UNITED STATES
FORM 10-K
(Mark One)
|
||
x
|
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the Fiscal Year Ended December 31, 2003 | ||
o
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-28104
JAKKS PACIFIC, INC.
Registrants telephone number, including
area code: (310) 456-7799
Securities registered pursuant to
Section 12(b) of the Exchange Act:
95-4527222
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Malibu, California
90265
(Address of principal executive
offices)
(Zip Code)
Name of each exchange
Title of each class
on which registered
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Class
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The aggregate market value of the voting and non-voting common equity (the only such common equity being Common Stock, $.001 par value) held by non-affiliates of the registrant (computed by reference to the closing sale price of the Common Stock on March 12, 2004) is $371,658,360.
The number of shares outstanding of the registrants Common Stock, $.001 par value (being the only class of its common stock) is 25,313,312 (as of March 12, 2004).
Documents Incorporated by Reference
None.
JAKKS PACIFIC, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year ended December 31, 2003
Items in Form 10-K
Page | ||||||
|
||||||
PART I | ||||||
Item 1.
|
Business
|
2 | ||||
Item 2.
|
Properties
|
13 | ||||
Item 3.
|
Legal Proceedings
|
13 | ||||
Item 4.
|
Submission of Matters to a Vote of Security
Holders
|
None | ||||
PART II | ||||||
Item 5.
|
Market for Registrants Common Equity and
Related Stockholder Matters
|
14 | ||||
Item 6.
|
Selected Financial Data
|
15 | ||||
Item 7.
|
Managements Discussion and Analysis of
Financial Condition and Results of Operations
|
16 | ||||
Item 7A.
|
Quantitative and Qualitative Disclosures About
Market Risk
|
24 | ||||
Item 8.
|
Consolidated Financial Statements and
Supplementary Data
|
26 | ||||
Item 9.
|
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
|
None | ||||
PART III | ||||||
Item 10.
|
Directors and Executive Officers of the Registrant
|
53 | ||||
Item 11.
|
Executive Compensation
|
55 | ||||
Item 12.
|
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
|
59 | ||||
Item 13.
|
Certain Relationships and Related Transactions
|
62 | ||||
Item 14.
|
Controls and Procedures
|
63 | ||||
Item 15.
|
Principal Accountant Fees and Services
|
63 | ||||
PART IV | ||||||
Item 16.
|
Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
|
64 | ||||
Signatures | 69 |
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements included in this report regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. When we use words like intend, anticipate, believe, estimate, plan or expect, we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important factors that could cause our actual results to differ materially from our current expectations elsewhere in this report. You should understand that forward-looking statements made in this report are necessarily qualified by these factors. We are not undertaking to publicly update or revise any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise.
1
Item 1.
Business
In this report, JAKKS, the Company,
we, us and our refer to
JAKKS Pacific, Inc. and its subsidiaries.
Company Overview
We are a leading multi-line, multi-brand toy company that
designs, develops, produces and markets toys and related
products. We focus our business on acquiring or licensing
well-recognized trademarks and brand names with long product
histories (evergreen brands). We seek to acquire
these evergreen brands because we believe they are less subject
to market fads or trends. Our products are typically simpler,
lower-priced, toys and accessories and include:
We continually review the marketplace to identify and evaluate
evergreen brands that we believe have the potential for
significant growth. We endeavor to generate growth within these
brands by:
In addition to developing our proprietary brands and marks, we
license brands such as
WWE
TM
,
Nickelodeon
®,
Rugrats
®,
Dora the
Explorer
®,
Blues Clues
®,
SpongeBob
SquarePants
®,
Mickey Mouse
,
Winnie the
Pooh
,
Kim Possible
,
Finding Nemo
,
Hello
Kitty
® and
NASCAR
®. Licensing enables us to
use these high-profile marks at a lower cost than we would incur
if we purchased these marks or developed comparable marks on our
own. By licensing marks, we have access to a far greater range
of marks than would be available for purchase. We also license
technology
2
We have capitalized on our relationship with the WWE by
obtaining an exclusive worldwide license for our joint venture
with THQ Inc. (THQ), which develops, produces,
manufactures and markets video games based on
WWE
characters and themes. Since the joint ventures first
title release in 1999, it has released 19 new titles. We
have received $41.6 million as our share of the joint
ventures profit through December 31, 2003.
Through the Toymax International, Inc. (Toymax)
acquisition, we added toy brand names such as
Laser Challenge
and
Creepy Crawlers
® to our brand portfolio. In
addition, pool-related products branded under the name
Funnoodle
and kites branded under the name
Go Fly a
Kite
® further diversified our portfolio with products
popular in the spring and summer seasons.
Through the assets acquired from Trendmasters®, Inc.
(Trendmasters) acquisition, we added the
The
Storm
brand of water guns, gliders and junior sports toys,
seasonal products for Halloween, Christmas and Easter, and
vehicles, action figures, dolls and playsets under multiple
brands.
In May 2003, we acquired from P&M Products USA, Inc. and an
affiliated United Kingdom company, P&M Products Limited,
(collectively P&M) the
Blopen
,
Blitzer
TM
,
Vivid Velvet
® and
SmArty Paints
® line of products.
Most of our current products are relatively simple and
inexpensive toys. In 2003, approximately 70% of our revenue came
from products priced at ten dollars or less at retail. We
believe that these products have enduring appeal and are less
subject to general economic conditions, toy product fads and
trends, and changes in retail distribution channels. As of
December 31, 2003, we had over 3,800 products in
approximately 19 product categories. In addition, the simplicity
of these products enables us to choose among a wider range of
manufacturers and affords us greater flexibility in product
design, pricing and marketing. Our product development process
typically takes from three to nine months from concept to
production and shipment to our customers. We believe that many
licensors and retailers recognize and reward our ability to
bring product to market faster and more efficiently than many of
our competitors.
We sell our products through our in-house sales staff and
independent sales representatives to toy and mass-market retail
chain stores, department stores, office supply stores, drug and
grocery store chains, club stores, toy specialty stores and
wholesalers. The
Road Champs
,
Flying Colors
and
Pentech
products also are sold to smaller hobby shops,
specialty retailers and corporate accounts, among others. Our
five largest customers are Target, Kmart, Toys R Us,
Wal-Mart, and Kay Bee Toys, which collectively accounted for
approximately 57.7% of our net sales in 2003. We have over 7,000
other customers, none of which accounted for more than 2.0% of
our net sales in 2003.
Our Growth Strategy
The execution of our growth strategy has resulted in increased
revenues and earnings. In 2003, we generated net sales and
EBITDA of $315.8 million and $35.0 million,
respectively. Key elements of our growth strategy include:
Expand Core Products.
We manage our
existing and new brands through strong product development
initiatives, including introducing new products, modifying
existing products and extending existing product lines. Our
product designers strive to develop new products or product
lines to offer added technological, aesthetic and functional
improvements to our product lines. In 2001, we expanded the use
of real-scan technology in our action toys, and in 2002 we
incorporated articulated joints and a flexible rubberized
coating to enhance the life-like and feel of these action toys.
These innovations produce higher quality and better likenesses
of the representative characters.
3
Enter New Product Categories.
We will
continue to use our extensive experience in the toy and other
industries to evaluate products and licenses in new product
categories and to develop additional product lines. We have
entered the toy candy category through our internal creation of
Tongue Tape
, commenced marketing of licensed classic
video games for simple plug-in use with television sets and
expanded into slumber bags through the licensing of this
category from our current licensors, such as Nickelodeon.
Pursue Strategic Acquisitions.
We
intend to supplement our internal growth rate with selected
strategic acquisitions. Since our inception in 1995, we have
successfully completed and integrated eleven acquisitions of
companies and trademarks. These include our acquisitions of
Justin Products, Road Champs, Remco, Child Guidance, Berk,
Flying Colors Toys, Pentech, Kidz Biz, Toymax® and
Trendmasters®. Most recently, in May 2003, we acquired
ColorWorkshop
and
Blopens
, among others, from
P&M which we plan on incorporating into our
Flying
Colors
and
Pentech
lines. We will continue focusing
our acquisition strategy on businesses or brands that have
compatible product lines and offer valuable trademarks or
brands. In December 2002, we signed a three-year master toy
license for DragonBall®, DragonBall Z® and
DragonBall GT®. We will develop, manufacture and
distribute action figures and action figure accessories based on
these top rated animated series.
Acquire Additional Character and Product
Licenses.
We have acquired the rights to use many
familiar corporate, trade and brand names and logos from third
parties that we use with our primary trademarks and brands.
Currently, we have license agreements with the WWE, Nickelodeon,
Disney, and Warner Bros.®, as well as with the licensors of
the many popular licensed childrens characters previously
mentioned, among others. We intend to continue to pursue new
licenses from these entertainment and media companies and other
licensors. We also intend to continue to purchase additional
inventions and product concepts through our existing network of
product developers.
Expand International Sales.
We believe
that foreign markets, especially Europe, Australia, Canada,
Latin America and Asia, offer us significant growth
opportunities. In 2003, our sales generated outside the United
States were approximately $44.7 million, or 14.2% of total
net sales. We intend to continue to expand our international
sales by capitalizing on our experience and our relationships
with foreign distributors and retailers. Our recent expansion
efforts included entering into a distribution agreement with
Funtastic Ltd., an Australia based toy distributor. In addition,
in December 2001, we acquired Kidz Biz for its distribution
channels in the United Kingdom and surrounding territories. We
expect both initiatives to continue to contribute to our
international growth in 2004.
Capitalize On Our Operating
Efficiencies.
We believe that our current infrastructure
and low-overhead operating model can accommodate significant
growth without a proportionate increase in our operating and
administrative expenses, thereby increasing our operating
margins.
Industry Overview
According to the TIA, the leading toy industry trade group, the
United States is the worlds largest toy market, followed
by Japan and Western Europe. Total retail sales of toys,
excluding video games, in the United States, were approximately
$20.3 billion in 2002. Sales by domestic toy manufacturers
to foreign customers exceeded $6.0 billion in 2002. We
believe the two largest United States toy companies, Mattel and
Hasbro, collectively hold a dominant share of the domestic
non-video toy market. In addition, hundreds of smaller companies
compete in the design and development of new toys, the
procurement of character and product licenses, and the
improvement
4
Over the past few years, the toy industry has experienced
substantial consolidation among both toy companies and toy
retailers. We believe that the ongoing consolidation of toy
companies provides us with increased growth opportunities due to
retailers desire to not be entirely dependent on a few
dominant toy companies. Retailer concentration also enables us
to ship products, manage account relationships and track retail
sales more effectively and efficiently.
Products
We focus our business on acquiring or licensing well-recognized
trademarks or brand names, and we seek to acquire evergreen
brands which are less subject to market fads or trends. Some of
our license agreements for products and concepts call for
royalties ranging from 1% to 18% of net sales, and some may
require minimum guarantees and advances. Our principal products
include:
Action Figures and Accessories
We have an extensive toy license with the WWE pursuant to which
we have the exclusive worldwide right, until December 31,
2009, to develop and market a full line of toy products based on
the popular
WWE
professional wrestlers. These wrestlers
perform throughout the year at live events that attract large
crowds, many of which are broadcast on free and cable
television, including pay-per-view specials. We launched this
product line in 1996 with various series of 6 inch
articulated action figures that have movable body parts and
feature real-life action sounds from our patented bone-crunching
mechanism that allows the figures bones to
crack when they are bent. We continually expand and enhance this
product line by using technology in the development and in the
products themselves. The 6 inch figures currently make up a
substantial portion of our overall
WWE
line, which has
since grown to include many other new products including
playsets using interactive technology. Our strategy has been to
release new figures and accessories frequently to keep the line
fresh and to retain the interest of the consumers.
In December 2002, we signed a three-year master toy license for
Dragon Ball
,
Dragon Ball Z
and
Dragon Ball
GT
. In 2003, we began to develop, manufacture and distribute
action figures and action figure accessories based on these
top-rated animated series.
Flying Colors/ Pentech Activity Sets, Compounds, Playsets,
Writing Instruments and Lunch Boxes
Through our acquisition of Flying Colors Toys we entered into
the toy activity category with compounds and plastic molded
activity cases containing a broad range of activities, such as
make and paint your own characters, jewelry making, art studios,
posters, puzzles and other projects. The activity cases, with
molded and painted likenesses of popular characters, such as
Nickelodeons
Blues Clues
and
SpongeBob
SquarePants
, and
Hello Kitty
, have immediate visual
appeal. Using a related production technology, our lunch boxes
complement this line with similarly-styled molded and painted
likenesses featuring these and other popular characters. Our
product lines also include stationery, back-to-school pens,
pencils, markers, notebooks and P&M craft products such as
Blopens
® and
ColorWorkshop
. In 2002, we
entered the toy candy category and introduced our
Tongue
Tape
products in six flavors in a plastic container and have
added a necklace to carry a
Tongue Tape
dispenser, as
well as various licenses including
Hello Kitty
and
NASCAR
.
Our compounds represent another significant area of emphasis for
Flying Colors. Launched under the
Blues Clues
license, this line has expanded from play clay in a bucket to an
entire
Blues Clues
playset featuring book molds,
extrusion and other devices. We are continuing to expand the
5
Electronics Products
Through our acquisition of Toymax we entered into the electronic
products category with our plug and play TV Games and
Laser
Challenge
product line. Our
Laser Challenge
product
line includes laser games and NRG paintball
TM
. Our
current TV Games include licenses from Activision, Atari, Namco
and Nickelodeon, and feature such games as Centipede® and
Pac-Man®.
