vision
  
    
    In July 2001, EMAK acquired Logistix (U.K.), gaining a presence in Europe with broad-based
strategic client relationships, including research, new concept development, licensing
guidance and the development of premium-based promotions.
    
    In July 2002, EMAK acquired Upshot, a strategic marketing agency with expertise in
promotional, event and collaborative marketing, retail design and environmental
branding, providing us with a broader range of services.
    
    In September 2003, EMAK acquired SCI Promotion, a provider of gift-with-purchase
and purchase-with-purchase promotional programs to the retail department store
industry.
    
    In February 2004, EMAK acquired Johnson Grossfield, expanding our client base in
the Quick Service Restaurant category with the addition of the kids marketing program
of Subway Restaurants.
    
    In November 2004, EMAK acquired Megaprint Group, a pan-European provider of
innovative paper and board engineered (2-D) premiums, providing a complementary
service offering and expanding our client roster and geographic presence.
   2




---



##### Table of Contents



Business Segments
    Marketing Services
     
    
    assisting clients in understanding the consumer through creative research and planning;
    
    assisting clients with promotional strategy, calendar
planning and concept development;
    
    evaluating intellectual properties for which licenses are available;
    
    advising clients as to which licenses are consistent with their marketing objectives;
    
    assisting clients in procuring licenses;
    
    proposing specific product and non-product based promotions often utilizing the properties secured by our clients;
    
    developing promotional concepts and designs based on the property;
    
    providing the development and engineering necessary to translate the property,
which often consists of two-dimensional artwork, into finished products;
    
    obtaining or coordinating licensor approval of product designs, prototypes and finished products;
    
    contracting for and supervising the manufacture of products;
    
    arranging for safety testing to customer and regulatory specifications by independent testing laboratories;
    
    arranging insurance, customs clearance and, in most instances, the shipping of finished products to the client;
 3




---



##### Table of Contents




    
    providing warehousing, fulfillment and billing services;
    
    providing creative services for packaging and point-of-sale advertising;
    
    developing experiential marketing campaigns to allow target
consumers to directly experience our clients brands;
    
    using the internet to complement promotional programs being
conducted in the physical world;
    
    developing collaborative marketing programs between retailers and manufacturers; and
    
    creating three dimensional environments to influence consumers purchasing behavior
including environmental planning, store design, space planning and visual
merchandising.
   Consumer Products
    Property
    
    Licensor
    
    Grant Date
    
    Market Date
    
    Exp. Date
    
    Categories
    
    TerritoryRobot Wars®
    
    BBC Worldwide
    
    Jul 2000
    
    Sep 2000
    
    Dec 2006
    
    Pullback, radio
    
    United Kingdom andcontrol and die
    
    Irelandcast toys andplaysets.Ultimate Book of Spells
    
    BKN Consumer
    
    Jan 2002
    
    Sep 2002
    
    Dec 2006
    
    Plastic figurines
    
    United Kingdom andProducts
    
    
    
    
    
    
    
    and playsets.
    
    IrelandCrayola®
    
    Binney & Smith
    
    May 2002
    
    Aug 2002
    
    Dec 2008
    
    Bath toys,
    
    North America andactivities and art
    
    Europesets.JoJos Circus
    
    Disney Consumer
    
    Dec 2003
    
    Jan 2005
    
    Dec 2007
    
    Pre-school toys,
    
    United StatesProducts
    
    
    
    
    
    
    
    plush, playsets andmusical toys.Baby Einstein
    
    The Baby Einstein
    
    Feb 2003
    
    Jan 2004
    
    June 2006
    
    Puppets, plush,
    
    United States andCompany, LLC
    
    
    
    
    
    
    
    activity and infant/
    
    Canada(a Disney subsidiary)
    
    
    
    
    
    
    
    pre-school toys.
 Backlog
  4




---



##### Table of Contents



Manufacturing
     Trademarks and Copyrights
  Competition
    Government Regulation
  5




---



##### Table of Contents



Employees
  Executive Officers of the Registrant
  Name
    
    Age
    
    PositionJames L. Holbrook, Jr.
    
    
    46
    
    
    Chief Executive OfficerTeresa L. Tormey
    
    
    41
    
    
    Chief Administrative Officer and General CounselJonathan Kramer
    
    
    54
    
    
    Group President, Logistix WorldwideEmily Shannon Brown
    
    
    41
    
    
    Sr. Vice President, Worldwide Operations
 James L. Holbrook, Jr.
 Teresa L. Tormey
 Jonathan Kramer ®
 Emily Shannon Brown
 6




---



##### Table of Contents



Available Information
 www.emak.com
 
 ITEM 1A. RISK FACTORS
 Cautionary Statements and Risk Factors
 Set forth below and elsewhere in this Form 10-K and in other documents we file with the
Securities and Exchange Commission are important risks and uncertainties that could cause our
actual results of operation, business and financial condition to differ materially from the
results contemplated by the forward looking statements contained in this Form 10-K.
 We Depend Significantly on One Key Customer
  We Face Credit Risk
  We Rely on the Continued Development of New Promotional Programs
  The Success of Our Products Depends on the Popularity of Licensed Materials
  7




---



##### Table of Contents



Our Future Operating Results are Difficult to Predict
  There Are Risks Associated with Acquisitions
  Our Current Licenses Require Us to Pay Minimum Royalties
  Our Business is Subject to Extensive Government Regulation and to Potential Product Liability
Claims
  Our Markets Are Highly Competitive
  We Rely on Foreign Manufacturers
  8




---



##### Table of Contents



We Face Foreign Currency Risk
   We May Issue Preferred Stock
  Anti-Takeover Provisions under Our Charter Documents Could Delay or Prevent a Change of
Control and Could also Limit the Market Price of Our Stock
      9




---



##### Table of Contents



ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 Market for the Registrants Stock
    Price Range of Common Stock2004
    
    2005High
    
    Low
    
    High
    
    LowFirst Quarter
    
    
    16.05
    
    
    
    13.81
    
    
    
    10.44
    
    
    
    8.76Second Quarter
    
    
    15.45
    
    
    
    11.94
    
    
    
    11.09
    
    
    
    9.20Third Quarter
    
    
    13.25
    
    
    
    9.60
    
    
    
    10.90
    
    
    
    7.50Fourth Quarter
    
    
    10.20
    
    
    
    9.07
    
    
    
    7.60
    
    
    
    5.91
 Issuer Purchases of Equity Securities
  10




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  Years Ended December 31,
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    

2005Consolidated Statements of Operations and Per Share Data:(in thousands, except share and per share data)Revenues
    
    $
    144,316
    
    
    $
    206,832
    
    
    $
    219,113
    
    
    $
    236,661
    
    
    $
    223,397Cost of sales
    
    
    104,129
    
    
    
    151,307
    
    
    
    158,117
    
    
    
    180,487
    
    
    
    164,926Forgiveness of note receivable
    
    
    
    
    
    
    1,685
    
    
    
    
    
    
    
    
    
    
    
    Minimum royalty guarantee shortfalls (gain)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,722
    
    
    
    (2,837
    )Gross profit
    
    
    40,187
    
    
    
    53,840
    
    
    
    60,996
    
    
    
    48,452
    
    
    
    61,308Operating expenses:Salaries, wages and benefits
    
    
    15,924
    
    
    
    20,662
    
    
    
    24,523
    
    
    
    31,310
    
    
    
    35,090Selling, general and administrative
    
    
    18,323
    
    
    
    22,423
    
    
    
    24,576
    
    
    
    25,606
    
    
    
    23,587Impairment of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,312
    
    
    
    30,970Integration costs
    
    
    192
    
    
    
    453
    
    
    
    
    
    
    
    174
    
    
    
    81Restructuring loss
    
    
    
    
    
    
    178
    
    
    
    234
    
    
    
    56
    
    
    
    2,952Loss on lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    237Dispute resolution charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    ERP reimplementation costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    147Total operating expenses
    
    
    34,439
    
    
    
    43,716
    
    
    
    49,333
    
    
    
    64,065
    
    
    
    93,064Income (loss) from operations
    
    
    5,748
    
    
    
    10,124
    
    
    
    11,663
    
    
    
    (15,613
    )
    
    
    (31,756
    )Other income (expense), net
    
    
    1,370
    
    
    
    383
    
    
    