In 2004, we expect to release at least eight new TV Games
including Ms. Pac-Man®, Spider-Man®, Disney and
several licensed and non-licensed preschool titles.
Seasonal Products
Through our acquisitions of Toymax and Trendmasters we have
entered into a wide range of seasonal toys and leisure products.
Our
Go Fly A Kite
product line includes youth and adult
kites and a wide array of decorative flags, windstocks, and
windwheels. Our
Funnoodle
pool toys include the basic
funnoodle, pool floats and a variety of other pool toys. Our
Storm
product line includes water guns, gliders and sport
balls. In addition, we added a holiday product line for Easter,
Halloween and Christmas.
Junior Sports Products
Our junior sports products include Disney licensed products,
Gaksplat
and
Storm
. Our Disney sports include such
activities as basketball, bowling and golf. Our
Gaksplat
and
Storm
junior sports include a variety of mini sport
balls and activity products.
Wheels Division Products
The
Road Champs
product line consists of highly detailed,
die-cast replicas of new and classic cars, trucks, motorcycles,
emergency vehicles and service vehicles, primarily in 1/43
scale (including police cars, fire trucks and ambulances), buses
and aircraft (including propeller planes, jets and helicopters).
Through licenses, we produce replicas of well-known vehicles
including those from
Ford
®,
Chevrolet
®
and
Porsche
®. Additionally, through our
NASCAR
license, we produce radio-controlled vehicles in a
variety of scales. We believe that these licenses, increase the
perceived value of the products and enhance their marketability.
Our extreme sports offering includes our
MXS
® line
of motorcycles with riders featuring click n grip
functionality which allows the user to release the rider from
the motorcycle seat and perform the signature moves of the
sports top riders. Other products include off-road
vehicles, personal watercraft, surfboards and skateboards, all
sold individually and with playsets and accessories.
Our
Remco
toy line includes toy and activity vehicles and
other toys. In 2002, we also added infrared radio controlled
vehicles and
Mighty Mos
® toy vehicles. Our toy
vehicle line is comprised of a large assortment of rugged
die-cast and plastic vehicles that range in size from four and
three-
6
Child Guidance
Our line of pre-school electronic toys features products that
enhance sensory stimulation and learning through play, while
offering value to the trade as well as to the consumer. Our
products are designed for children ages two and under. We have
combined the fun of music, lights, motion and sound with the
early introduction of numbers, letters, shape and color
recognition, all at a value price.
The foam toy products include puzzle mats featuring licensed
characters, such as
Winnie the Pooh and Blues
Clues
, among others, as well as letters of the alphabet and
numbers. The inter-locking puzzle pieces can also be used to
build houses and other play areas. Other products include foam
puzzles of the United States, foam vehicles and outdoor foam
products.
Our line of childrens indoor slumber bags features
Dora
the Explorer
,
SpongeBob SquarePants
and
Blues Clues
in addition to proprietary designs.
Fashion and Mini Dolls and Related Accessories
We produce various proprietary and licensed fashion and mini
dolls and accessories for children between the ages of three and
ten. The proprietary product lines include 11 1/2 inch
fashion dolls customized with high-fashion designs that
correspond with particular holidays, events or themes, and
fashion dolls based on childrens classic fairy tales and
holidays. We also have an agreement to manufacture for
The Disney Store chain a full line of dolls under a private
label which features
Disney
Princesses and classic Disney
characters.
Our in-house product developers originate the design and
functionality of most of our fashion dolls. In many cases, they
work with retailers and incorporate their input on doll
characteristics, packaging and other design elements to create
exclusive product lines for them.
World Wrestling Entertainment Video Games
In June 1998, we formed a joint venture with THQ®, a
developer, publisher and distributor of interactive
entertainment software for the leading hardware game platforms
in the home video game market. The joint venture entered into a
license agreement with the WWE under which it acquired the
exclusive worldwide right to publish
WWE
video games on
all hardware platforms. The term of the license agreement
expires on December 31, 2009, and the joint venture has a
right to renew the license for an additional five years under
various conditions.
The games are designed, developed, manufactured and distributed
by THQ. THQ arranges for the manufacture of the CD-ROMs and game
cartridges used in the various video game platforms under
non-exclusive licenses with Sony, Nintendo, Sega and Microsoft.
No other licenses are required for the manufacture of the
personal computer titles.
Through June 30, 2006, we are entitled to receive a
guaranteed percentage preferred return from the joint venture at
varying rates of net sales of the video games depending on the
cumulative
7
The joint venture currently publishes titles for the Sony
PlayStation®
and
PlayStation 2
®,
Nintendo 64
® and
GameCube®
and Microsoft
Xbox
® consoles, Nintendo
Game Boy Color
®
and
Game Boy Advance
® hand-held platforms and
personal computers. The joint venture launched its first
products in November 1999. It will also publish titles for new
hardware platforms when, and as they are introduced to the
market and have established a sufficient installed base to
support new software. These titles are marketed to our existing
customers as well as to game, electronics and other specialty
stores, such as Electronics Boutique and Best Buy.
The following table presents our past results with the joint
venture:
Wrestling video games have demonstrated consistent popularity,
with five of our wrestling-themed video games each having sold
in excess of 1 million units in 1999, 2000, 2001, 2002 and
2003, at retail prices ranging from approximately $42 to $60 per
game. We believe that the success of
WWE
titles is
dependent on the graphic look and feel of the software, the
depth and variation of game play and the popularity of
WWE.
We believe that as a franchise property,
WWE
titles have brand recognition and sustainable consumer
appeal, which may allow the joint venture to use titles over an
extended period of time through the release of sequels and
extensions and to re-release such products at different price
points in the future. In 2001, our PlayStation title
SmackDown
TM
was re-released as a
greatest hit.
8
Sales, Marketing and Distribution
We sell all of our products through our own in-house sales staff
and independent sales representatives to toy and mass-market
retail chain stores, department stores, office supply stores,
drug and grocery store chains, club stores, toy specialty stores
and wholesalers. Our five largest customers are Target, Kmart,
Toys R Us, Wal-Mart, and Kay Bee Toys, which
accounted for approximately 55.7% of our net sales in 2002 and
57.7% of our net sales in 2003. Kay Bee Toys filed for
bankruptcy protection under Chapter 11 in January 2004.
Except for purchase orders relating to products on order, we do
not have written agreements with our customers. Instead, we
generally sell products to our customers pursuant to letters of
credit or, in some cases, on open account with payment terms
typically varying from 30 to 90 days. From time to time, we
allow our customers credits against future purchases from us in
order to facilitate their retail markdown and sales of
slow-moving inventory. We also sell our products through
e-commerce sites, including Toysrus.com.
We contract the manufacture of most of our products to
unaffiliated manufacturers located in China. We sell the
finished products on a letter of credit basis or on open account
to our customers, who take title to the goods in Hong Kong or
China. These methods allow us to reduce certain operating costs
and working capital requirements. A portion of our sales
originate in the United States, so we hold certain inventory in
our warehouse and fulfillment facilities. To date, a significant
portion of all of our sales has been to domestic customers. We
intend to continue expanding distribution of our products into
foreign territories and, accordingly, we have:
Outside of the United States, we currently sell our products
primarily in Europe, Australia, Canada, Latin America and Asia.
Sales of our products abroad accounted for approximately
$53.2 million, or 17.2% of our net sales, in 2002 and
approximately $44.7 million, or 14.2% of our net sales, in
2003. We believe that foreign markets present an attractive
opportunity, and we plan to intensify our marketing efforts and
further expand our distribution channels abroad.
We establish reserves for sales allowances, including
promotional allowances and allowances for anticipated defective
product returns, at the time of shipment. The reserves are
determined as a percentage of net sales based upon either
historical experience or on estimates or programs agreed upon by
our customers.
We obtain, directly, or through our sales representatives,
orders for our products from our customers and arrange for the
manufacture of these products as discussed below. Cancellations
generally are made in writing, and we take appropriate steps to
notify our manufacturers of these cancellations.
We maintain a full-time sales and marketing staff, many of whom
make on-site visits to customers for the purpose of showing
product and soliciting orders for products. We also retain a
number of independent sales representatives to sell and promote
our products, both domestically and internationally. Together
with retailers, we sometimes test the consumer acceptance of new
products in selected markets before committing resources to
large-scale production.
9
We advertise our products in trade and consumer magazines and
other publications, market our products at international,
national and regional toy, stationery and other specialty trade
shows, conventions and exhibitions and carry on cooperative
advertising programs with toy and mass retailers and other
customers which include the use of in-store displays. We also
produce and broadcast television commercials for our
WWE
action figure line, as well as for some of our
Flying Colors
and Electronics products. We may also advertise some of our
other products on television, if we expect that the resulting
increase in our net sales will justify the relatively high cost
of television advertising.
Product Development
Each of our product lines has an in-house manager responsible
for product development. The in-house manager identifies and
evaluates inventor products and concepts and other opportunities
to enhance or expand existing product lines or to enter new
product categories. In addition, we create proprietary products,
the principal source of products for our fashion doll line, and
products to more fully exploit our concept and character
licenses. Although we do have the capability to create and
develop products from inception to production, we generally use
third-parties to provide a substantial portion of the sculpting,
sample making, illustration and package design required for our
products in order to accommodate our increasing product
innovations and introductions. Typically, the development
process takes from three to nine months from concept to
production and shipment to our customers.
We employ a staff of designers for all of our product lines. We
occasionally acquire our other product concepts from
unaffiliated third parties. If we accept and develop a third
partys concept for new toys, we generally pay a royalty on
the toys developed from this concept that are sold, and may, on
an individual basis, guarantee a minimum royalty. Royalties
payable to inventors and developers generally range from 1% to
8% of the wholesale sales price for each unit of a product sold
by us. We believe that utilizing experienced third-party
inventors gives us access to a wide range of development talent.
We currently work with numerous toy inventors and designers for
the development of new products and the enhancement of existing
products. We believe that toy inventors and designers have come
to appreciate our practice of acting quickly and decisively to
acquire and market licensed products. In addition, we believe
that all of these factors, as well as our recent success in
developing and marketing products, make us more attractive to
toy inventors and developers than some of our competitors.
Safety testing of our products is done at the
manufacturers facilities by an engineer employed by us or
by independent third-party contractors engaged by us. Safety
testing is designed to meet regulations imposed by federal and
state governmental authorities. We also monitor quality
assurance procedures for our products for safety purposes. In
addition, independent laboratories engaged by some of our larger
customers test certain of our products.
Manufacturing and Supplies
Most of our products are currently produced by overseas
third-party manufacturers, which we choose on the basis of
quality, reliability and price. Consistent with industry
practice, the use of third-party manufacturers enables us to
avoid incurring fixed manufacturing costs, while maximizing
flexibility, capacity and production technology. All of the
manufacturing services performed overseas for us are paid for on
open account with the manufacturers. To date, we have not
experienced any material delays in the delivery of our products;
however, delivery schedules are subject to various factors
beyond our control, and any delays in the future could adversely
affect our sales. Currently, we have ongoing relationships with
more than 20 different manufacturers. We
10
Although we do not conduct the day-to-day manufacturing of our
products, we participate in the design of the product prototype
and production tools, dies and molds for our products and we
seek to ensure quality control by actively reviewing the
production process and testing the products produced by our
manufacturers. We employ quality control inspectors who rotate
among our manufacturers factories to monitor the
production of substantially all of our products.
The principal raw materials used in the production and sale of
our toy products are plastics, zinc alloy, plush, printed
fabrics, paper products and electronic components, all of which
are currently available at reasonable prices from a variety of
sources. Although we do not manufacture our products, we own the
tools, dies and molds used in the manufacturing process, and
these are transferable among manufacturers if we choose to
employ alternative manufacturers. Tools, dies and molds
represent substantially all of our property and equipment and
amounted to $9.6 million in 2002 and $7.1 million in
2003. Substantially all of these assets are located in China.
Trademarks and Copyrights
Most of our products are produced and sold under trademarks
owned by or licensed to us. We typically register our
properties, and seek protection under the trademark, copyright
and patent laws of the United States and other countries where
our products are produced or sold. These intellectual property
rights can be significant assets. Accordingly, while we believe
we are sufficiently protected, the loss of some of these rights
could have an adverse effect on our business, financial
condition and results of operations.
Competition
Competition in the toy industry is intense. Globally, certain of
our competitors have greater financial resources, larger sales
and marketing and product development departments, stronger name
recognition, longer operating histories and benefit from greater
economies of scale. These factors, among others, may enable our
competitors to market their products at lower prices or on terms
more advantageous to customers than those we could offer for our
competitive products. Competition often extends to the
procurement of entertainment and product licenses, as well as to
the marketing and distribution of products and the obtaining of
adequate shelf space. Competition may result in price
reductions, reduced gross margins and loss of market share, any
of which could have a material adverse effect on our business,
financial condition and results of operations. In each of our
product lines we compete against one or both of the toy
industrys two dominant companies, Mattel and Hasbro. In
addition, we compete, in our
Flying Colors
and
Pentech
product categories, with Rose Art Industries, Hasbro
(Play-doh) and Binney & Smith (Crayola), and, in our toy
vehicle lines, with Racing Champions. We also compete with
numerous smaller domestic and foreign toy manufacturers,
importers and marketers in each of our product categories. Our
joint ventures principal competitors in the video game
market are Electronic Arts, Activision and Acclaim Entertainment.
Seasonality and Backlog
In 2003, approximately 55.3% of our net sales were made in the
third and fourth quarters. Generally, the first quarter is the
period of lowest shipments and sales in our business and the toy
industry generally and therefore the least profitable due to
various fixed costs. Seasonality factors may cause our operating
results to fluctuate significantly from quarter to quarter.
However, our
11
We ship products in accordance with delivery schedules specified
by our customers, which usually request delivery of their
products within three to six months of the date of their orders.
Because customer orders may be canceled at any time without
penalty, our backlog may not accurately indicate sales for any
future period.
Government and Industry Regulation
Our products are subject to the provisions of the Consumer
Product Safety Act (CPSA), the Federal Hazardous
Substances Act (FHSA), the Flammable Fabrics Act
(FFA) and the regulations promulgated
thereunder. The CPSA and the FHSA enable the Consumer Products
Safety Commission (CPSC) to exclude from the
market consumer products that fail to comply with applicable
product safety regulations or otherwise create a substantial
risk of injury, and articles that contain excessive amounts of a
banned hazardous substance. The FFA enables the CPSC to regulate
and enforce flammability standards for fabrics used in consumer
products. The CPSC may also require the repurchase by the
manufacturer of articles. Similar laws exist in some states and
cities and in various international markets. We maintain a
quality control program designed to ensure compliance with all
applicable laws.
Employees
As of March 12, 2004, we employed 316 persons, all of
whom are full-time employees, including four executive officers.
We employed 208 in the United States, 25 in the United Kingdom,
58 in Hong Kong and 25 in China. We believe that we have
good relationships with our employees. None of our employees is
represented by a union.
Environmental Issues
We are subject to legal and financial obligations under
environmental, health and safety laws in the United States and
in other jurisdictions where we operate. We are not currently
aware of any material environmental liabilities associated with
any of our operations.
Available Information
We make available free of charge on or through our Internet
website, www.jakkspacific.com, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC.
12
Our Corporate Information
We were formed as a Delaware corporation in 1995. Our principal
executive offices are located at 22619 Pacific Coast
Highway, Malibu, California 90265. Our telephone number is
(310) 456-7799 and our Internet Website address is
www.jakkspacific.com.
Action figures and accessories including licensed characters,
principally based on
World Wrestling
Entertainment
TM
(WWE) and the
Dragon Ball
® franchise, and toy vehicles, including
Road Champs
® die-cast collectibles and
Remco®
toy vehicles and role-play toys and
accessories;
Craft, activity and stationery products, including
Flying
Colors Toys
® activity sets, compounds, playsets and
lunch boxes, and Colorworkshop® craft products such as the
Blopen
® and
Pentech
® writing
instruments, stationery and activity products;
Child Guidance
® infant and pre-school electronic
toys, toy foam puzzle mats and blocks, activity sets, outdoor
products, plush toys and slumber bags;
Seasonal toys and leisure products, including kites,
Funnoodle
® pool toys, and
Storm
TM
water guns;
Toy candy through our creation of
Tongue
Tape
TM
;
Electronics products, including plug and play TV Games and
Laser Challenge
TM
;
Junior sports, including Disney products,
Gaksplat
TM
and
Storm
TM
; and
Fashion and mini dolls and related accessories, including
Disney
Princesses sold in The Disney Store chain.
creating innovative products under established brand names;
focusing our marketing efforts to enhance consumer recognition
and retailer interest;
linking them with our evergreen portfolio of brands;
adding new items to the branded product lines that we expect
will enjoy greater popularity; and
adding new features and improving the functionality of products
in the line.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Road Champs
die-cast collectible and toy vehicles
Extreme sports die-cast collectibles and toy vehicles and
action figures
Toy and activity vehicles
Table of Contents
Infant and pre-school toys
Foam puzzle mats and playsets
Slumber bags
Table of Contents
New Game Titles
Profit from Joint
Console Platforms
Hand-held Platforms
Venture
(1)
(In millions)
1
1
$
3.6
4
1
15.9
1
2
6.7
3
1
8.0
5
7.4
(1)
Profit from the joint venture reflects our preferred return on
joint venture revenue less certain costs incurred directly by us.
Table of Contents
acquired Kidz Biz, a United Kingdom-based distributor of toys
and related products,
engaged representatives to oversee sales in certain territories,
engaged distributors in certain territories, such as Funtastic
in Australia, and
established direct relationships with retailers in certain
territories.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Our principal executive offices occupy approximately 17,000 square feet of space in Malibu, California under a lease expiring on February 28, 2008. We have a lease, expiring August 31, 2007, for approximately 11,000 square feet of additional office space in Malibu, California, which contains our design offices. We have a lease for showroom and office space of approximately 14,500 square feet at the International Toy Center in New York City which expires April 30, 2010. We also have leased office and showroom space of approximately 10,000 square feet in Hong Kong from which we oversee our China-based third-party manufacturing operations, 318,000 square feet of warehouse space in City of Industry, California, and 10,000 square feet of office space in Surrey, England. We also occupy approximately 25,000 square feet of office and warehouse space in Clinton, Connecticut under a lease expiring September 30, 2007 from which the operations of our Go Fly a Kite and Funnoodle divisions are carried out. We believe that our facilities in the United States, Hong Kong and England are adequate for our reasonably foreseeable future needs.
Item 3. Legal Proceedings
We are a party to, and certain of our property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of our business, but we do not believe that any of these claims or proceedings will have a material effect on our business, financial condition or results of operations.
13
PART II
Item 5.
Market for Registrants Common Equity
and Related Stockholder Matters
Market Information
Our common stock is traded on the Nasdaq National Market under
the symbol JAKK. The following table sets forth, for
the periods indicated, the range of high and low sales prices
for our common stock on the Nasdaq National Market.
Price Range of
Common Stock
High
Low
$
23.70
$
15.85
23.49
15.91
17.76
9.57
16.63
9.30
14.49
9.50
14.49
10.22
14.04
10.05
13.77
11.74
Security Holders
As of March 12, 2004, there were 161 holders of record of our common stock.
Dividends
We have never paid any cash dividends on any of our common stock. The agreements applicable to our Line of Credit (see the discussion in Item 7 below) prohibit the payment of dividends on our common stock (except for dividends payable in shares of our common stock or other equity security). In any event, we currently intend to retain our future earnings, if any, to finance the growth and development of our business, but may consider implementing a plan to pay cash dividends on our common stock in the future.
14
Item 6. Selected Financial Data
You should read the financial data set forth below in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
consolidated financial statements and the related notes
(included in Item 8).
Year Ended December 31,
1999
2000
2001
2002
2003
(In thousands, except per share data and ratios)
$
183,685
$
252,288
$
284,309
$
310,016
$
315,776
107,602
149,881
164,222
179,465
189,142
76,083
102,407
120,087
130,551
126,634
51,154
80,435
89,575
91,849
105,771
1,469
1,214
6,718
2,000
24,929
20,503
29,298
31,984
18,863
(3,605
)
(15,906
)
(6,675
)
(8,004
)
(7,351
)
(1,588
)
(3,833
)
(2,057
)
(1,141
)
1,405
(182
)
(92
)
30,304
40,334
38,030
41,129
24,809
8,334
11,697
9,797
9,048
4,205
21,970
28,637
28,233
32,081
20,604
810
$
21,970
$
28,637
$
28,233
$
31,271
$
20,604
$
1.58
$
1.50
$
1.55
$
1.42
$
0.85
13,879
19,060
18,199
21,963
24,262
$
1.39
$
1.41
$
1.45
$
1.37
$
0.83
15,840
20,281
19,410
22,747
24,677
72.64
x
89.84
x
38.80
x
25.42
x
6.39
x
At December 31,
1999
2000
2001
2002
2003
(In thousands)
$
57,546
$
29,275
$
25,036
$
68,413
$
118,182
113,170
86,897
116,492
129,182
232,600
232,878
248,722
284,041
408,810
537,364
9
1,000
77
60
98,042
187,501
204,530
244,404
360,577
385,950
(1) | For the purpose of computing the ratio of fixed charges, earnings consist of income before provision for income taxes plus fixed charges. Fixed charges consist of interest charges, amortization of debt expenses and that portion of rental expense we believe to be representative of interest. |
15
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. You should read this section in conjunction with our consolidated financial statements and the related notes (included in Item 8).
Critical Accounting Policies
The accompanying consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are discussed in Footnote 2 to the Consolidated Financial Statements, Item 8. Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policies with the greatest potential effect on our results of operation and financial position include:
The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there were a deterioration of a major customers creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results.
Our revenue recognition policy is significant because our revenue is a key component of our results of operations. In addition, our revenue recognition determines the timing of certain expenses, such as commissions and royalties. We follow very specific and detailed guidelines in measuring revenues; however, certain judgments affect the application of our revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.
We assess the impairment of long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
| significant underperformance relative to expected historical or projected future operating results; | |
| significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and | |
| significant negative industry or economic trends. |
When we determine that the carrying value of long-lived assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Net long-lived assets, including goodwill, amounted to $241.5 million as of December 31, 2003.
16
Recent Developments
On May 31, 2003, we purchased certain product lines,
including
ColorWorkshop
and
Blopens
, assets and
assumed certain liabilities of P&M Products USA, Inc.
and an affiliated United Kingdom company, P&M Products
Limited (collectively P&M). The total purchase
price of approximately $22.0 million consisted of all cash
and the assumption of certain liabilities and resulted in
goodwill of $16.8 million. Our results of operations have
included P&M from the date of acquisition.
Results of Operation
The following table sets forth, for the periods indicated,
certain statement of operations data as a percentage of net
sales.
Years Ended December 31,
1999
2000
2001
2002
2003
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
58.6
59.4
57.8
57.9
59.9
41.4
40.6
42.2
42.1
40.1
27.8
31.9
31.5
29.6
33.5
0.5
0.4
2.2
0.6
13.6
8.2
10.3
10.3
6.0
(2.0
)
(6.3
)
(2.3
)
(2.6
)
(2.3
)
(0.9
)
(1.5
)
(0.7
)
(0.4
)
0.4
16.5
16.0
13.3
13.3
7.9
4.5
4.6
3.4
2.9
1.3
12.0
11.4
9.9
10.4
6.6
0.3
12.0
%
11.4
%
9.9
%
10.1
%
6.6
%
Years Ended December 31, 2003 and 2002
Net Sales. Net sales were $315.8 million in 2003 compared to $310.0 million in 2002, representing an increase of 1.9%. The contribution to net sales by our seasonal products, including Trendmasters, Go Fly a Kite, Funnoodle and sports toys, and new product introductions, including Dragon Ball and NASCAR action toys, TV games and ColorWorkshop craft products, were offset by a decrease in sales in our traditional products, and international sales, which included a reduction in sales of our karaoke machines and Equalizer radio control vehicle in 2003, both higher priced items.
Gross Profit. Gross profit decreased $3.9 million, or 3.0%, to $126.6 million, or 40.1% of net sales, in 2003 from $130.6 million, or 42.1% of net sales, in 2002. The overall decrease in gross profit was attributable to a decrease in gross profit margin. The decrease in gross profit margin of 2.0% of net sales was due to higher sales of seasonal products with lower margins and an increase in royalty expense as a percentage of net sales due to changes in the product mix resulting from the sale of more products with higher royalty rates, though offset in part by a decrease in amortization expense of molds and tools used in the manufacture of our products.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $105.8 million in 2003 and $91.8 million in 2002, constituting 33.5% and 29.6% of net sales, respectively. The overall increase of $14.0 million in such costs was primarily due to a charge for
17
Acquisition Shut-down and Recall Costs. Acquisition shut-down costs in 2002 relate to shut-down costs, including lease termination, fixed asset abandonment and other costs, of certain operations of Toymax and Kidz Biz. There were no such costs in 2003. Operations impacted by these shut-downs were sales, design, distribution, and administration. The integrations of Toymax and Kidz Biz were completed in 2002. In 2003, we accrued a net amount of $2.0 million for the recall of one of our products, compared to having accrued $2.2 million in 2002 for the recall of the same product.
The remaining component of the acquisition shut-down and recall
costs is as follows (in thousands):
Accrued Balance
Accrued Balance
December 31, 2002
Accrual
Actual
December 31, 2003
$
2,310
$
$
(2,310
)
$
2,000
(1,510
)
490
$
2,310
$
2,000
$
(3,820
)
$
490
Profit from Joint Venture. Profit from joint venture decreased by $0.7 million in 2003 due to the joint venture having lower unit sales at lower wholesale prices of its two vehicle combat games of the five games released in 2003 compared to releasing all new titles with higher unit sales at higher wholesale prices in addition to having higher sales of carryover titles in 2002. New releases typically generate higher unit sales resulting in higher overall sales as compared to carryover titles. Profit from the joint venture contributed significantly to our pre-tax profit, representing 19.5% of pre-tax income in 2002 and 22.2% in 2003. We expect to continue to receive a preferred return over the remaining term of the license agreement ending December 31, 2009, although we cannot predict with certainty what levels of return will be achieved and, in any case, we anticipate substantial fluctuations in the amount of the preferred return distributed to us from year to year.
Interest Net. Interest income increased due to higher average cash balances during 2003 than in 2002, but was offset by interest expense of $2.5 million related to the convertible notes issued in June 2003.