    389
    
    
    
    (787
    )
    
    
    37Income (loss) before provision (benefit) for
income taxes and cumulative effect
of change in accounting principles
    
    
    7,118
    
    
    
    10,507
    
    
    
    12,052
    
    
    
    (16,400
    )
    
    
    (31,719
    )Provision (benefit) for income taxes
    
    
    2,517
    
    
    
    3,786
    
    
    
    4,103
    
    
    
    (6,716
    )
    
    
    8,153Income (loss) before cumulative effect
of change in accounting principles
    
    
    4,601
    
    
    
    6,721
    
    
    
    7,949
    
    
    
    (9,684
    )
    
    
    (39,872
    )Cumulative effect of change in accounting
principles, net of tax
    
    
    
    
    
    
    (2,496
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    4,601
    
    
    
    4,225
    
    
    
    7,949
    
    
    
    (9,684
    )
    
    
    (39,872
    )Preferred stock dividends
    
    
    1,500
    
    
    
    1,500
    
    
    
    1,500
    
    
    
    1,500
    
    
    
    1,500Undistributed earnings allocated to participating
preferred stock
    
    
    683
    
    
    
    623
    
    
    
    1,474
    
    
    
    
    
    
    
    Net income (loss) available to common
stockholders
    
    $
    2,418
    
    
    $
    2,102
    
    
    $
    4,975
    
    
    $
    (11,184
    )
    
    $
    (41,372
    )Basic income (loss) per share:Income (loss) per share
before cumulative effect of
change in accounting principles
    
    $
    0.40
    
    
    $
    0.81
    
    
    $
    0.87
    
    
    $
    (1.94
    )
    
    $
    (7.15
    )Cumulative effect of change in accounting
principles, net of tax
    
    
    
    
    
    
    (0.44
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) per share
    
    $
    0.40
    
    
    $
    0.37
    
    
    $
    0.87
    
    
    $
    (1.94
    )
    
    $
    (7.15
    )Basic weighted average shares
outstanding
    
    
    5,996,662
    
    
    
    5,721,790
    
    
    
    5,718,548
    
    
    
    5,753,978
    
    
    
    5,782,925Diluted income (loss) per share:Income (loss) per share
before cumulative effect of
change in accounting principles
    
    $
    0.39
    
    
    $
    0.78
    
    
    $
    0.83
    
    
    $
    (1.94
    )
    
    $
    (7.15
    )Cumulative effect of change in accounting
principles, net of tax
    
    
    
    
    
    
    (0.42
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) per share
    
    $
    0.39
    
    
    $
    0.36
    
    
    $
    0.83
    
    
    $
    (1.94
    )
    
    $
    (7.15
    )Diluted weighted average shares
outstanding
    
    
    6,164,154
    
    
    
    5,895,103
    
    
    
    6,017,718
    
    
    
    5,753,978
    
    
    
    5,782,925
 11




---



##### Table of Contents



As of December 31,
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005Consolidated Balance Sheet Data:(in thousands)Working capital
    
    $
    36,620
    
    
    $
    29,157
    
    
    $
    29,447
    
    
    $
    17,934
    
    
    $
    12,520Total assets
    
    $
    99,487
    
    
    $
    133,254
    
    
    $
    128,330
    
    
    $
    133,313
    
    
    $
    67,744Mandatorily redeemable preferred stock
    
    $
    23,049
    
    
    $
    23,049
    
    
    $
    23,049
    
    
    $
    22,518
    
    
    $
    22,518Stockholders equity
    
    $
    42,473
    
    
    $
    45,946
    
    
    $
    53,666
    
    
    $
    46,293
    
    
    $
    3,810
 
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 Overview
   
    
    Non-cash impairment charges totaling $30,970 for the write-off of goodwill and other
intangibles attributable to the following agencies:Johnson Grossfield We recorded an impairment charge of $3,431 in the third quarter of
2005 as a result of the loss of that agencys primary client in August 2005. As a result of
this loss, we decided to close the Johnson Grossfield office.Logistix (U.K.) Throughout 2004, our U.K.-based Logistix agency won all of its
largest clients pan-European programs. The agency did not repeat this win rate in 2005.
Additionally, this client has reduced the number and size of its promotional programs in
Europe. Based on our most recent projections, which were formulated in the fourth quarter of
2005, we believe this pattern will continue, and as a result, we incurred a goodwill
impairment charge of $16,701 in the fourth quarter of 2005 in connection with the annual
impairment test required by Statement of Financial Accounting Standards (SFAS) No. 142
Goodwill and Other Intangibles(see Acquisitions and Impairment of Assets below and Note 3
in the Notes to the Consolidated Financial Statements). As a result of the decreased
revenues, we have reduced staffing levels at our Logistix offices in the U.K. and Europe.SCI Promotion SCI Promotions revenues grew in 2005 compared to 2004, but its
margins were impacted by its changing client base. In the fourth quarter of 2005, we
incurred a goodwill impairment charge of $10,838 in connection with the annual impairment
test required by SFAS No. 142 (see Acquisitions and Impairment of Assets below and Note 3
in the Notes to the Consolidated Financial Statements). This charge is based on our most
recent projections, which were formulated in the fourth quarter of 2005. Our projections
were negatively impacted by the department store consolidation, and its industry-specific
challenges which have resulted in smaller marketing budgets, fewer programs and smaller
program sizes. Competitive pressures and materials cost increases in Asia have also
compressed margins. As a result of the recent trends in this business we have decided to
consolidate SCI Promotions offices with our Los Angeles office. These actions will result
in the reduction of SCI Promotions future annual operating expenses by 40%.
    
    Restructuring charges totaling $2,952 related to the wind down of our Consumer Products
business, the reorganization of our SCI Promotion agency, staff reductions at Logistix (U.K.),
the closure of the Johnson Grossfield office in Minneapolis and the elimination of several
executive management positions. The costs related to the restructuring charges, however,
were partially offset by a gain of $2,837 for the reversal of a portion of a charge taken
in the fourth quarter of 2004 for minimum royalty guarantee shortfalls on several consumer
products licenses. The reversal is due to a negotiated settlement with a licensor and due
to better than anticipated performance of the Scooby-DooTM toy line.
 12




---



##### Table of Contents




    
    We incurred costs totaling $1,350 in the second quarter of 2005 related to the severance
of our former CEO.
    
    As a result of recent tax losses, we established a valuation allowance of $8,658 against
previously recorded deferred tax assets related to our U.S. operations. As a result, we
had a net tax provision of $8,153 despite losses before taxes.
  
    
    Our Equity Marketing agency performed well during the year, despite a decrease in
revenues as compared to the prior year resulting from certain low-margin logistical
services that we decided not to pursue this year. During 2005, we executed eleven domestic
premium programs and seven international premium programs including three large promotional
programs tied to Lucasfilms Star Wars® movies. During 2005, we saw the continuation of a
trend of higher unit volumes for domestic as well as international programs as continued
recent improvements in our primary clients business. We expect a decrease in
sales to this client in 2006 due primarily to the clients existing level of filler
inventory (maintained to service non-core promotion windows), as well as the lack of
currently anticipated blockbuster core promotions.
    
    The performance of our Upshot agency continues to improve as a result of significant new
business wins earlier in the year. In March 2005, Upshot was one of two agencies of record
selected for the promotional business of Miller Brewing Company. In its new role, Upshot
began providing promotional work for most of Millers beer brand
portfolio, including
trademark brands such as Miller Lite and Miller Genuine Draft in the U.S., beginning in
April 2005.
  