Provision for Income Taxes. Provision for income taxes included Federal, state and foreign income taxes in 2002 and 2003, at an effective tax rate of 22.0% and 17% in 2002 and 2003, respectively, benefiting from a flat 16.5% and 17.0%, Hong Kong Corporation Tax on our income arising in, or derived from, Hong Kong for 2002 and 2003, respectively. For 2003, the effective rate decreased as a result of a higher proportionate share of income arising in Hong Kong as opposed to income arising in the higher statutory jurisdictions. As of December 31, 2003, we had deferred tax assets of approximately $4.0 million for which no allowance has been provided since, in the opinion of management, realization of the future benefit is probable. In making this determination, management believes it considered all available evidence, both positive and negative, as well as the weight and importance given to such evidence.
18
Years Ended December 31, 2002 and 2001
Net Sales. Net sales increased $25.7 million, or 9.0%, to $310.0 million in 2002 from $284.3 million in 2001. The growth in net sales was due primarily to the addition of the Toymax products and continuing growth in sales of our Flying Colors and Doll products which was offset in part by a decrease in sales of our Wheels division, consisting primarily of our Road Champs die-cast toy and collectible vehicles with its extreme sports products.
Gross Profit. Gross profit increased $10.5 million, or 8.7%, to $130.6 million in 2002, or 42.1% of net sales, from $120.1 million, or 42.2% of net sales, in 2001. The overall increase in gross profit was attributable to the increase in net sales. Gross profit margin was compatible to last year as lower margins for Toymax products were offset by the decrease in royalty expense as a percentage of net sales due to changes in the product mix resulting from the sale of more products with lower royalty rates or proprietary products with no royalties.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $91.8 million in 2002 and $89.6 million in 2001, constituting 29.6% and 31.5% of net sales, respectively. The overall increase of $2.2 million in such costs was due to costs incurred in support of our Kidz Biz and Toymax acquisitions and increased media buys, offset in part by a decrease in Goodwill amortization expense based on the implementation of SFAS 142. The decrease as a percentage of net sales is primarily attributable to the relative fixed nature of certain expenses with a concurrent increase in net sales. We produced and aired television commercials in support of several of our products, including WWE action figures and Flying Colors products, in 2001 and 2002. From time to time, we may increase our advertising efforts, if we deem it appropriate for particular products.
Acquisition Shut-down and Recall Costs. Acquisition shut-down costs in 2002 relate to shut-down costs, including lease termination, fixed asset abandonment and other costs, of certain operations of Toymax and Kidz Biz. Such costs in 2001 relate to shut-down costs of certain operations of Pentech, acquired in 2000. Operations impacted by these shut-downs were sales, design, distribution and administration. The integration of Pentech was completed in 2001 and the integration of Toymax and Kidz Biz was completed in 2002. In 2002, we accrued $2.2 million for the recall of one of our products.
The components of the acquisition shut-down and recall costs are
as follows (in thousands):
Accrued Balance
Accrued Balance
December 31, 2001
Accrual
Actual
December 31, 2002
$
$
3,724
$
(1,414
)
$
2,310
260
(260
)
559
(559
)
2,175
(2,175
)
$
$
6,718
$
(4,408
)
$
2,310
Profit from Joint Venture. Profit from joint venture increased by $1.3 million in 2002 due to the joint venture having sales of only carryover titles in 2001 compared to releasing a new Microsoft Xbox title in addition to having sales of carryover titles in 2002. New releases typically generate higher unit sales resulting in higher overall sales as compared to carryover titles. Profit from the joint venture contributed significantly to our pre-tax profit, representing 17.6% of pre-tax income in 2001 and 19.5% in 2002.
19
Interest, Net. Interest income decreased in 2002 compared to 2001 in spite of higher average cash balances due to lower interest rates.
Provision for Income Taxes. Provision for income taxes included Federal, state and foreign income taxes in 2001 and 2002, at effective tax rates of 26% in 2001 and 22% in 2002, benefiting from a flat 16.5% Hong Kong Corporation Tax on our income arising in, or derived from, Hong Kong. The decrease in the current year effective rate net results primarily from certain permanently non-taxable items in addition to a continued shift in profits to more favorable tax jurisdictions.
Quarterly Fluctuations and Seasonality
We have experienced significant quarterly fluctuations in operating results and anticipate these fluctuations in the future. The operating results for any quarter are not necessarily indicative of results for any future period. Our first quarter is typically expected to be the least profitable as a result of lower net sales but substantially similar fixed operating expenses. This is consistent with the performance of many companies in the toy industry.
The following table presents our unaudited quarterly results for
the years indicated. The seasonality of our business is
reflected in this quarterly presentation.
2001
2002
2003
First
Second
Third
Fourth
First
Second
Third
Fourth
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
(In thousands, except per share data)
$
59,962
$
70,141
$
92,768
$
61,438
$
59,895
$
78,992
$
102,640
$
68,489
$
67,759
$
73,290
$
90,308
$
84,419
21.1
%
24.7
%
32.6
%
21.6
%
19.3
%
25.5
%
33.1
%
22.1
%
21.5
%
23.2
%
28.6
%
26.7
%
$
24,468
$
32,609
$
39,056
$
23,954
$
26,470
$
35,192
$
41,812
$
27,077
$
27,442
$
27,906
$
36,226
$
35,060
20.4
%
27.2
%
32.5
%
19.9
%
20.3
%
27.0
%
32.0
%
20.7
%
21.7
%
22.0
%
28.6
%
27.7
%
40.8
%
46.5
%
42.1
%
39.0
%
44.2
%
44.6
%
40.7
%
39.5
%
40.5
%
38.1
%
40.1
%
41.5
%
$
7,267
$
8,879
$
14,562
$
(1,410
)
$
1,420
$
9,912
$
18,895
$
1,757
$
7,504
$
4,065
$
12,578
$
(5,284
)
24.8
%
30.3
%
49.7
%
(4.8
)%
4.4
%
31.0
%
59.1
%
5.5
%
39.8
%
21.6
%
66.7
%
(28.0
)%
12.7
%
12.1
%
15.7
%
(2.3
)%
2.4
%
12.5
%
18.4
%
2.6
%
11.1
%
5.5
%
13.9
%
(6.3
)%
$
8,480
$
9,478
$
15,250
$
4,822
$
2,985
$
10,849
$
19,944
$
7,351
$
7,842
$
4,222
$
12,593
$
152
14.1
%
13.5
%
16.4
%
7.8
%
5.0
%
13.7
%
19.4
%
10.7
%
11.6
%
5.8
%
13.9
%
0.2
%
$
6,021
$
6,873
$
10,949
$
4,390
$
2,156
$
7,832
$
13,954
$
7,329
$
5,960
$
3,208
$
9,570
$
1,866
10.0
%
9.8
%
11.8
%
7.1
%
3.6
%
9.9
%
13.6
%
10.7
%
8.8
%
4.4
%
10.6
%
2.2
%
$
0.32
$
0.36
$
0.56
$
0.22
$
0.11
$
0.36
$
0.58
$
0.30
$
0.24
$
0.13
$
0.39
$
0.08
18,920
19,259
19,586
19,763
20,236
21,953
24,059
24,800
24,917
24,683
24,629
24,642
During the fourth quarter of 2001, we recorded a charge of $5.0 million to bad debt impacting operating income relating to the bankruptcy filing of one of our customers, Kmart.
During the first quarter of 2002, we recorded a charge which impacted operating income by approximately $6.6 million relating to the restructuring of Toymax and Kidz Biz.
During the second quarter of 2002, we recorded a charge which impacted operating income by approximately $1.5 million relating to the recall of one of our products.
During the fourth quarter of 2002, we reversed $2.1 million of the restructuring charge recorded in the first quarter of 2002 and recorded an additional charge of approximately $0.7 million relating to the recall of one of our products, the net of which favorably impacted operating income by approximately $1.4 million. In addition, our effective tax rate for the year 2002 was reduced from 26% to 22%.
During the second quarter of 2003, we recorded a charge which impacted operating income by approximately $2.7 million relating to the recall of one of our products.
20
During the third quarter of 2003, we recovered $0.7 million of the recall costs, recorded in the second quarter of 2003, from one of our factories.
During the fourth quarter of 2003, we recorded a non-cash charge of $8.4 million which impacted operating income relating to the grant of restricted stock and a charge of $2.1 million to bad debt impacting operating income relating to the bankruptcy filing of several of our customers, including Kay Bee Toys.
Recent Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS 143). The objective of SFAS 143 is to establish an accounting standard for the recognition and measurement of an asset retirement obligation on certain long-lived assets. The retirement obligation must be one that results from the acquisition, construction or normal operation of a long-lived asset. SFAS 143 requires the legal obligation associated with the retirement of a tangible long-lived asset to be recognized at fair value as a liability when incurred, and the cost to be capitalized by increasing the carrying amount of the related long-lived asset. SFAS 143 was adopted effective January 1, 2003 and the adoption of this statement had no material impact on the consolidated financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction (SFAS 145). SFAS 145 eliminates extraordinary accounting treatment for reporting gains or losses on debt extinguishments, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS 145 was adopted effective January 1, 2003 and the adoption of this statement had no material impact on the consolidated financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which changes the accounting for costs such as lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity initiated after December 31, 2002. The standard requires companies to recognize the fair value of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The adoption of SFAS 146 had no material effect on the Companys financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45), which addresses the accounting for and disclosure of guarantees. Interpretation 45 requires a guarantor to recognize a liability for the fair value of a guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The initial recognition and measurement provisions are effective for all guarantees within the scope of Interpretation 45 issued or modified after December 31, 2002. The application of Interpretation 45 did not have a material effect on the Companys financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain
21
In January 2003 and as revised in December 2003, FASB
issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (Interpretation 46)
and FASB Interpretation No. 46R. Interpretation 46 and 46R
require companies with a variable interest in a variable
interest entity to apply this guidance as of the beginning of
the first reporting period after December 15, 2003. The
application of the guidance could result in the consolidation of
a variable interest entity. The Company anticipates that the
adoption of Interpretation 46 and 46R will not have a material
effect on the Companys financial position or results of
operations.
Liquidity and Capital Resources
As of December 31, 2003, we had working capital of
$232.6 million, as compared to $129.2 million as of
December 31, 2002. This increase was primarily attributable
to the receipt of net proceeds from the issuance of our
convertible notes payable and from operating activities offset
in part by disbursements relating to the acquisition of certain
assets of P&M.
Operating activities provided net cash of $7.2 million in
the year ended December 31, 2003 as compared to
$66.2 million, including cash provided from the sale of
marketable securities of $37.1 million, in 2002. Net cash
was provided primarily by net income and non-cash charges, such
as the grant of restricted stock and depreciation and
amortization, as well as increases in accounts payable and
deferred income taxes, which were offset in part by an increase
in accounts receivable, inventory, prepaid expenses and other
and decreases in accrued expenses, income taxes payable, and
reserve for sales returns and allowances. As of
December 31, 2003, we had cash and cash equivalents of
$118.2 million and marketable securities of
$19.3 million.
Our investing activities used cash of $47.5 million in the
year ended December 31, 2003, as compared to
$87.8 million in 2002, consisting primarily of the purchase
of office furniture and equipment and molds and tooling used in
the manufacture of our products, the purchase of other assets,
the goodwill acquired in the acquisition of P&M and the
purchase of marketable securities, partially offset by the
repayment of notes receivable from officers. In 2002, our
investing activities consisted primarily of the purchase of
molds and tooling used in the manufacture of our products, the
goodwill acquired in the acquisitions of Toymax and
Trendmasters, plus the $4.5 million in goodwill relating to
the final earn-out for Flying Colors, partially offset by the
repayment of notes receivable from officers. As part of our
strategy to develop and market new products, we have entered
into various character and product licenses with royalties
ranging from 1% to 18% payable on net sales of such products. As
of December 31, 2003, these agreements required future
aggregate minimum guarantees of $21.9 million, exclusive of
$4.8 million in advances already paid.
Our financing activities provided net cash of $90.0 million
in the year ended December 31, 2003, as compared to
$64.9 million in 2002. In 2003, cash was primarily provided
from the sale of our convertible senior notes and from the
exercise of stock options, partially offset by the repurchase of
our common stock and the repayment of long-term debt. In 2002,
cash was primarily provided from the sale of our common stock
and from the exercise of stock options and warrants, partially
offset by the repayment of debt.
22
The following is a summary of our significant contractual cash
obligations for the periods indicated that existed as of
December 31, 2003 and is based on information appearing in
the notes to the consolidated financial statements (in
thousands):
In December 2001, we acquired all of the outstanding capital
stock of Kidz Biz Limited, a United Kingdom company, and an
affiliated Hong Kong company, Kidz Biz Far East Limited, for an
aggregate purchase price of approximately $12.4 million.
Total consideration was paid on the closing of the transaction
in cash in the amount of $6.4 million and the issuance of
308,992 shares of our common stock at a value of
$6.0 million. In addition, we agreed to pay an earn-out for
each of 2002, 2003, 2004 and 2005, based on the year over year
increase in Kidz Biz sales, payable by delivery of up to 25,749
shares of our common stock per year. In 2002 and 2003, no
earn-outs were earned.