    
    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.
 ®
   13




---



##### Table of Contents



Results of Operation
  Years Ended December 31,
    
    2003
    
    
    2004
    
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    72.2
    %
    
    
    76.3
    %
    
    
    73.8
    %Forgiveness of note receivable
    
    
    
    %
    
    
    
    %
    
    
    
    %Minimum royalty guarantee shortfalls (gain)
    
    
    
    %
    
    
    3.2
    %
    
    
    (1.2
    )%Gross profit
    
    
    27.8
    %
    
    
    20.5
    %
    
    
    27.4
    %Operating expenses:Salaries, wages and benefits
    
    
    11.2
    %
    
    
    13.2
    %
    
    
    15.7
    %Selling, general and administrative
    
    
    11.2
    %
    
    
    10.8
    %
    
    
    10.5
    %Impairment of assets
    
    
    
    %
    
    
    2.7
    %
    
    
    13.9
    %Integration costs
    
    
    
    %
    
    
    0.1
    %
    
    
    0.0
    %Restructuring loss
    
    
    0.1
    %
    
    
    0.0
    %
    
    
    1.3
    %Loss on lease
    
    
    
    %
    
    
    0.1
    %
    
    
    0.1
    %Dispute resolution charge
    
    
    
    %
    
    
    0.1
    %
    
    
    
    %ERP reimplementation costs
    
    
    
    %
    
    
    0.1
    %
    
    
    0.1
    %Total operating expenses
    
    
    22.5
    %
    
    
    27.1
    %
    
    
    41.6
    %Income (loss) from operations
    
    
    5.3
    %
    
    
    (6.6
    )%
    
    
    (14.2
    )%Other income (expense), net
    
    
    0.2
    %
    
    
    (0.3
    )%
    
    
    0.0
    %Income (loss) before provision (benefit)
for income taxes
    
    
    5.5
    %
    
    
    (6.9
    )%
    
    
    (14.2
    )%Provision (benefit) for income taxes
    
    
    1.9
    %
    
    
    (2.8
    )%
    
    
    3.6
    %Net income (loss)
    
    
    3.6
    %
    
    
    (4.1
    )%
    
    
    (17.8
    )%
 Year ended December 31, 2005 compared to year ended December 31, 2004
 Revenues
   ® ® ®
 Cost of sales and gross profit
  14




---



##### Table of Contents



Salaries, wages and benefits
   Selling, general and administrative expenses
   Impairment of assets
  Integration costs
  Restructuring
  15




---



##### Table of Contents



Loss on lease
    ERP reimplementation costs
  Other income (expense)
  Provision (benefit) for Income Taxes
  Net loss
  Year ended December 31, 2004 compared to year ended December 31, 2003
 Revenues
   16




---



##### Table of Contents



®  ® ®
 Cost of sales and gross profit
    Salaries, wages and benefits
   Selling, general and administrative expenses
   17




---



##### Table of Contents



Impairment of assets
  Integration costs
  Restructuring
  Loss on lease
  Dispute resolution charge
  ERP reimplementation costs
  Other income (expense)
  Provision (benefit) for Income Taxes
  Net income (loss)
  18




---



##### Table of Contents



Financial Condition and Liquidity
 Overview
    2005 Compared to 2004
          19




---



##### Table of Contents



Commitments
  2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalOperating Leases
    
    $
    4,449
    
    
    $
    4,169
    
    
    $
    3,931
    
    
    $
    3,791
    
    
    $
    787
    
    
    $
    1,912
    
    
    $
    19,039Guaranteed Royalties
    
    
    1,007
    
    
    
    600
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,907Employment Agreements
    
    
    2,422
    
    
    
    1,755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,177Total
    
    $
    7,878
    
    
    $
    6,524
    
    
    $
    4,231
    
    
    $
    3,791
    
    
    $
    787
    
    
    $
    1,912
    
    
    $
    25,123
   Credit Facilities
     Acquisitions and Impairment of Assets
  20




---



##### Table of Contents



21




---



##### Table of Contents



Restructuring
       22




---



##### Table of Contents



Income Taxes
  Stock Repurchase
  Inflation
  Related Party Transactions
  23




---



##### Table of Contents



Subsequent Events
       Recent Accounting Pronouncements
  24




---



##### Table of Contents



25




---



##### Table of Contents



Critical Accounting Policies
  Revenue Recognition
     Allowance
for Doubtful Accounts
    26




---



##### Table of Contents



Goodwill and Other Intangibles
     Royalties
  27




---



##### Table of Contents



Inventories
       28




---



##### Table of Contents



2003
    
    2004
    
    2005Allowance for obsolescence
    
    $
    665
    
    
    $
    740
    
    
    $
    891As a percentage of total inventories
    
    
    4.2
    %
    
    
    3.8
    %
    
    
    7.3
    %
  Income Taxes
    
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Impact of Interest Rate Changes
  Impact of Foreign Currency Fluctuation
  29




---



##### Table of Contents



30




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  
  
 
 31




---



##### Table of Contents



EMAK
WORLDWIDE, INC.
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2004
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,406
    
    
    $
    6,315Accounts receivable (net of allowances of $1,733 and $1,738
as of December 31, 2004 and 2005, respectively)
    
    
    47,180
    
    
    
    29,375Inventories
    
    
    18,763
    
    
    
    11,246Deferred income taxes
    
    
    2,557
    
    
    
    Prepaid expenses and other current assets
    
    
    2,909
    
    
    
    3,044Total current assets
    
    
    75,815
    
    
    
    49,980Fixed assets, net
    
    
    5,029
    
    
    
    3,571Goodwill
    
    
    41,723
    
    
    
    12,855Other intangibles, net
    
    
    3,686
    
    
    
    712Deferred income taxes
    
    
    6,101
    
    
    
    Other assets
    
    
    959
    
    
    
    626Total assets
    
    $
    133,313
    
    
    $
    67,744LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    6,025
    
    
    $
    Accounts payable
    
    
    30,996
    
    
    
    20,118Deferred revenue
    
    
    3,607
    
    
    
    3,094Due to customer
    
    
    3,741
    
    
    
    2,795Accrued payroll and payroll related costs
    
    
    1,074
    
    
    
    2,122Accrued liabilities
    
    
    12,438
    
    
    
    9,331Total current liabilities
    
    
    57,881
    
    
    
    37,460Long-term liabilities
    
    
    6,621
    
    
    
    3,956Total liabilities
    
    
    64,502
    
    
    
    41,416COMMITMENTS AND CONTINGENCIES (Note 10)Mandatorily redeemable preferred stock, Series AA senior cumulative
convertible, $.001 par value, 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, par value $.001 per share, 25,000,000
shares authorized 5,759,263 and 5,799,442 shares
outstanding as of December 31, 2004 and 2005, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    27,516
    
    
    
    26,422Retained earnings (accumulated deficit)
    
    
    33,954
    
    
    
    (5,918
    )Accumulated other comprehensive income
    
    
    4,972
    
    
    
    2,69966,442
    
    
    
    23,203LessTreasury stock, 3,167,258 shares at cost as of December 31, 2004 and 2005
    
    
    (17,669
    )
    
    
    (17,669
    )Unearned compensation
    
    
    (2,480
    )
    
    
    (1,724
    )Total stockholders equity
    
    
    46,293
    
    
    
    3,810Total liabilities, mandatorily redeemable preferred stock and stockholders equity
    
    $
    133,313
    
    
    $
    67,744
 The accompanying notes are an integral part of these consolidated financial statements.
 32




---



##### Table of Contents



EMAK
WORLDWIDE, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31,2003
    
    2004
    2005REVENUES
    
    $
    219,113
    
    
    $
    236,661
    
    
    $
    223,397Cost of sales
    
    
    158,117
    
    
    
    180,487
    
    
    
    164,926Minimum royalty guarantee shortfalls (gain)
    
    
    
    
    
    
    7,722
    
    
    
    (2,837
    )Gross profit
    
    
    60,996
    
    
    
    48,452
    
    
    
    61,308OPERATING EXPENSES:Salaries, wages and benefits
    
    
    24,523
    
    
    
    31,310
    
    
    
    35,090Selling, general and administrative
    
    
    24,576
    
    
    
    25,606
    
    
    
    23,587Integration costs
    
    
    
    
    
    
    174
    
    
    
    81Loss on lease
    
    
    
    
    
    
    311
    
    
    
    237Restructuring charge
    
    
    234
    
    
    
    56
    
    
    
    2,952Impairment of assets
    
    
    
    
    
    
    6,312
    
    
    
    30,970Dispute resolution charge
    
    
    
    
    
    
    237
    
    
    
    ERP reimplementation costs
    
    
    
    
    
    
    59
    
    
    
    147Total operating expenses
    
    
    49,333
    
    
    
    64,065
    
    
    
    93,064Income (loss) from operations
    
    
    11,663
    
    
    
    (15,613
    )
    
    
    (31,756
    )OTHER (EXPENSE) INCOME:Interest expense
    
    
    (221
    )
    
    
    (253
    )
    
    
    (443
    )Interest income
    
    
    152
    
    
    