In October 2001, we and all of our domestic subsidiaries jointly
and severally secured a syndicated line of credit totaling
$50.0 million with a consortium of banks led by Bank of
America, N.A. (Line of Credit). On June 3,
2003, we and the banks amended the loan agreements governing the
Line of Credit (the Loan Agreements), pursuant to
which amendment (i) the banks suspended certain of our
covenants under the Loan Agreements, including those that
prohibited us from consummating the Convertible Senior Notes
offering (note 8) without the banks consent, and
(ii) the banks obligations to extend credit under the
Line of Credit were simultaneously suspended. The amendment
contemplates that we and the banks will attempt to negotiate
revised terms for the Line of Credit, to be reflected in a
further amendment to the Loan Agreements, while waiving the
requirement for obtaining consent for this offering. Neither we
nor the banks, however, have any obligation to enter into such
further amendment to the Loan Agreements. The amendment did not
otherwise effect our right under the Loan Agreements to
voluntarily reduce or terminate the Line of Credit. There have
never been any outstanding borrowings under the Line of Credit
since its inception.
In February 2003, our Board of Directors approved a buyback of
up to $20 million of our common stock. As of
December 31, 2003, we repurchased and retired
554,500 shares of our common stock for a total of
approximately $6.1 million.
On May 31, 2003, we purchased certain product lines,
related assets and assumed certain liabilities of P&M. The
total purchase price of approximately $22.0 million
consisted of cash paid in the amount of $20.7 million and
liabilities of $1.3 million and resulted in goodwill of
$16.8 million. Results of operations have included P&M
from the date of acquisition.
Pursuant to the terms of a Purchase Agreement, dated
June 9, 2003, we sold an aggregate of $98 million of
4.625% Convertible Senior Notes due June 15, 2023. The
holders of the notes may convert the notes into shares of our
common stock at any time at an initial conversion price of
$20.00 per share, subject to certain circumstances
described in the notes. We will pay cash interest on the notes
at an annual rate of 4.625% of the principal amount at issuance,
from the issue date to June 15, 2010, payable on
June 15 and December 15 of each year, commencing on
December 15, 2003. After June 15, 2010, we will not
pay cash interest on the notes. At maturity, on June 15,
23
We may redeem the notes at our option in whole or in part
beginning on June 15, 2010, at 100% of their accreted
principal amount plus accrued and unpaid interest (including
contingent interest and additional amounts), if any, payable in
cash. Holders of the notes may also require us to repurchase all
or part of their notes on June 15, 2010, for cash, at a
repurchase price of 100% of the principal amount per note plus
accrued and unpaid interest (including contingent interest and
additional amounts), if any. Holders of the notes may also
require us to repurchase all or part of their notes on
June 15, 2013 and June 15, 2018 at a repurchase price
of 100% of the accreted principal amount per note plus accrued
and unpaid interest (including contingent interest and
additional amounts), if any. Any repurchases at June 15,
2013 and June 15, 2018 may be paid in cash, in shares of
common stock or a combination of cash and shares of common stock.
We believe that our cash flows from operations, cash and cash
equivalents on hand and marketable securities will be sufficient
to meet our working capital and capital expenditure requirements
and provide us with adequate liquidity to meet our anticipated
operating needs for at least the next 12 months. Although
operating activities are expected to provide cash, to the extent
we grow significantly in the future, our operating and investing
activities may use cash and, consequently, this growth may
require us to obtain additional sources of financing. There can
be no assurance that any necessary additional financing will be
available to us on commercially reasonable terms, if at all.
Exchange Rates
Sales from our United States and Hong Kong operations are
denominated in U.S. dollars and our manufacturing costs are
denominated in either U.S. or Hong Kong dollars. Domestic sales
from our United Kingdom operations and operating expenses of all
of our operations are denominated in local currency, thereby
creating exposure to changes in exchange rates. Changes in the
Hong Kong dollar or British Pound/U.S. dollar exchange rate may
positively or negatively affect our gross margins, operating
income and retained earnings. The exchange rate of the Hong Kong
dollar to the U.S. dollar has been fixed by the Hong Kong
government since 1983 at HK$7.80 to US$1.00 and, accordingly,
has not represented a currency exchange risk to the U.S. dollar.
We cannot assure you that the exchange rate between the United
States and Hong Kong currencies will continue to be fixed or
that exchange rate fluctuations between the United States and
Hong Kong and United Kingdom currencies will not have a material
adverse effect on our business, financial condition or results
of operations.
Table of Contents
2004
2005
2006
2007
2008
Thereafter
Total
$
19
$
21
$
21
$
$
$
98,000
$
98,061
4,757
4,285
4,022
3,531
444
481
17,520
6,593
7,682
3,571
1,198
1,427
1,435
21,906
4,675
4,473
3,215
2,930
2,180
4,510
21,983
$
16,044
$
16,461
$
10,829
$
7,659
$
4,051
$
104,426
$
159,470
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and international borrowing rates and changes in foreign currency exchange rates. In addition, we are exposed to market risk in certain geographic areas that have experienced or remain vulnerable to an economic downturn, such as China. We purchase substantially all of our inventory from companies in China, and, therefore, we are subject to the risk that such suppliers will be unable to provide inventory at competitive prices. While we believe that, if such an event were to occur we would be able to find alternative sources of inventory at competitive prices, we cannot assure you that we would be able to do so. These exposures are directly related to our normal operating and funding activities.
24
Interest Rate Risk
As of December 31, 2003, we do not have any outstanding balances on our Line of Credit. On June 9, 2003, we issued convertible notes payable of $98.0 million with a fixed interest rate of 4.625% per annum. Accordingly, we are not generally subject to any direct risk of loss arising from changes in interest rates.
Foreign Currency Risk
We have wholly-owned subsidiaries in Hong Kong and in the United Kingdom. Sales by these operations made on a FOB China or Hong Kong basis are denominated in U.S. dollars. However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and domestic sales and operating expenses made in the United Kingdom are typically denominated in British Pounds, thereby creating exposure to changes in exchange rates. Changes in the British Pound or Hong Kong dollar/ U.S. dollar exchange rates may positively or negatively affect our gross margins, operating income and retained earnings. The British Pound gave rise to the other comprehensive loss in the balance sheet at December 31, 2003. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to US$1.00 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We do not believe that near-term changes in these exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows, and therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of the Hong Kong dollar or British Pound.
25
Item 8.
Consolidated Financial Statements and
Supplementary Data
INDEPENDENT AUDITORS REPORT
The Stockholders
We have audited the accompanying consolidated balance sheets of
JAKKS Pacific, Inc. and Subsidiaries as of December 31,
2002 and 2003, and the related consolidated statements of
operations, other comprehensive income, stockholders
equity and cash flows and the financial statement schedule for
each of the three years in the period ended December 31,
2003. These financial statements and the financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements and
schedule referred to above present fairly, in all material
respects, the financial position of JAKKS Pacific, Inc. and
Subsidiaries as of December 31, 2002 and 2003, and the
results of their operations and cash flows for each of the three
years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United
States of America.
Los Angeles, California
26
/s/ PKF
PKF
Certified Public Accountants
A Professional Corporation
Table of Contents
JAKKS PACIFIC, INC. AND SUBSIDIARIES
December 31,
2002
2003
(In thousands, except
share data)
$
68,413
$
118,182
19,345
56,195
86,119
38,010
44,400
13,062
16,762
1,113
176,793
284,808
5,932
6,563
31,069
34,481
2,464
2,429
39,465
43,473
24,640
31,751
14,825
11,722
8,169
13,217
8,119
9,097
189,336
206,952
11,568
11,568
$
408,810
$
537,364
$
8,994
$
25,064
19,394
17,351
13,579
7,753
18
19
5,625
2,021
47,610
52,208
60
98,042
563
1,164
48,233
151,414
24
25
240,102
245,219
120,451
141,055
(349
)
360,577
385,950
$
408,810
$
537,364
See notes to consolidated financial statements.
27
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Years Ended December 31,
2001
2002
2003
(In thousands, except per share amounts)
$
284,309
$
310,016
$
315,776
164,222
179,465
189,142
120,087
130,551
126,634
89,575
91,849
105,771
1,214
6,718
2,000
29,298
31,984
18,863
(6,675
)
(8,004
)
(7,351
)
(2,057
)
(1,141
)
1,405
38,030
41,129
24,809
9,797
9,048
4,205
28,233
32,081
20,604
810
$
28,233
$
31,271
$
20,604
$
1.55
$
1.42
$
0.85
$
1.45
$
1.37
$
0.83
See notes to consolidated financial statements.
28
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Years Ended December 31,
2001
2002
2003
(In thousands)
$
28,233
$
31,271
$
20,604
(349
)
$
28,233
$
31,271
$
20,255
See notes to consolidated financial statements.
29
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Common Stock
Accumulated
Additional
Other
Total
Number
Paid-in
Treasury
Retained
Comprehensive
Stockholders
of Shares
Amount
Capital
Stock
Earnings
Loss
Equity
(In thousands)
17,992
$
19
$
156,475
$
(12,911
)
$
60,947
$
$
204,530
526
1
3,069
3,070
2,571
2,571
309
6,000
6,000
28,233
28,233
18,827
20
168,115
(12,911
)
89,180
244,404
955
1
5,883
5,884
(1,308
)
(1,308
)
(1
)
(12,910
)
12,911
3,151
3,151
3,525
3
59,091
59,094
1,166
1
18,080
18,081
31,271
31,271
24,473
24
240,102
120,451
360,577
312
1,777
1,777
636
1
8,363
8,364
1,057
1,057
6
6
(555
)
(6,086
)
(6,086
)
20,604
20,604
(349
)
(349
)
24,866
$
25
$
245,219
$
$
141,055
$
(349
)
$
385,950
See notes to consolidated financial statements.
30
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Years Ended December 31,
2001
2002
2003
(In thousands)
$
28,233
$
31,271
$
20,604
12,220
9,193
8,747
(349
)
2,571
(1,308
)
6
2,977
(225
)
79
16
285
8,364
810
(23,501
)
37,119
(5,835
)
(3,307
)
(28,224
)
(1,489
)
(10,996
)
(2,654
)
1,423
507
(5,643
)
(1,927
)
(3,698
)
16,070
5,529
(9,535
)
(3,115
)
(6,052
)
7,056
(1,397
)
(1,600
)
8,626
(5,827
)
800
432
525
(14,868
)
34,959
(13,418
)
13,365
66,230
7,186
(4,971
)
(6,594
)
(4,471
)
(1,230
)
(1,659
)
(2,434
)
(1,112
)
(12,280
)
(80,410
)
(22,320
)
(19,345
)
226
861
1,113
(19,369
)
(87,802
)
(47,457
)
59,095
(6,087
)
95
3,070
5,884
1,777
94,366
(1,400
)
(30
)
(16
)
1,765
64,949
90,040
(4,239
)
43,377
49,769
29,275
25,036
68,413
$
25,036
$
68,413
$
118,182
$
118
$
80
$
2,375
$
14,008
$
3,235
$
9,694
See note 17 for additional supplemental information to consolidated statements of cash flows.
See notes to consolidated financial statements.
31
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Note 1Principal industry
JAKKS Pacific, Inc. (the Company) is engaged in the
development, production and marketing of toys and related
products, some of which are based on highly-recognized
entertainment properties and character licenses. The Company
commenced its primary business operations in July 1995 through
the purchase of substantially all of the assets of a Hong Kong
toy company. The Company markets its product lines domestically
and internationally.
The Company was incorporated under the laws of the State of
Delaware in January 1995.
Note 2Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements include accounts of the
Company and its wholly-owned subsidiaries. In consolidation, all
significant inter-company balances and transactions are
eliminated.
Cash and cash equivalents
The Company considers all highly liquid assets, having an
original maturity of less than three months, to be cash
equivalents. The Company maintains its cash in bank deposits
which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The
Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of
the financial statements, and the reported amounts of revenue
and expenses during the reporting periods. Actual future results
could differ from those estimates.
Revenue recognition
Revenue is recognized upon the shipment of goods to customers.
Provisions for estimated returns, defective products and other
allowances are made at the time of sale.
Inventory
Inventory, which includes the ex-factory cost of goods and
in-bound freight, is valued at the lower of cost (first-in,
first-out) or market and consists of the following:
32
Marketable securities
Marketable securities categorized as trading securities were
liquidated at December 31, 2002 and related unrealized
holding gains or losses are included in earnings. New
investments made in 2003 are categorized as available for sale
and related unrealized holding gains or losses are included as a
component of stockholders equity. At December 31,
2002 and 2003, cost approximated fair market value.
Fair value of financial instruments
The Companys cash and cash equivalents, accounts
receivable and loan payable represent financial instruments. The
carrying value of these financial instruments is a reasonable
approximation of fair value. The fair value of the convertible
senior notes, at December 31, 2003 was approximately
$99.0 million. The fair value of the Companys
convertible senior notes approximates the carrying value based
on quoted trading prices for the notes.
Property and equipment
Property and equipment are stated at cost and are being
depreciated using the straight-line method over their estimated
useful lives as follows:
Shipping and handling costs
The consolidated financial statements reflect, for all periods
presented, the adoption of the classification or disclosure
requirements pursuant to Emerging Issues Task Force
(EITF) 00-10, Accounting for Shipping and
Handling Fees and Costs, which was effective in the fourth
quarter of fiscal 2000. Consistent with EITF 00-10, the Company
has historically classified income from freight charges to
customers in Net sales. The Company classifies
shipping and handling costs in Selling, general and
administrative expenses. Such costs amounted to
approximately $11.9 million in 2001, $8.1 million in
2002 and $5.2 million in 2003.
Advertising
Production costs of commercials and programming are charged to
operations in the year during which the production is first
aired. The costs of other advertising, promotion and marketing
programs are charged to operations in the year incurred.