    102
    
    
    
    94Other income (expense)
    
    
    458
    
    
    
    (636
    )
    
    
    386Income (loss) before provision (benefit) for income taxes
    
    
    12,052
    
    
    
    (16,400
    )
    
    
    (31,719
    )PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    4,103
    
    
    
    (6,716
    )
    
    
    8,153Net income (loss)
    
    
    7,949
    
    
    
    (9,684
    )
    
    
    (39,872
    )PREFERRED STOCK DIVIDENDS
    
    
    1,500
    
    
    
    1,500
    
    
    
    1,500UNDISTRIBUTED EARNINGS ALLOCATED TO
PARTICIPATING PREFERRED STOCK
    
    
    1,474
    
    
    
    
    
    
    
    NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
    
    $
    4,975
    
    
    $
    (11,184
    )
    
    $
    (41,372
    )BASIC INCOME (LOSS) PER SHARE:BASIC INCOME (LOSS) PER SHARE
    
    $
    0.87
    
    
    $
    (1.94
    )
    
    $
    (7.15
    )BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,718,548
    
    
    
    5,753,978
    
    
    
    5,782,925DILUTED INCOME (LOSS) PER SHARE:DILUTED INCOME (LOSS) PER SHARE
    
    $
    0.83
    
    
    $
    (1.94
    )
    
    $
    (7.15
    )DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    6,017,718
    
    
    
    5,753,978
    
    
    
    5,782,925
 The accompanying notes are an integral part of these consolidated financial statements.
 33




---



##### Table of Contents



EMAK
WORLDWIDE, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND MANDATORILY REDEEMABLE PREFERRED STOCK
 Additional
    
    Retained Earnings
    
    Accumulated OtherCommon Stock
    
    Preferred Stock
    
    Paid-in
    
    (Accumulated
    
    Comprehensive
    
    Treasury
    
    UnearnedShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Deficit)
    
    Income
    
    Stock
    
    Compensation
    
    TotalBalance, December 31, 2002
    
    
    5,716,503
    
    
    $
    
    
    
    
    25,000
    
    
    $
    23,049
    
    
    $
    21,641
    
    
    $
    38,689
    
    
    $
    1,710
    
    
    $
    (15,506
    )
    
    $
    (588
    )
    
    $
    68,995Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,949
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,949Issuance of shares pursuant to restricted
stock plan
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    Issuance of restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,022
    )
    
    
    Amortization of restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    186Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177
    
    
    
    177Cancellation of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    Exercise of stock options
    
    
    111,050
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    935
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    935Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,784
    
    
    
    
    
    
    
    
    
    
    
    1,784Unrealized loss on foreign
currency forward contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    
    
    
    
    
    
    
    
    (160
    )Purchase of treasury stock
    
    
    (143,600
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,952
    )
    
    
    
    
    
    
    (1,952
    )Balance, December 31, 2003
    
    
    5,684,953
    
    
    
    
    
    
    
    25,000
    
    
    
    23,049
    
    
    
    23,886
    
    
    
    45,138
    
    
    
    3,334
    
    
    
    (17,458
    )
    
    
    (1,234
    )
    
    
    76,715Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,684
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,684
    )Warrant exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (531
    )
    
    
    487
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44
    )Issuance of common stock
    
    
    35,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    530
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    530Issuance of restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,399
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,399
    )
    
    
    Issuance of shares pursuant to vesting
of restricted stock units
    
    
    375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    548
    
    
    
    548Cancellation of restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (440
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440
    
    
    
    Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165
    
    
    
    165Exercise of stock options
    
    
    54,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,805
    
    
    
    
    
    
    
    
    
    
    
    1,805Unrealized loss on foreign
currency forward contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (167
    )
    
    
    
    
    
    
    
    
    
    
    (167
    )Purchase of treasury stock
    
    
    (16,550
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211
    )
    
    
    
    
    
    
    (211
    )Balance, December 31, 2004
    
    
    5,759,263
    
    
    
    
    
    
    
    25,000
    
    
    
    22,518
    
    
    
    27,516
    
    
    
    33,954
    
    
    
    4,972
    
    
    
    (17,669
    )
    
    
    (2,480
    )
    
    
    68,811Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,872
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,872
    )Issuance of common stock
    
    
    10,616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109Issuance of restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,134
    )
    
    
    Amortization of restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    804
    
    
    
    804Cancellation of restricted stock units
    
    
    (3,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (952
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    952
    
    
    
    Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    134Exercise of stock options
    
    
    32,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,679
    )
    
    
    
    
    
    
    
    
    
    
    (2,679
    )Unrealized gain on foreign
currency forward contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    
    
    
    
    
    
    
    
    406Balance, December 31, 2005
    
    
    5,799,442
    
    
    $
    
    
    
    
    25,000
    
    
    $
    22,518
    
    
    $
    26,422
    
    
    $
    (5,918
    )
    
    $
    2,699
    
    
    $
    (17,669
    )
    
    $
    (1,724
    )
    
    $
    26,328
 The accompanying notes are an integral part of these consolidated financial statements.
 34




---



##### Table of Contents



EMAK WORLDWIDE, INC.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
  Years Ended December 31,2003
    
    
    2004
    
    
    2005NET INCOME (LOSS)
    
    $
    7,949
    
    
    $
    (9,684
    )
    
    $
    (39,872
    )OTHER COMPREHENSIVE INCOME:Foreign currency translation adjustments
    
    
    1,784
    
    
    
    1,805
    
    
    
    (2,679
    )Unrealized gain (loss) on foreign currency forward contract
    
    
    (160
    )
    
    
    (167
    )
    
    
    406COMPREHENSIVE INCOME (LOSS)
    
    $
    9,573
    
    
    $
    (8,046
    )
    
    $
    (42,145
    )
 The accompanying notes are an integral part of these consolidated financial statements.
 35




---



##### Table of Contents



EMAK WORLDWIDE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Years Ended December 31,2003
    
    2004
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    7,949
    
    
    $
    (9,684
    )
    
    $
    (39,872
    )Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    1,946
    
    
    
    2,067
    
    
    
    2,165Provision for bad debts
    
    
    277
    
    
    
    48
    
    
    
    180Gain on asset disposal
    
    
    (19
    )
    
    
    (13
    )
    
    
    (17
    )Tax benefit from exercise of stock options
    
    
    301
    
    
    
    14
    
    
    
    Amortization of restricted stock
    
    
    363
    
    
    
    714
    
    
    
    938Impairment of assets
    
    
    
    
    
    
    6,312
    
    
    
    30,970Minimum guarantee royalty shortfalls (gain)
    
    
    
    
    
    
    7,722
    
    
    
    (2,837
    )Other
    
    
    (1
    )
    
    
    
    
    
    
    Changes in assets and liabilities, net of effects of acquisitions:Increase (decrease) in cash and cash equivalents:Accounts receivable
    
    
    12,338
    
    
    
    (3,222
    )
    
    
    16,370Inventories
    
    
    2,294
    
    
    
    98
    
    
    
    7,265Deferred income taxes
    
    
    559
    
    
    
    (4,015
    )
    
    
    8,976Prepaid expenses and other current assets
    
    
    963
    
    
    
    (1,503
    )
    
    
    (238
    )Other assets
    
    
    (840
    )
    
    
    (908
    )
    
    
    (93
    )Accounts payable
    
    
    (14,518
    )
    
    
    82
    
    
    
    (10,203
    )Accrued liabilities
    
    
    (9,486
    )
    
    
    (6,006
    )
    
    
    (558
    )Long-term liabilities
    
    
    (791
    )
    
    
    (934
    )
    
    
    (953
    )Net cash provided by (used in) operating activities
    
    
    1,335
    
    
    
    (9,228
    )
    
    
    12,093CASH FLOWS FROM INVESTING ACTIVITIES:Payment for purchase of SCI Promotion, net of cash acquired of $162
    
    
    (6,059
    )
    
    
    
    
    
    
    Payment for purchase of Johnson Grossfield
    
    
    
    
    
    
    (4,614
    )
    
    
    (148
    )Payment for purchase of Megaprint Group, net of cash acquired of $1,194
    
    
    
    
    
    
    (2,591
    )
    
    
    (1,908
    )Refund from purchase of Upshot
    
    
    
    
    
    
    