Advertising expense for the years ended December 31, 2001,
2002 and 2003, was approximately $11.0 million,
$12.7 million and 12.4 million, respectively.
Income taxes
The Company does not file a consolidated return with its foreign
subsidiaries. The Company files Federal and state returns and
its foreign subsidiaries each file Hong Kong returns and United
Kingdom returns, as applicable. Deferred taxes are provided on a
liability method whereby deferred tax assets are recognized as
deductible temporary differences and operating loss and tax
credit
33
carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Translation of foreign currencies
Monetary assets and liabilities denominated in Hong Kong dollars
or British Pounds Sterling are translated into United States
dollars at the rate of exchange ruling at the balance sheet
date. Transactions during the period are translated at the rates
ruling at the dates of the transactions.
Profits and losses resulting from the above translation policy
are recognized in the consolidated statements of operations and
statements of other comprehensive income.
Accounting for the impairment of long-lived assets
Long-lived assets, which include property and equipment,
goodwill and intangible assets other than goodwill, are
evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows
from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value.
Goodwill and other intangible assets
In July 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 141, Business Combinations
(SFAS 141) and Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142).
SFAS 141 is effective for business combinations initiated
after June 30, 2001. SFAS 141 requires that all
business combinations completed after its adoption be accounted
for under the purchase method of accounting and establishes
specific criteria for the recognition of intangible assets
separately from goodwill. SFAS 142 was effective for the
Company on January 1, 2002 and primarily addresses the
accounting for goodwill and intangible assets subsequent to
their acquisition. With the adoption of SFAS 142, goodwill
and other intangible assets are no longer amortized and are
tested for impairment at least annually at the reporting unit
level. As of December 31, 2003, there was no impairment to
the underlying value of goodwill or intangible assets other than
goodwill.
34
The effect of adoption of SFAS 142 on the reported net
income for the current and comparative prior period is as
follows:
Goodwill represents the excess purchase price paid over the fair
market value of the assets of acquired companies. In fiscal
2002, the Company began to write off goodwill and certain
intangible assets on an impairment basis where losses in value
are recorded when and as material impairment has occurred in the
underlying assets. Accumulated amortization of goodwill at
December 31, 2002 and 2003 totaled $6.6 million.
The carrying value of goodwill is based on managements
current assessment of recoverability. Management evaluates
recoverability using both objective and subjective factors.
Objective factors include managements best estimates of
projected future earnings and cash flows and analysis of recent
sales and earnings trends. Subjective factors include
competitive analysis and the Companys strategic focus.
Intangible assets other than goodwill consist of product
technology rights and trademarks. Intangible assets are
amortized on a straight-line basis, over five to thirty years,
the estimated economic lives of the related assets. Accumulated
amortization as of December 31, 2002 and 2003 was
$2.9 million and $3.0 million, respectively.
Stock Option Plans
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148 Accounting for
Stock-Based Compensation Transition and Disclosure
an Amendment of FASB Statement No. 123
(SFAS 148). SFAS 148 Statement amends
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS 123), to provide alternative methods of
transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on
reported net income of an entitys accounting policy
decisions with respect to stock-based employee
35
compensation. Finally, SFAS 148 amends APB Opinion
No. 28, Interim Financial Reporting, to require disclosure
about those effects in interim financial information.
At December 31, 2003, the Company has stock-based employee
compensation plans, which are described more fully in
Note 14. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. However,
certain options had been repriced resulting in compensation
adjustments, which have been reflected in net income. The
following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123, to stock-based employee
compensation.
In 2001, 2002 and 2003 the fair value of each employee option
grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used:
risk-free rate of interest of 6%, 4% and 4%, respectively;
dividend yield of 0%; with volatility of 91%, 87% and 82%
respectively; and expected lives of five years.
36
Earnings per share
The following table is a reconciliation of the weighted-average
shares used in the computation of basic and diluted earnings per
share for the periods presented (in thousands, except per share
data):
Recent Accounting
Standards
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). The objective of
SFAS 143 is to
37
establish an accounting standard for the recognition and
measurement of an asset retirement obligation on certain
long-lived assets. The retirement obligation must be one that
results from the acquisition, construction or normal operation
of a long-lived asset. SFAS 143 requires the legal
obligation associated with the retirement of a tangible
long-lived asset to be recognized at fair value as a liability
when incurred, and the cost to be capitalized by increasing the
carrying amount of the related long-lived asset. SFAS 143
was adopted effective January 1, 2003 and the adoption of
this statement had no material impact on the consolidated
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, Rescission of Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Correction (SFAS 145).
SFAS 145 eliminates extraordinary accounting treatment for
reporting gains or losses on debt extinguishments, and amends
other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS 145 was
adopted effective January 1, 2003 and the adoption of this
statement had no material impact on the consolidated financial
statements.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities
(SFAS 146), which changes the accounting for
costs such as lease termination costs and certain employee
severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal
activity initiated after December 31, 2002. The standard
requires companies to recognize the fair value of costs
associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or
disposal plan. The adoption of SFAS 146 had no material
effect on the Companys financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
(Interpretation 45), which addresses the
accounting for and disclosure of guarantees.
Interpretation 45 requires a guarantor to recognize a
liability for the fair value of a guarantee at inception. The
recognition of the liability is required even if it is not
probable that payments will be required under the guarantee. The
disclosure requirements are effective for interim and annual
financial statements ending after December 15, 2002. The
initial recognition and measurement provisions are effective for
all guarantees within the scope of Interpretation 45 issued
or modified after December 31, 2002. The application of
Interpretation 45 did not have a material effect on the
Companys financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity (SFAS 150). SFAS 150
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. The provisions of SFAS 150 were
adopted effective June 9, 2003. The adoption of
SFAS 150 did not have a material effect on the
Companys financial position or results of operations.
In January 2003 and as revised in December 2003, FASB issued
FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (Interpretation 46) and
FASB Interpretation No. 46R. Interpretation 46 and 46R
require companies with a variable interest in a variable
interest entity to apply this guidance as of the beginning of
the first reporting period after December 15,
38
2003. The application of the guidance could result in the
consolidation of a variable interest entity. The Company
anticipates that the adoption of Interpretation 46 and 46R
will not have a material effect on the Companys financial
position or results of operations.
Reclassifications
Certain reclassifications have been made to prior years balances
in order to conform to the current year presentation.
Note 3Business Segments and Geographic Data
JAKKS Pacific, Inc. is a worldwide producer and marketer of
childrens toys and related products, principally engaged
in the design, development, production and marketing of
traditional toys, including boys action figures, vehicles and
playsets, craft and activity products, writing instruments,
compounds, girls toys, and infant and preschool toys. The
Companys reportable segments are North America Toys,
International and Other.
The North America Toys segment, which includes the United States
and Canada, and the International toy segment, which includes
sales to non-North American markets, include the design,
development, production and marketing of childrens toys
and related products. The Company also has an additional segment
classified as Other, which sells various products to the
specialty markets in the United States.
Segment performance is measured at the operating income level.
All sales are made to external customers, and general corporate
expenses have been attributed to the North America Toy segment,
which is a dominant segment. Segment assets are comprised of
accounts receivable and inventories, net of applicable reserves
and allowances.
The accounting policies of the segments are described in
Note 2.
Results are not necessarily those that would be achieved were
each segment an unaffiliated business enterprise. Information by
segment and a reconciliation to reported amounts for the three
years ended December 31, 2003 are as follows (in thousands):
39
The following tables present information about the Company by
geographic area as of and for the three years ended
December 31, 2003 (in thousands):
Note 4 Acquisitions and Joint Venture
The Company owns a fifty percent interest in a joint venture
with a company that develops, publishes and distributes
interactive entertainment software for the leading hardware game
platforms in the home video game market. The joint venture has
entered into a license agreement with an initial license period
expiring December 31, 2009 under which it acquired the
exclusive worldwide right to publish video games on all hardware
platforms. The Companys investment is accounted for using
the cost method due to the financial and operating structure of
the venture and our lack of
40
control over the joint venture. The Companys basis
consists primarily of organizational costs, license costs and
recoupable advances and is being amortized over the term of the
initial license period. The joint venture agreement provides for
the Company to receive guaranteed preferred returns through
June 30, 2006 at varying rates of the joint ventures
net sales depending on the cumulative unit sales and platform of
each particular game. For periods after June 30, 2006, the
amount of the preferred return will be subject to renegotiation
between the parties. The preferred return is accrued in the
quarter in which the licensed games are sold and the preferred
return is earned. The Companys joint venture partner
retains the financial risk of the joint venture and is
responsible for the day-to-day operations, including
development, sales and distribution, for which they are entitled
to any remaining profits. During 2001, 2002 and 2003, the
Company earned $6.7 million, $8.0 million and
$7.4 million, respectively, in profit from the joint
venture.
In December 2001, the Company acquired all the outstanding
stock of Kidz Biz Ltd., a United Kingdom company, and Kidz Biz
Far East Limited, an affiliated Hong Kong corporation,
(collectively Kidz Biz), for an aggregate
purchase price of approximately $12.4 million, which was
paid by the issuance of 308,992 shares of the Companys
common stock at a value of $6.0 million and cash of
$6.4 million. In addition, we agreed to pay an earn-out for
each of 2002, 2003, 2004 and 2005, based on the year over year
increase in Kidz Biz sales, payable by delivery of up to
25,749 shares of our common stock per year. In 2002 and
2003, no earn-outs were earned. Both the United Kingdom and Hong
Kong based companies are distributors of toys and related
products in the United Kingdom, Ireland and the Channel Islands.
The Company acquired the following entities to further enhance
its existing product lines and to continue diversification into
other seasonal businesses.
In March 2002, the Company purchased a controlling interest in
Toymax International, Inc. (Toymax) and on
October 25, 2002, the Company completed that acquisition by
acquiring the remaining outstanding common shares in a merger
transaction. The total purchase price of approximately
$62.8 million consisted of 1,166,360 shares of the
Companys common stock, 598,697 options and approximately
$41.0 million in cash. Results of operations have included
Toymax from March 12, 2002; however, for the period from
March 12, 2002 through October 25, 2002, the minority
interests share of Toymaxs earnings were excluded.
In November 2002, the Company purchased certain product lines,
assets and assumed certain specific liabilities from
Trendmasters, Inc. (Trendmasters). The total
purchase price of approximately $19.2 million consisted of
all cash. Results of operations have included Trendmasters from
the date of acquisition.
On May 31, 2003, the Company purchased certain product
lines, assets and assumed certain liabilities of
P&M Products USA, Inc. and an affiliated United Kingdom
company, P&M Products Limited (collectively
P&M). The total purchase price of approximately
$22.0 million consisted of $20.7 million in cash and
$1.3 million in liabilities. Results of operations have
included P&M from the date of acquisition.
41
The total purchase price was allocated to the estimated fair
value of assets acquired and liabilities assumed as set forth in
the following table:
Goodwill related to Trendmasters is not expected to be
deductible for tax purposes, however, approximately
$12.7 million of the Toymax goodwill and $13.6 million
of the P&M goodwill is expected to be deductible for tax
purposes.
The following unaudited pro forma information represents the
Companys consolidated results of operations as if the
acquisitions of Toymax, Trendmasters and P&M had occurred on
January 1, 2002 and after giving effect to certain
adjustments including the elimination of certain general and
administrative expenses and other income and expense items not
attributable to on-going operations, interest expense, and
related tax effects. Such pro forma information does not purport
to be indicative of operating results that would have been
reported had the acquisitions of Toymax, Trendmasters and
P&M actually occurred on January 1, 2002 or on future
operating results.
Note 5Concentration of credit risk
Financial instruments that subject the Company to concentration
of credit risk are cash and cash equivalents and accounts
receivable. Cash equivalents consist principally of short-term
money market funds. These instruments are short-term in nature
and bear minimal risk. To date, the Company has not experienced
losses on these instruments.
The Company performs on-going credit evaluations of its
customers financial condition, but does not require
collateral to support domestic customer accounts receivables.
Most goods shipped FOB Hong Kong or China are backed by
irrevocable letters of credit.
42
Note 6Accrued expenses
Accrued expenses consist of the following (in thousands):
Note 7Related party transactions
A director of the Company is a partner in the law firm that acts
as counsel to the Company. The Company incurred legal fees and
expenses to the law firm in the amount of approximately
$1.1 million in 2001, $2.7 million in 2002 and
$4.6 million in 2003.
On March 27, 2003, the balance of the notes receivable from
two officers of the Company totaling $1.1 million plus
accrued interest at interest rates of 6.5% per annum each, were
paid in full.
Note 8Long-term debt
Long-term debt consists of the following (in thousands):
43
The following is a schedule of payments for the long-term debt
(in thousands):
Note 9Income taxes
The Company does not file a consolidated return with its foreign
subsidiaries. The Company files Federal and state returns and
its foreign subsidiaries file Hong Kong and United Kingdom
returns. Income taxes reflected in the accompanying consolidated
statements of operations are comprised of the following:
44
The components of deferred tax assets/(liabilities) are as
follows:
The current portion of deferred tax assets is included in
prepaid expenses and other.
Income tax expense varies from the U.S. Federal statutory
rate. The following reconciliation shows the significant
differences in the tax at statutory and effective rates:
Deferred taxes result from temporary differences between tax
bases of assets and liabilities and their reported amounts in
the consolidated financial statements. The temporary differences
result from costs required to be capitalized for tax purposes by
the U.S. Internal Revenue Code (IRC), and
certain items accrued for financial reporting purposes in the
year incurred but not deductible for tax purposes until paid.