    
    
    
    75Proceeds from sales of fixed assets
    
    
    74
    
    
    
    64
    
    
    
    992Purchases of fixed assets
    
    
    (1,150
    )
    
    
    (1,602
    )
    
    
    (1,711
    )Proceeds from sale of marketable securities, net
    
    
    1,000
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (6,135
    )
    
    
    (8,743
    )
    
    
    (2,700
    )CASH FLOWS FROM FINANCING ACTIVITIES:Preferred stock dividends paid
    
    
    (1,500
    )
    
    
    (1,500
    )
    
    
    (1,500
    )Purchase of treasury stock
    
    
    (1,952
    )
    
    
    (211
    )
    
    
    Proceeds from exercise of stock options
    
    
    935
    
    
    
    640
    
    
    
    115Repayment under line of credit
    
    
    
    
    
    
    (14,325)
    
    
    
    (76,550
    )Borrowings under line of credit
    
    
    626
    
    
    
    18,379
    
    
    
    70,525Net cash provided by (used in) financing activities
    
    
    (1,891
    )
    
    
    2,983
    
    
    
    (7,410
    )Net increase (decrease) in cash and cash equivalents
    
    
    (6,691
    )
    
    
    (14,988
    )
    
    
    1,983Effects of exchange rate changes on cash and cash equivalents
    
    
    149
    
    
    
    103
    
    
    
    (74
    )CASH AND CASH EQUIVALENTS, beginning of year
    
    
    25,833
    
    
    
    19,291
    
    
    
    4,406CASH AND CASH EQUIVALENTS, end of year
    
    $
    19,291
    
    
    $
    4,406
    
    
    $
    6,315SUPPLEMENTAL CASH FLOW INFORMATION:Non-cash investing activitiesIssuance of shares for
purchase of Johnson Grossfield
    
    $
    
    
    
    $
    530
    
    
    $
    CASH PAYMENTS DURING YEAR FOR:Interest
    
    $
    214
    
    
    $
    236
    
    
    $
    449Taxes, net of refunds
    
    $
    4,166
    
    
    $
    1,210
    
    
    $
    (1,824
    )
 The accompanying notes are an integral part of these consolidated financial statements
 36




---



##### Table of Contents



EMAK WORLDWIDE, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2005
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Marketable Securities
   Revenue Recognition
   37




---



##### Table of Contents











Inventories




December 31,2004
    
    2005Production-in-process
    
    $
    861
    
    
    $
    2,483Finished goods
    
    
    17,902
    
    
    
    8,763$
    18,763
    
    
    $
    11,246


Fixed Assets











Goodwill and Other Intangibles




38




---



##### Table of Contents



As of December 31,2004
    
    2005Amortized Intangible AssetsEquity Marketing trademark
    
    $
    52
    
    
    $
    52Licensing, royalty and standstill agreements
    
    
    163
    
    
    
    146Customer contracts and related customer relationships
    
    
    3,491
    
    
    
    940Non-competition agreement
    
    
    113
    
    
    
    94Sales order backlog
    
    
    377
    
    
    
    354Subtotal
    
    
    4,196
    
    
    
    1,586Less: Accumulated amortization
    
    
    (1,214
    )
    
    
    (1,503
    )2,982
    
    
    
    83Unamortized Intangible AssetsLogistix trademark
    
    
    704
    
    
    
    629Total Other Intangibles
    
    $
    3,686
    
    
    $
    712
        39




---



##### Table of Contents



Year2006
    
    $
    1392007
    
    
    642008
    
    
    632009
    
    
    632010
    
    
    63Thereafter
    
    
    315Total
    
    $
    707
 Due to Customer
  Income Taxes
  Stock-Based Compensation
    40




---



##### Table of Contents



2003
    
    
    2004
    
    
    2005Net income (loss) available to common stockholders  as reported
    
    $
    4,975
    
    
    $
    (11,184
    )
    
    $
    (41,372
    )Plus:Stock-based compensation expense, net of tax, included in reported
net income (loss) available to the common stockholder
    
    
    239
    
    
    
    422
    
    
    
    562Less:Compensation expense (a)
    
    
    1,715
    
    
    
    1,065
    
    
    
    1,198Net income (loss) available to common stockholders  pro forma
    
    $
    3,499
    
    
    $
    (11,827
    )
    
    $
    (42,008
    )Earnings (loss) per share:Basic earnings (loss) per share, as reported
    
    $
    0.87
    
    
    $
    (1.94
    )
    
    $
    (7.15
    )Pro forma basic (loss) earnings per share
    
    $
    0.61
    
    
    $
    (2.06
    )
    
    $
    (7.26
    )Diluted earnings (loss) per share, as reported
    
    $
    0.83
    
    
    $
    (1.94
    )
    
    $
    (7.15
    )Pro forma diluted earnings (loss) per share
    
    $
    0.58
    
    
    $
    (2.06
    )
    
    $
    (7.26
    )
 
 (a) Determined under fair value based method for all awards, net of tax.
   Years Ended December 31,2003
    
    
    2004
    
    
    2005Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected stock price volatility
    
    
    58.57
    %
    
    
    45.00
    %
    
    
    41.33
    %Risk free interest rate
    
    
    1.90
    %
    
    
    2.76
    %
    
    
    4.46
    %Expected life of options
    
    4 years
    
    5 years
    
    4 years
   Net Income Per Share




---



##### Table of Contents



For the years ended December 31,2003
    
    
    
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005Income
    
    
    Shares
    
    
    Per Share
    
    

Loss
    
    
    Shares
    
    
    Per Share
    
    
    Loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS:Net income (loss) available to common
stockholders
    
    $
    4,975
    
    
    
    5,718,548
    
    
    $
    0.87
    
    
    $
    (11,184
    )
    
    
    5,753,978
    
    
    $
    (1.94
    )
    
    $
    (41,372
    )
    
    
    5,782,925
    
    
    $
    (7.15
    )Effect of Dilutive Securities:Options and warrants
    
    
    
    
    
    
    242,466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    56,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive EPS:Net income (loss) available to common
stockholders and assumed conversion
    
    $
    4,975
    
    
    
    6,017,718
    
    
    $
    0.83
    
    
    $
    (11,184
    )
    
    
    5,753,978
    
    
    $
    (1.94
    )
    
    $
    (41,372
    )
    
    
    5,782,925
    
    
    $
    (7.15
    )
 Royalties
  Concentration of Risk




---



##### Table of Contents



Supplemental Cash Flow Information
  Comprehensive Income
  Shipping and Handling Costs
  Foreign Currency Translation
   Derivative Instruments




---



##### Table of Contents



Advertising
  Reclassifications
  Recent Accounting Pronouncements




---



##### Table of Contents



2. RESTRUCTURING CHARGE AND MINIMUM ROYALTY GUARANTEE SHORTFALLS




---



##### Table of Contents



3. IMPAIRMENT OF ASSETS




---



##### Table of Contents



4. ACQUISITIONS
   Net current assets
    
    $
    7,029Property, plant and equipment
    
    
    700Other non-current assets
    
    
    1Net current liabilities
    
    
    (7,783
    )Non-current liabilities
    
    
    (4,874
    )Estimated fair value, net liabilities assumed
    
    
    (4,927
    )Goodwill
    
    
    14,631Other intangible assets
    
    
    187Total purchase price
    
    $
    9,891




---



##### Table of Contents



Net current assets
    
    $
    6,357Receivable from seller
    
    
    800Property, plant and equipment
    
    
    37Other non-current assets
    
    
    13Net current liabilities
    
    
    (5,755
    )Estimated fair value, net assets acquired
    
    
    1,452Goodwill
    
    
    4,041Other intangible assets
    
    
    728Total purchase price
    
    $
    6,221




---



##### Table of Contents



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




---



##### Table of Contents



Pro Forma Financial Data
   Years Ended December 31,2003
    
    2004Pro forma revenues
    
    $
    264,044
    
    
    $
    249,920Pro forma net income (loss)
    
    $
    8,845
    
    
    $
    (9,669
    )Pro forma basic income (loss) per share
    
    $
    0.99
    
    
    $
    (1.94
    )Pro forma diluted income (loss) per share
    
    $
    0.94
    
    
    $
    (1.94
    )Pro forma basic weighted average
shares outstanding
    
    
    5,718,548
    
    
    
    5,756,960Pro forma diluted weighted average
shares outstanding
    
    
    6,053,503
    
    
    
    5,756,960
  5. FIXED ASSETS, NET
  December 31,2004
    
    2005Furniture, fixtures and equipment
    
    $
    3,431
    
    
    $
    3,366Computer software
    
    
    4,572
    
    
    
    5,580Computer hardware
    
    
    5,180
    
    
    
    5,646Leasehold improvements
    
    
    2,069
    
    
    
    2,125Building
    
    
    1,239
    
    
    
    Fixed assets, at cost
    
    
    16,491
    
    
    
    16,717Accumulated depreciation and amortization
    
    
    (11,462
    )
    
    
    (13,146
    )Fixed assets, net
    
    $
    5,029
    
    
    $
    3,571
  6. LINE OF CREDIT
 In addition to the Facility, in October, 2003 the Companys Logistix agency in the United Kingdom
established an import/letter of credit facility with Hong Kong Shanghai Bank Corp. (HSBC) to
provide short-term financing of product purchases in Asia. The total availability under this
facility is 1,500 GBP. The total availability under this facility was increased from 1,000 GBP to
1,500 GBP in 2005. Under this facility HSBC may pay the agencys vendors directly upon receipt of
invoices and shipping documentation. Logistix (U.K.) in turn is obligated to repay HSBC within 120
days. As of December 31, 2004 and December 31, 2005, $1,797 and $0, respectively, were outstanding
under this facility.
 50




---



##### Table of Contents



7. DEFINED CONTRIBUTION PLAN
  8. EQUITY COMPENSATION PLANS
      51




---



##### Table of Contents



Exercisable at End of YearWeighted
    
    
    
    
    
    
    WeightedRestricted
    
    
    Average
    
    
    
    
    
    
    AverageOptions
    
    
    Stock
    
    
    Exercise Price
    
    
    Number
    
    
    Exercise PriceOutstanding
    
    
    Outstanding
    
    
    Per Share
    
    
    Exercisable
    
    
    SharesOutstanding at December 31, 2002
    
    
    2,234,378
    
    
    
    50,000
    
    
    
    12.34
    
    
    
    911,743
    
    
    $
    13.40Granted
    
    
    120,000
    
    
    
    78,750
    
    
    
    13.48Exercised
    
    
    (111,050
    )
    
    
    
    
    
    
    8.42Canceled
    
    
    (80,800
    )
    
    
    (4,300
    )
    
    
    13.48Outstanding at December 31, 2003
    
    
    2,162,528
    
    
    
    124,450
    
    
    
    12.74
    
    
    
    1,092,576
    
    
    $
    13.29Granted
    
    
    285,000
    
    
    
    167,050
    
    
    
    10.68Exercised
    
    
    (54,700
    )
    
    
    (13,075
    )
    
    
    9.44Canceled
    
    
    (436,100
    )
    
    
    (33,100
    )
    
    
    10.13Outstanding at December 31, 2004
    
    
    1,956,728
    
    
    
    245,325
    
    
    
    12.01
    
    
    
    1,315,383
    
    
    $
    13.33Granted
    
    
    500,000
    
    
    
    118,648
    
    
    
    9.03Exercised
    
    
    (20,000
    )
    
    
    (26,813
    )
    
    
    2.46Canceled
    
    
    (702,758
    )
    
    
    (72,337
    )
    
    
    14.17Outstanding at December 31, 2005
    
    
    1,733,970
    
    
    
    264,823
    
    
    $
    12.04
    
    
    
    1,820,327
    
    
    $
    9.63
  WEIGHTEDAVERAGE
    
    WEIGHTED
    
    
    
    
    
    WEIGHTEDRANGE OF
    
    NUMBER
    
    REMAINING
    
    AVERAGE
    
    NUMBER
    
    AVERAGEEXERCISE PRICES
    
    OUTSTANDING
    
    CONTRACTUAL LIFE
    
    EXERCISE PRICE
    
    EXERCISABLE
    
    EXERCISE PRICE$0.0 - $10.00
    
    
    753,443
    
    
    
    5.77
    
    
    $
    7.70
    
    
    
    574,977
    
    
    $
    7.70$10.75 - $12.50
    
    
    515,850
    
    
    
    5.98
    
    
    $
    11.65
    
    
    
    515,850
    
    
    $
    11.65$12.81 - $15.00
    
    
    464,500
    
    
    
    7.46
    
    
    $
    13.81
    
    
    
    464,500
    
    
    $
    13.81$15.50 - $28.13
    
    
    265,000
    
    
    
    4.90
    
    
    $
    19.14
    
    
    
    265,000
    
    
    $
    19.141,998,793
    
    
    
    6.10
    
    
    $
    11.66
    
    
    
    1,820,327
    
    
    $
    9.63
 Warrants
  Preferred Stock
   52




---



##### Table of Contents



Stock Repurchase
  53




---



##### Table of Contents



9. INCOME TAXES
   Years Ended December 31,2003
    
    2004
    
    2005US operations
    
    $
    7,430
    
    
    $
    (20,013
    )
    
    $
    (16,764
    )Foreign operations
    
    
    4,622
    
    
    
    3,613
    
    
    
    (14,955
    )$
    12,052
    
    
    $
    (16,400
    )
    
    $
    (31,719
    )
  Years Ended December 31,2003
    
    2004
    
    2005CURRENT:Federal
    
    $
    2,202
    
    
    $
    (2,640
    )
    
    $
    (750
    )State and local
    
    
    16
    
    
    
    16
    
    
    
    15Foreign
    
    
    1,166
    
    
    
    717
    
    
    
    483,384
    
    
    
    (1,907
    )
    
    
    (687
    )DEFERRED:Federal
    
    
    980
    
    
    
    (2,970
    )
    
    
    6,554State and Local
    
    
    157
    
    
    
    (1,839
    )
    
    
    2,387Foreign
    
    
    (418
    )
    
    
    
    
    
    
    (101
    )719
    
    
    
    (4,809
    )
    
    
    8,840$
    4,103
    
    
    $
    (6,716
    )
    
    $
    8,153
  Years Ended December 31,2003
    
    2004
    
    2005Tax at the Federal statutory rate
    
    $
    4,146
    
    
    $
    (5,641
    )
    
    $
    (10,911
    )State income taxes, net of the Federal tax benefit
    
    
    (5
    )
    
    
    (1,052
    )
    
    
    (858
    )Effect of change in state rate on deferred tax assets
    
    
    
    
    
    
    (300
    )
    
    
    Effect of
permanent differences for non-deductible goodwill
    
    
    
    
    
    
    
    
    
    
    5,010Valuation Allowance
    
    
    
    
    
    
    223
    
    
    
    14,390Other
    
    
    (38
    )
    
    
    54
    
    
    
    522$
    4,103
    
    
    $
    (6,716
    )
    
    $
    8,153
  54




---



##### Table of Contents



2004
    
    2005Allowance for doubtful accounts
    
    $
    717
    
    
    $
    644Inventory reserve
    
    
    80
    
    
    
    146Accrued expenses
    
    
    1,681
    
    
    
    1,199Net operating loss carryforwards
    
    
    606
    
    
    
    Other
    
    
    (304
    )
    
    
    (488
    )Total current
    
    
    2,780
    
    
    
    1,501Goodwill and other intangibles
    
    
    1,908
    
    
    
    7,367Fixed assets
    
    
    69
    
    
    
    365Net operating loss and other carryforwards
    
    
    
    
    
    
    3,152Long term liabilities
    
    
    3,836
    
    
    
    1,768Other
    
    
    288
    
    
    
    271Total non-current
    
    
    6,101
    
    
    
    12,923Deferred income tax asset valuation allowance
    
    
    (223
    )
    
    
    (14,613
    )Net deferred tax assets (liabilities)
    
    $
    8,658
    
    
    $
    (189
    )
      55




---



##### Table of Contents



10. COMMITMENTS AND CONTINGENCIES
 Operating Leases
   Year2006
    
    $
    4,4492007
    
    
    4,1692008
    
    
    3,9312009
    
    
    3,7912010
    
    
    787Thereafter
    
    
    1,912Total
    
    $
    19,039
  Guaranteed Royalties
   Year2006
    
    $
    1,0072007
    
    
    6002009
    
    
    300Total
    
    $
    1,907
 Employment Agreement
  Year2006
    
    $
    2,4222007
    
    
    1,755Total
    
    $
    4,177
 Legal Proceedings
  Dispute Resolution Charge
  56




---



##### Table of Contents



11. INDUSTRY SEGMENTS, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
     Industry Segments
 As of and For the Year Ended December 31, 2003ConsumerMarketing Services
    