As of December 31, 2003, the Company has federal and state
net operating loss carryforwards of $20.4 million and
$38.9 million, respectively, expiring through 2023. These
carryforwards resulted from the acquisitions of Pentech and
Toymax; the utilization of these losses to offset future income
is limited under IRC§382. The Companys management
concluded that a deferred tax asset valuation allowance was not
necessary.
45
The components of income before provision for income taxes and
minority interest are as follows (in thousands):
Note 10Credit Facility
In October 2001, the Company and all of its subsidiaries
jointly and severally secured a syndicated line of credit
totaling $50.0 million with a consortium of banks led by
Bank of America, N.A. (Line of Credit). On
June 3, 2003, the Company and the banks amended the loan
agreements governing the Line of Credit (the Loan
Agreements), pursuant to which amendment (i) the
banks suspended certain of our covenants under the Loan
Agreements, including those that prohibited the Company from
consummating the Convertible Senior Notes offering (note 8)
without the banks consent, and (ii) the banks
obligations to extend credit under the Line of Credit were
simultaneously suspended. The amendment contemplates that the
Company and the banks will attempt to negotiate revised terms
for the Line of Credit, to be reflected in a further amendment
to the Loan Agreements, while waiving the requirement for
obtaining consent for this offering. Neither the Company nor the
banks, however, have any obligation to enter into such further
amendment to the Loan Agreements. The amendment did not
otherwise effect the Companys right under the Loan
Agreements to voluntarily reduce or terminate the Line of
Credit. There have never been any outstanding borrowings under
the Line of Credit since its inception.
Note 11Leases
The Company leases office, warehouse and showroom facilities and
certain equipment under operating leases. Rent expense for the
three years ended December 31, 2003 totaled
$2.5 million, $4.0 million and $5.2 million,
respectively. The following is a schedule of minimum annual
lease payments (in thousands).
Note 12Common stock and preferred stock
The Company has 105,000,000 authorized shares of stock
consisting of 100,000,000 shares of $.001 par value common stock
and 5,000,000 shares of $.001 par value preferred stock. During
2003, the Company repurchased and retired 554,500 shares of its
common stock at an aggregate cost of $6.1 million.
46
During 2003, the Company awarded 2,760,000 shares of
restricted stock to four executive officers of the Company
pursuant to its 2002 Stock Award and Incentive Plan, of which
636,000 were earned on December 31, 2003 and the balance
may be earned through 2010 based upon the achievement of certain
financial criteria and continuing employment. A charge of
$8.4 million was recorded as of December 31, 2003
relating to this award. The Company also issued 312,492 shares
of common stock on the exercise of options for a total of
$1.8 million.
During 2002, the Company issued 954,770 shares of common
stock on the exercise of options and warrants for a total of
$5.9 million, 1,166,360 shares of common stock at a
value of $18.1 million in connection with the Toymax
acquisition and 3,525,000 shares of common stock in connection
with an underwritten public offering for net proceeds of
approximately $59.1 million.
During 2001, the Company issued 525,780 shares of common stock
on exercise of options and warrants for a total of
$3.1 million and 308,992 shares of common stock at a value
of $6.0 million in connection with the Kidz Biz acquisition.
During 2003, the Company issued 100,000 fully vested warrants,
expiring in 2013, in connection with license costs relating to
its investment in the joint venture. The fair market value of
these warrants was approximately $1.1 million and has been
included in the basis of the joint venture (note 4).
Warrant activity is summarized as follows:
Note 13Commitments
The Company has entered into various license agreements whereby
the Company may use certain characters and properties in
conjunction with its products. Such license agreements call for
royalties to be paid at 1% to 18% of net sales with minimum
guarantees and advance payments. Additionally, under two
separate licenses, the Company has committed to spend 12.5% of
related net sales up to $1.0 million and 5% of related net
sales on advertising per year on such licenses.
47
Future annual minimum royalty guarantees as of December 31,
2003 are as follows (in thousands):
The Company has entered into various employment agreements with
certain executives expiring through December 31, 2010. At
December 31, 2003, the aggregate minimum guaranteed amounts
under those agreements amount to approximately
$22.0 million.
Note 14Stock option plans
Under its 2002 Stock Award and Incentive Plan (the
Plan), which incorporated its Third Amended and Restated
1995 Stock Option Plan, the Company has reserved
6,025,000 shares of its common stock for issuance upon
exercise of options granted under the Plan. Under the Plan,
employees (including officers), non-employee directors and
independent consultants may be granted options to purchase
shares of common stock.
As of December 31, 2003, 1,718,392 shares were
available for future grant. Additional shares may become
available to the extent that options presently outstanding under
the Plan terminate or expire unexercised. Stock option activity
pursuant to the Plan is summarized as follows:
48
Stock option activity outside of the Plan is summarized as
follows:
The weighted average fair value of options granted to employees
in 2001, 2002 and 2003 was $16.24, $10.65 and $13.28 per share,
respectively.
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2003:
Note 15Employee Pension Plan
The Company sponsors for its U.S. employees, a defined
contribution plan under Section 401(k) of the Internal
Revenue Code. The plan provides that employees may defer up to
15% of annual compensation, and that the Company will make a
matching contribution equal to 50% of each employees
deferral, up to 5% of compensation. Company matching
contributions, which vest equally over a five year period,
totaled $0.2 million, $0.3 million and
$0.3 million for 2001, 2002 and 2003, respectively.
Note 16Major customers
Net sales to major customers, which are part of our North
American Toys segment, were approximately as follows (in
thousands):
49
Note 17Supplemental information to consolidated
statements of cash flows
In 2003, the Company issued 100,000 warrants valued at
approximately $1.1 million in connection with license costs
relating to its investment in the joint venture (note 12).
In 2002, 1,166,360 shares of common stock valued at
approximately $18.1 million and 598,697 options valued at
$3.2 million were issued in connection with the acquisition
of Toymax (note 4).
In 2001, 308,992 shares of common stock valued at approximately
$6.0 million were issued in connection with the acquisition of
Kidz Biz (note 4).
50
Note 18Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial data for the years 2002
and 2003 are summarized below:
During the first quarter of 2002, the Company recorded a charge
which impacted operating income by approximately
$6.6 million relating to the restructuring of Toymax and
Kidz Biz.
During the second quarter of 2002, the Company recorded a charge
which impacted operating income by approximately
$1.5 million relating to the recall of one of its products.
During the fourth quarter of 2002, the Company reversed
$2.1 million of the restructuring charge recorded in the
first quarter of 2002 and recorded an additional charge of
approximately $0.7 million relating to the recall of one of its
products, the net of which favorably impacted operating income
by approximately $1.5 million. In addition, the Companys
effective tax rate for the year 2002 was reduced from 26% to 22%.
During the second quarter of 2003, the Company recorded a charge
which impacted operating income by approximately
$2.7 million relating to the recall of one of its products.
During the third quarter of 2003, we recovered $0.7 million
of recall costs, recorded in the second quarter of 2003, from
one of our factories.
During the fourth quarter of 2003, the Company recorded a
non-cash charge of $8.4 million which impacted operating
income relating to the grant of restricted stock and a charge of
$2.1 million to bad debt impacting operating income
relating to the bankruptcy filing of several of its customers,
including Kay Bee Toys.
Note 19Litigation
The Company is a party to, and certain of its property is the
subject of, various pending claims and legal proceedings that
routinely arise in the ordinary course of its business, but the
Company does not believe that any of these claims or proceedings
will have a material effect on its business, financial condition
or results of operations.
51
December 31,
2002
2003
(In thousands)
$
20
$
586
1,033
37,404
43,367
$
38,010
$
44,400
Table of Contents
5 years
5 - 7 years
2 - 4 years
Shorter of length of lease or 10 years
Table of Contents
Table of Contents
For the Year Ended December 31,
2001
2002
2003
(In thousands, except per share
amounts)
$
28,233
$
31,271
$
20,604
2,579
$
30,812
$
31,271
$
20,604
$
1.55
$
1.42
$
0.85
0.14
$
1.69
$
1.42
$
0.85
$
1.45
$
1.37
$
0.83
0.13
$
1.58
$
1.37
$
0.83
Table of Contents
Year Ended December 31,
2001
2002
2003
(In thousands,
except per share data)
$
28,233
$
31,271
$
20,604
2,571
(1,308
)
6
(1,499
)
(2,034
)
(2,796
)
$
29,305
$
27,929
$
17,814
$
1.55
$
1.42
$
0.85
$
1.61
$
1.27
$
0.73
$
1.45
$
1.37
$
0.83
$
1.51
$
1.23
$
0.72
Table of Contents
2001
Weighted
Average
Income
Shares
Per Share
$
28,233
18,199
$
1.55
1,211
$
28,233
19,410
$
1.45
2002
Weighted
Average
Income
Shares
Per Share
$
31,271
21,963
$
1.42
784
$
31,271
22,747
$
1.37
2003
Weighted
Average
Income
Shares
Per Share
$
20,604
24,262
$
0.85
415
$
20,604
24,677
$
0.83
Table of Contents
Table of Contents
Year Ended December 31,
2001
2002
2003
$
250,627
$
263,314
$
272,317
32,871
46,251
43,424
811
451
35
$
284,309
$
310,016
$
315,776
Table of Contents
Year Ended December 31,
2001
2002
2003
$
25,827
$
27,166
$
16,267
3,387
4,772
2,594
84
46
2
$
29,298
$
31,984
$
18,863
December 31,
2002
2003
$
347,488
$
463,409
60,913
73,897
409
58
$
408,810
$
537,364
December 31,
2001
2002
2003
$
93,155
$
161,597
$
184,949
24,557
59,745
52,550
497
613
4,012
$
118,209
$
221,955
$
241,511
Year Ended December 31,
2001
2002
2003
$
244,317
$
256,799
$
271,051
29,030
39,414
35,547
7,121
6,966
5,125
324
1,275
3,841
6,513
2,778
$
284,309
$
310,016
$
315,776
Table of Contents
Table of Contents
Toymax
Trendmasters
P&M
Total
(In thousands)
$
26,857
$
20
$
5,121
$
31,998
1,673
1,488
17
3,178
11,751
11
11,762
(43,000
)
(8,713
)
(1,267
)
(52,980
)
65,493
26,447
16,825
108,765
$
62,774
$
19,242
$
20,707
$
102,723
Year Ended December 31,
2002
2003
(In thousands, except per
share data)
Net Sales
$
409,143
$
326,105
Net income
$
25,981
$
18,737
Basic earnings per share
$
1.16
$
0.77
Weighted average shares outstanding
22,363
24,262
Diluted earnings per share
$
1.11
$
0.76
Weighted average shares and equivalents outstanding
23,483
24,677
Table of Contents
2002
2003
$
3,973
$
4,738
15,421
12,613
$
19,394
$
17,351
2002
2003
$
$
98,000
78
61
78
98,061
(18
)
(19
)
$
60
$
98,042
(1)
Pursuant to the terms of a Purchase Agreement, dated
June 9, 2003, the Company sold an aggregate of
$98.0 million of 4.625% Convertible Senior Notes due
June 15, 2023. The holders of the notes may convert the
notes into shares of our common stock at any time at an initial
conversion price of $20.00 per share, subject to certain
circumstances described in the notes. The Company will pay cash
interest on the notes at an annual rate of 4.625% of the
principal amount at issuance, from the issue date to
June 15, 2010, payable on June 15 and December 15
of each year, commencing on December 15, 2003. After
June 15, 2010, the Company will not pay cash interest on
the notes. At maturity, on June 15, 2023, the Company will
redeem the notes at their accreted principal amount, which will
be equal to $1,811.95 (181.195%) per $1,000 principal amount at
issuance.
The Company may redeem the notes at its option in whole or in
part beginning on June 15, 2010, at 100% of their accreted
principal amount plus accrued and unpaid interest (including
contingent interest and additional amounts), if any, payable in
cash. Holders of the notes may also require the Company to
repurchase all or part of their notes on June 15, 2010, for
cash, at a repurchase price of 100% of the principal amount per
note plus accrued and unpaid interest (including contingent
interest and additional amounts), if any. Holders of the notes
may also require the Company to repurchase all or part of their
notes on June 15, 2013 and June 15,
Table of Contents
2018 at a repurchase price of 100% of the accreted principal
amount per note plus accrued and unpaid interest (including
contingent interest and additional amounts), if any. Any
repurchases at June 15, 2013 and June 15, 2018 may be
paid in cash, in shares of common stock or a combination of cash
and shares of common stock.