    
    Products
    
    
    Corporate
    
    
    TotalTotal revenues
    
    
    189,261
    
    
    $
    29,852
    
    
    $
    
    
    
    $
    219,113Segment income (loss) before provision (benefit) for
income taxes
    
    $
    27,717
    
    
    $
    3,400
    
    
    $
    (19,065
    )
    
    $
    12,052Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    1,150
    
    
    $
    1,150Depreciation and amortization
    
    $
    174
    
    
    $
    128
    
    
    $
    1,644
    
    
    $
    1,946Total assets
    
    $
    86,218
    
    
    $
    8,767
    
    
    $
    33,345
    
    
    $
    128,330
 As of and For the Year Ended December 31, 2004ConsumerMarketing Services
    
    
    Products
    
    
    Corporate
    
    
    TotalTotal revenues
    
    $
    211,526
    
    
    $
    25,135
    
    
    $
    
    
    
    $
    236,661Segment income (loss) before provision (benefit) for
income taxes
    
    $
    12,362
    
    
    $
    (9,337
    )
    
    $
    (19,425
    )
    
    $
    (16,400
    )Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    1,602
    
    
    $
    1,602Depreciation and amortization
    
    $
    358
    
    
    $
    
    
    
    $
    1,709
    
    
    $
    2,067Total assets
    
    $
    98,866
    
    
    $
    11,570
    
    
    $
    22,877
    
    
    $
    133,313
 As of and For the Year Ended December 31, 2005ConsumerMarketing Services
    
    
    Products
    
    
    Corporate
    
    
    TotalTotal revenues
    
    $
    197,182
    
    
    $
    26,215
    
    
    $
    
    
    
    $
    223,397Segment income (loss) before provision (benefit) for
income taxes
    
    $
    (15,641
    )
    
    $
    851
    
    
    $
    (16,929
    )
    
    $
    (31,719
    )Fixed asset additions
    
    $
    
    
    
    $
    
    
    
    $
    1,711
    
    
    $
    1,711Depreciation and amortization
    
    $
    344
    
    
    $
    
    
    
    $
    1,821
    
    
    $
    2,165Total assets
    
    $
    48,215
    
    
    $
    5,963
    
    
    $
    13,566
    
    
    $
    67,744
 57




---



##### Table of Contents



As of and For the Years Ended December 31,2003
    
    
    2004
    
    
    2005Revenues:United States
    
    $
    171,819
    
    
    $
    177,125
    
    
    $
    171,995International
    
    
    47,294
    
    
    
    59,536
    
    
    
    51,402Total revenues
    
    $
    219,113
    
    
    $
    236,661
    
    
    $
    223,397Income (loss) from operations:United States
    
    $
    8,195
    
    
    $
    (14,893
    )
    
    $
    (12,076
    )International
    
    
    3,468
    
    
    
    (720
    )
    
    
    (19,680
    )Total income from operations
    
    $
    11,663
    
    
    $
    (15,613
    )
    
    $
    (31,756
    )Fixed assets, net:United States
    
    $
    3,244
    
    
    $
    2,916
    
    
    $
    2,984International
    
    
    565
    
    
    
    2,113
    
    
    
    587Total fixed assets
    
    $
    3,809
    
    
    $
    5,029
    
    
    $
    3,571
 12. Related Party Transactions
  58




---



##### Table of Contents



13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
 Three Months EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312004Revenues
    
    $
    51,812
    
    
    $
    51,778
    
    
    $
    58,055
    
    
    $
    75,016Gross profit
    
    $
    13,240
    
    
    $
    13,763
    
    
    $
    12,410
    
    
    $
    9,039Income (loss) from operations
    
    $
    24
    
    
    $
    (806
    )
    
    $
    (1,638
    )
    
    $
    (13,193
    )Net income (loss) available to
common stockholders
    
    $
    (541
    )
    
    $
    (905
    )
    
    $
    (1,268
    )
    
    $
    (8,470
    )Basic income (loss) per share:Income (loss) per share
    
    $
    (0.09
    )
    
    $
    (0.16
    )
    
    $
    (0.22
    )
    
    $
    (1.47
    )Weighted average shares
outstanding
    
    
    5,739,603
    
    
    
    5,758,370
    
    
    
    5,758,888
    
    
    
    5,759,052Diluted income (loss) per share:Income (loss) per share
    
    $
    (0.09
    )
    
    $
    (0.16
    )
    
    $
    (0.22
    )
    
    $
    (1.47
    )Weighted average shares
outstanding
    
    
    5,739,603
    
    
    
    5,758,370
    
    
    
    5,758,888
    
    
    
    5,759,052
 Three Months EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312005Revenues
    
    $
    57,242
    
    
    $
    58,102
    
    
    $
    49,810
    
    
    $
    58,243Gross profit
    
    $
    14,449
    
    
    $
    16,885
    
    
    $
    14,948
    
    
    $
    15,026Income (loss) from operations
    
    $
    (600
    )
    
    $
    1,247
    
    
    $
    (2,640
    )
    
    $
    (29,763
    )(1)Net income (loss) available to
common stockholders
    
    $
    (792
    )
    
    $
    349
    
    
    $
    (1,915
    )
    
    $
    (39,014
    )Basic income (loss) per share:Income (loss) per share
    
    $
    (0.14
    )
    
    $
    0.06
    
    
    $
    (0.33
    )
    
    $
    (6.74
    )Weighted average shares
outstanding
    
    
    5,765,938
    
    
    
    5,785,202
    
    
    
    5,788,042
    
    
    
    5,792,517Diluted income (loss) per share:Income (loss) per share
    
    $
    (0.14
    )
    
    $
    0.06
    
    
    $
    (0.33
    )
    
    $
    (6.74
    )Weighted average shares
outstanding
    
    
    5,765,938
    
    
    
    6,005,326
    
    
    
    5,788,042
    
    
    
    5,792,517
 
  14. SUBSEQUENT EVENTS
      59




---



##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
   
 ITEM 9B.
    
    OTHER INFORMATION
  
 PART III
 
 ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11.
    
    EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  60




---



##### Table of Contents



ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 (a)
  PageReport of Independent Registered Public Accounting Firm
    
    
    31CONSOLIDATED FINANCIAL STATEMENTS:Balance Sheets as of December 31, 2004 and 2005
    
    
    32Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005
    
    
    33Statements of Stockholders Equity and Mandatorily Redeemable Preferred Stock for the Years Ended
December 31, 2003, 2004 and 2005
    
    
    34Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2003, 2004 and 2005
    
    
    35Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005
    
    
    36Notes to Consolidated Financial Statements
    
    
    372. Financial Statement Schedules:Report of Independent Registered Public Accounting Firm on Financial Statement Schedule
    
    
    65Schedule II Valuation and Qualifying Accounts
    
    
    66
 Note:
    
    All other supplementary schedules are omitted since
they are not applicable or the required information can be obtained from
the consolidated financial statements.
  3.1
    
    Certificate of Incorporation. (1)3.2
    
    Certificate of Amendment of Certificate of Incorporation dated July 16, 2004. (2)3.3
    
    Certificate of Amendment of Certificate of Incorporation dated September 15, 2004. (2)3.4
    
    Amended and Restated Bylaws. (3)3.5
    
    Certificate of Designation of Series AA Senior Cumulative
Convertible Preferred Stock of the Company, dated December 30, 2004. (4)3.6
    
    Certificate of Amendment of Certificate of Designation of
Series AA Senior Cumulative Convertible Preferred Stock of the Company dated
September 2, 2005. (5)3.7
    
    Certificate of Designation of Series A Junior Participating
Preferred Stock dated March 15, 2006. (6)3.8
    
    Rights Agreement dated as of March 15, 2006 between the
Company and Continental Stock Transfer & Trust Company. (6)10.1
    
    Securities Purchase Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000. (7)
 61




---



##### Table of Contents



10.2
    
    Registration Rights Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000. (7)10.3
    
    Exchange Agreement by and between Crown EMAK Partners, LLC and
EMAK Worldwide dated as of December 30, 2004. (4)10.4
    
    Agreement of Lease dated July 17, 1998 between Miracle Mile,
L.L.C. and Equity Marketing, Inc. (8)10.5
    
    Second Amendment to Office Lease by and between Lexington San
Vicente Associates, LLC (successor to Miracle Mile, L.L.C.) and Equity
Marketing, Inc.*10.6
    
    Agreement of Lease (18th Floor) effective September
1, 2005 between Wide Harvest Investment Ltd. and Equity Marketing Hong Kong,
Ltd.*10.7
    
    Agreement of Lease (19th Floor) effective September
1, 2005 between Wide Harvest Investment Ltd. and Equity Marketing Hong Kong,
Ltd.*10.8
    
    Agreement of Lease dated June 30, 1998, as amended August 27,
1998, March 31, 2000 and May 22, 2002 between 303 Wacker Realty L.L.C. and
EMAK Worldwide, Inc. (as successor to Promotional Marketing, L.L.C., d/b/a
Upshot).*10.9
    
    Loan and Security Agreement by and between Bank of America, N.A. and
EMAK Worldwide, Inc. (and its domestic subsidiaries), dated March 29, 2006.*10.10
    
    Form of Directors and Officers Indemnification Agreement. (9)10.11
    
    Amended and Restated 1996 Stock Option Plan. (10)10.12
    
    Non-Employee Director Stock Option Plan. (11)10.13
    
    Amended and Restated 2000 Stock Option Plan. (12)10.14
    
    2004 Non-Employee Director Stock Incentive Plan. (13)10.15
    
    2004 Stock Incentive Plan. (13)10.16
    
    Employment agreement dated as of October 3, 2005 between
Equity Marketing, Inc. and Kim H. Thomsen. (14)10.17
    
    Employment agreement dated as of October 3, 2005 between
Equity Marketing, Inc. and Jonathan Banks. (14)10.18
    
    Employment agreement dated as of November 9, 2005 between the
Company and Jim Holbrook. (15)10.19
    
    Form of Resale Restriction Agreement. (16)21.
    
    Subsidiaries of the Registrant.*23.
    
    Consent of PricewaterhouseCoopers LLP.*31.1
    
    Certification of Principal Executive Officer dated March 31,
2006 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of Principal Accounting Officer dated March 31,
2006 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification of Principal Executive Officer dated March 31,
2006 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of Principal Accounting Officer dated March 31,
2006 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
 
 (1)
    
    Previously filed as an exhibit to the Registrants Annual
Report on Form 10-K for the year ended December 31, 1995, and incorporated
herein by reference.(2)
    
    Previously filed as an exhibit to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2004, and incorporated
herein by reference.(3)
    
    Previously filed as an exhibit to the Registrants Current
Report on Form 8-K dated March 17, 2005, and incorporated herein by
reference. 62




---



##### Table of Contents



(4)
    
    Previously filed as an exhibit to the Registrants Current
Report on Form 8-K dated January 5, 2005, and incorporated herein by
reference.(5)
    
    Previously filed with the Registrants Proxy Statement for the
2005 Annual Meeting of Stockholders dated April 28, 2005 and incorporated
herein by reference.(6)
    
    Previously filed as an exhibit to the Registrants Current
Report on Form 8-K dated March 15, 2006, and incorporated herein by
reference.(7)
    
    Previously filed as an exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000, and incorporated
herein by reference.(8)
    
    Previously filed as an exhibit to the Registrants Current
Report on Form 8-K dated April 11, 2000, and incorporated herein by
reference.(9)
    
    Previously filed as an exhibit to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2003, and incorporated
herein by reference.(10)
    
    Previously filed as an exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated
herein by reference.(11)
    
    Previously filed as an exhibit to the Registrants Annual
Report on Form 10-K for the year ended December 31, 1997, and incorporated
herein by reference.(12)
    
    Previously filed as an exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003, and incorporated
herein by reference.(13)
    
    Previously filed with the Registrants Proxy Statement for the
2004 Annual Meeting of Stockholders dated April 26, 2004 and incorporated
herein by reference.(14)
    
    Previously filed as an exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarter ended September 30, 2005, and
incorporated herein by reference.(15)
    
    Previously filed as an exhibit to the Registrants Current
Report on Form 8-K dated November 15, 2005, and incorporated herein by
reference.(16)
    
    Previously filed as an exhibit to the Registrants Current
Report on Form 8-K dated December 21, 2005, and incorporated herein by
reference.(*)
    
    Filed herewith (b)
    
    Exhibits Required by Item 601 of Regulation S-K
  (c)
    
    Financial Statement Schedule
  63




---



##### Table of Contents



SIGNATURES
 st
 EMAK WORLDWIDE, INC.By:
    
    /s/ James L. Holbrook, Jr.James L. Holbrook, Jr.Chief Executive Officer
 POWER OF ATTORNEY
   /s/ James L. Holbrook, Jr.
    
    Chief Executive Officer, Director
    
    March 31, 2006James L. Holbrook, Jr.
    
    (Principal
Executive Officer)/s/ Roy Dar
    
    Vice President, Controller
    
    March 31, 2006Roy Dar
    
    (Principal
Accounting Officer)/s/ Stephen P. Robeck
    
    Chairman, Director
    
    March 31, 2006Stephen P. Robeck/s/ Barrie P. Berg
    
    Director
    
    March 31, 2006Barrie P. Berg/s/ Howard D. Bland
    
    Director
    
    March 31, 2006Howard D. Bland/s/ Jeffrey S. Deutschman
    
    Director
    
    March 31, 2006Jeffrey S. Deutschman/s/ Alfred E. Osborne, Jr.
    
    Director
    
    March 31, 2006Alfred E. Osborne, Jr./s/ Daniel W. OConnor
    
    Director
    
    March 31, 2006Daniel W. OConnor
 64




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
    /s/ PricewaterhouseCoopers LLPPricewaterhouseCoopers LLPLos Angeles, CAMarch 30, 2006
 65




---



##### Table of Contents



EMAK WORLDWIDE, INC.
 
 SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
 (in thousands)
 Balance at
    
    
    Additions
    
    
    AdditionsBeginning of
    
    
    Charged to
    
    
    Charged to
    
    
    Net
    
    
    Balance atCLASSIFICATION
    
    of Year
    
    
    Expenses
    
    
    Revenues
    
    
    Deductions
    
    
    End of YearYear Ended December 31, 2003Allowances for doubtful
accounts receivable
and sales returns
    
    $
    2,033
    
    
    $
    277
    
    
    $
    605
    
    
    $
    (772
    )(A)
    
    $
    2,143Inventory reserve
    
    
    1,732
    
    
    
    487
    
    
    
    
    
    
    
    (1,554
    )
    
    
    665Restructuring reserves
    
    
    229
    
    
    
    366
    
    
    
    
    
    
    
    (228
    )
    
    
    367Year Ended December 31, 2004Allowances for doubtful
accounts receivable
and sales returns
    
    $
    2,143
    
    
    $
    48
    
    
    $
    1,410
    
    
    $
    (1,868
    )(A)
    
    $
    1,733Inventory reserve
    
    
    665
    
    
    
    499
    
    
    
    
    
    
    
    (424
    )
    
    
    740Restructuring reserves
    
    
    367
    
    
    
    56
    
    
    
    
    
    
    
    (423
    )
    
    
    Deferred tax asset valuation allowance
    
    
    
    
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    223Year Ended December 31, 2005Allowances for doubtful
accounts receivable
and sales returns
    
    $
    1,733
    
    
    $
    180
    
    
    $
    1,247
    
    
    $
    (1,422
    )(A)
    
    $
    1,738Inventory reserve
    
    
    740
    
    
    
    1,719
    
    
    
    
    
    
    
    (1,568
    )
    
    
    891Restructuring reserves
    
    
    
    
    
    
    2,952
    
    
    
    
    
    
    
    (1,117
    )
    
    
    1,835Deferred tax asset valuation allowance
    
    
    223
    
    
    
    14,390
    
    
    
    
    
    
    
    
    
    
    
    14,613
 
 (A)
    
    Represents product returns, credits applied and accounts receivable written off, net
of recoveries. 66