$
19
21
21
98,000
$
98,061
2001
2002
2003
(In thousands)
$
2,596
$
2,241
$
608
1,065
270
55
5,336
6,105
3,017
8,997
8,616
3,680
800
432
525
$
9,797
$
9,048
$
4,205
Table of Contents
2002
2003
(In thousands)
$
2,013
$
1,114
1,849
182
3,094
584
132
4,446
4,522
(11,024
)
(7,191
)
(1,564
)
(1,088
)
(925
)
(1,223
)
(2,100
)
2,793
2,152
9,666
7,321
789
667
(563
)
(1,164
)
$
3,883
$
3,358
2001
2002
2003
35
%
35
%
35
%
1.8
0.4
0.1
(16.7
)
(15.3
)
(20.7
)
5.9
1.9
2.6
26
%
22
%
17
%
Table of Contents
2001
2002
2003
$
4,678
$
3,537
$
2,219
33,352
37,592
22,590
$
38,030
$
41,129
$
24,809
$
4,757
4,285
4,022
3,531
444
481
$
17,520
Table of Contents
Weighted
Average
Number
Exercise
of Shares
Price
256,355
$
5.94
(82,118
)
4.48
(7,362
)
5.63
166,875
6.67
(166,875
)
6.67
100,000
11.35
100,000
$
11.35
Table of Contents
$
6,593
7,682
3,571
1,198
1,427
1,435
$
21,906
Weighted
Average
Number
Exercise
of Shares
Price
2,202,740
$
7.15
724,125
15.73
(427,536
)
6.21
(185,773
)
7.98
2,313,556
9.97
1,124,197
11.06
(787,836
)
6.71
(42,030
)
15.00
2,607,887
11.35
184,500
13.31
(309,296
)
11.78
(214,630
)
12.71
2,268,461
$
12.15
Table of Contents
Weighted
Average
Number
Exercise
of Shares
Price
16,126
$
2.24
(16,126
)
2.24
$
Outstanding
Exercisable
Weighted
Weighted
Weighted
Average
Average
Number
Average
Exercise
Number
Exercise
Option Price Range
of Shares
Life
Price
of Shares
Price
2,268,461
3.62 years
$
12.15
984,596
$
11.07
2001
2002
2003
Amount
Percentage
Amount
Percentage
Amount
Percentage
$
44,646
15.7
%
$
46,396
15.0
%
$
91,378
28.9
%
36,024
12.7
41,506
13.4
30,371
9.6
34,319
12.1
34,773
11.2
30,009
9.5
20,972
7.4
34,018
11.0
17,996
5.7
19,425
6.8
16,077
5.1
12,670
4.0
$
155,386
54.7
%
$
172,770
55.7
%
$
182,424
57.7
%
Table of Contents
Table of Contents
2002
2003
First
Second
Third
Fourth
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
(in thousands, except per share data)
$
59,895
$
78,992
$
102,640
$
68,489
$
67,759
$
73,290
$
90,308
$
84,419
$
26,470
$
35,192
$
41,812
$
27,077
$
27,442
$
27,906
$
36,226
$
35,060
$
1,420
$
9,912
$
18,895
$
1,757
$
7,504
$
4,065
$
12,578
$
(5,284
)
$
2,985
$
10,849
$
19,944
$
7,351
$
7,842
$
4,222
$
12,593
$
152
$
2,156
$
7,832
$
13,954
$
7,329
$
5,960
$
3,208
$
9,570
$
1,866
$
0.11
$
0.37
$
0.59
$
0.30
$
0.24
$
0.13
$
0.40
$
0.08
19,017
20,985
23,586
24,178
24,430
24,175
24,177
24,304
$
0.11
$
0.36
$
0.58
$
0.30
$
0.24
$
0.13
$
0.39
$
0.08
20,236
21,953
24,059
24,800
24,917
24,683
24,629
24,642
Table of Contents
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Allowances are deducted from the assets to which they apply,
except for sales returns and allowances.
Balance at
Charged to
Charged to
Balance
Beginning of
Costs and
Other
at End
Period
Expenses
Accounts
Deductions
of Period
(in thousands)
$
3,012
$
6,321
$
$
2,059
$
7,274
7,322
1,039
5,770
2,591
6,553
25,190
26,791
4,952
$
16,887
$
32,550
$
$
34,620
$
14,817
$
7,273
$
2,373
$
$
2,865
$
6,781
2,590
4,085
1,893
4,782
4,953
31,917
7,500
(a)
30,790
13,580
$
14,816
$
38,375
$
7,500
$
35,548
$
25,143
$
6,781
$
2,896
$
$
1,800
$
7,877
4,782
4,288
4,045
5,025
13,580
27,064
32,891
7,753
$
25,143
$
34,248
$
0
$
38,736
$
20,655
(a) | Obligations assumed in conjunction with the asset acquisitions of Trendmasters and Dragon Ball Franchise. |
52
PART III
Item 10. | Directors and Executive Officers of the Registrant |
Directors and Executive Officers
Our directors and executive officers are as follows:
Name | Age | Positions with the Company | ||||
|
|
|
||||
Jack Friedman
|
63 | Chairman and Chief Executive Officer | ||||
Stephen G. Berman
|
39 | Chief Operating Officer, President, Secretary and Director | ||||
Joel M. Bennett
|
42 | Executive Vice President and Chief Financial Officer | ||||
Michael Bianco, Jr.
|
45 | Executive Vice President and Chief Merchandising Officer | ||||
David C. Blatte
|
39 | Director | ||||
Robert E. Glick
|
58 | Director | ||||
Michael G. Miller
|
56 | Director | ||||
Murray L. Skala
|
57 | Director |
Jack Friedman has been our Chairman and Chief Executive Officer since co-founding JAKKS with Mr. Berman in January 1995. Until December 31, 1998, he was also our President. From January 1989 until January 1995, Mr. Friedman was Chief Executive Officer, President and a director of THQ. From 1970 to 1989, Mr. Friedman was President and Chief Operating Officer of LJN Toys, Ltd., a toy and software company. After LJN was acquired by MCA/ Universal, Inc. in 1986, Mr. Friedman continued as President until his departure in late 1988.
Stephen G. Berman has been our Chief Operating Officer and Secretary and one of our directors since co-founding JAKKS with Mr. Friedman in January 1995. Since January 1, 1999, he has also served as our President. From our inception until December 31, 1998, Mr. Berman was also our Executive Vice President. From October 1991 to August 1995, Mr. Berman was a Vice President and Managing Director of THQ International, Inc., a subsidiary of THQ. From 1988 to 1991, he was President and an owner of Balanced Approach, Inc., a distributor of personal fitness products and services.
Joel M. Bennett joined us in September 1995 as Chief Financial Officer and was given the additional title of Executive Vice President in May 2000. From August 1993 to September 1995, he served in several financial management capacities at Time Warner Entertainment Company, L.P., including as Controller of Warner Brothers Consumer Products Worldwide Merchandising and Interactive Entertainment. From June 1991 to August 1993, Mr. Bennett was Vice President and Chief Financial Officer of TTI Technologies, Inc., a direct-mail computer hardware and software distribution company. From 1986 to June 1991, Mr. Bennett held various financial management positions at The Walt Disney Company, including Senior Manager of Finance for its international television syndication and production division. Mr. Bennett holds a Master of Business Administration degree and is a Certified Public Accountant.
Michael Bianco, Jr. has been an Executive Vice President since July 2001 and was given the additional title of Chief Merchandising Officer in February 2001. Until July 2001, he had served as a Senior Vice President of our Flying Colors division since joining us in October 1999, when we acquired Flying Colors Toys, where he had been President and a principal shareholder since July 1996. From 1994 to 1996, Mr. Bianco served as Executive Vice President of Rose Art Industries, Inc., a manufacturer of craft and activity products, and from 1976 to 1993, he served in various capacities, including Vice President of Merchandising, at toy retailer Kay Bee Toys.
53
David C. Blatte has been one of our directors since January 2001. From January 1993 to May 2000, Mr. Blatte was a Senior Vice President in the specialty retail group of the investment banking division of Donaldson, Lufkin and Jenrette Securities Corporation. From May 2000 to January 2004, Mr. Blatte was a partner in Catterton Partners, a private equity fund. Since February 2004, Mr. Blatte has been a partner in Centre Partners, a private equity fund.
Robert E. Glick has been one of our directors since October 1996. For more than 20 years, Mr. Glick has been an officer, director and principal stockholder in a number of privately-held companies which manufacture and market womens apparel.
Michael G. Miller has been one of our directors since February 1996. From 1979 until May 1998, Mr. Miller was President and a director of a group of privately-held companies, including a list brokerage and list management consulting firm, a database management consulting firm, and a direct mail graphic and creative design firm. Mr. Millers interests in such companies were sold in May 1998. Since 1991, he has been President of an advertising company.
Murray L. Skala has been one of our directors since October 1995. Since 1976, Mr. Skala has been a partner of the law firm Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP, our general counsel. Mr. Skala is a director of Traffix, Inc., a publicly-held company in the business of telecommunications services and entertainment.
Our directors hold office until the next annual meeting of stockholders and until their successors are elected and qualified.
Committees of the Board of Directors
We have an Audit Committee, a Compensation Committee and a Stock Option Committee. The Board does not have a Nominating Committee and performs the functions of a Nominating Committee itself.
Audit Committee. The primary functions of the Audit Committee are to select or to recommend to our Board the selection of outside auditors; to monitor our relationships with our outside auditors and their interaction with our management in order to ensure their independence and objectivity; to review, and to assess the scope and quality of, our outside auditors services, including the audit of our annual financial statements; to review our financial management and accounting procedures; to review our financial statements with our management and outside auditors; and to review the adequacy of our system of internal accounting controls. Messrs. Blatte, Glick and Miller are the current members of the Audit Committee and are each independent (as that term is defined in NASD Rule 4200(a)(14)), and are each able to read and understand fundamental financial statements. Mr. Blatte is the Chairman of the Audit Committee and possesses the financial expertise required under Rule 401(h) of Regulation SK of the Act and NASD Rule 4350(d)(2). He is further independent, as that term is defined under Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. We will, in the future, continue to have (i) an Audit Committee of at least three members comprised solely of independent directors, each of whom will be able to read and understand fundamental financial statements (or will become able to do so within a reasonable period of time after his or her appointment); and (ii) at least one member of the Audit Committee that will possess the financial expertise required under NASD Rule 4350(d)(2). Our Board has adopted a written charter for the Audit Committee and the Audit Committee reviews and reassesses the adequacy of that charter on an annual basis.
Compensation Committee. The functions of the Compensation Committee are to make recommendations to the Board regarding compensation of management employees and to administer plans and programs relating to employee benefits, incentives, compensation and awards under our Third Amended and Restated 1995 Stock Option Plan and our 2002 Stock Award and Incentive
54
Code of Ethics
We have adopted a Code of Ethics that applies to each of our employees, including our principal executive officer and principal accounting officer, as well as the members of our Board of Directors. We have filed a copy of such Code as an exhibit to this Annual Report.
Item 11. Executive Compensation
The following table sets forth the compensation we paid for our
fiscal years ended December 31, 2001, 2002 and 2003 to our
Chief Executive Officer and to each of our other executive
officers whose compensation exceeded $100,000 on an annual
basis (collectively, the Named Officers).
Summary Compensation Table
Long-Term Compensation
Annual Compensation
Restricted
Securities
Other Annual
Stock
Underlying
Name and
Salary
Bonus
Compensation
Awards
Options
Principal Position
Year
($)
($)
($)
($)(*)
(#)
2003
965,000
1,327,140
2,524,800
(2)
2002
846,000
1,429,696
2001
821,000
1,706,390
175,000
2003
965,000
1,327,140
2,524,800
(2)
2002
821,000
1,429,696
2001
796,000
1,706,390
175,000
2003
300,000
1,262,400
(3)
2002
272,500
495,000
(1)
2001
247,500
160,000
20,000
2003
700,000
1,009,920
(4)
2002
575,000
600,000
2001
550,000
450,000
150,000
* | The shares of restricted stock referenced in this column were all issued pursuant to the 2002 Plan. The total number of restricted shares issued under the 2002 Plan that were outstanding at December 31, 2003 was 696,000 shares. Such shares had an aggregate value of $9,152,400, representing the product of (a) 696,000 shares, multiplied by (b) $13.15, the closing price of our common stock on December 31, 2003, as reported by Nasdaq. |
(1) | Includes the forgiveness of a note receivable and accrued interest in the aggregate amount of $285,000. |
(2) | Represents the product of (a) 240,000 shares of restricted stock multiplied by (b) $10.52, the closing price of our common stock, as reported by Nasdaq, on March 27, 2003, the date the shares were granted, all of which vested on January 1, 2004. |
(3) | Represents the product of (a) 120,000 shares of restricted stock multiplied by (b) $10.52, the closing price of our common stock, as reported by Nasdaq, on March 27, 2003, the date the shares were granted, which vest as follows: 60,000 on each of January 1, 2004 and 2005, subject to certain Company financial performance criteria. |
55
(4) | Represents the product of (a) 96,000 shares of restricted stock multiplied by (b) $10.52, the closing price of our common stock, as reported by Nasdaq, on March 27, 2003, the date the shares were granted, all of which vested on January 1, 2004. |
Employment Agreements
In March 2003 we amended and restated our employment agreements with each of the Named Officers.
Mr. Friedmans amended and restated employment agreement, pursuant to which he serves as our Chairman and Chief Executive Officer, provides for an annual base salary in 2004 of $990,000. Mr. Friedmans agreement expires December 31, 2010. His base salary is subject to annual increases determined by our Board of Directors, but in an amount not less than $25,000 per annum. For our fiscal year ended December 31, 2003, Mr. Friedman received a bonus of $1,327,140. For each fiscal year between 2004 through 2010, Mr. Friedmans bonus will depend on our achieving certain earnings per share growth targets. The earnings per share growth targets for 2004 have been set, but the earnings per share growth targets for subsequent fiscal years will be determined annually by the Compensation Committee of our Board of Directors. Depending on the levels of earnings per share growth that we achieve in each fiscal year, Mr. Friedman will receive an annual bonus from 0% to up to 200% of his base salary. This bonus will be paid in accordance with the terms and conditions of our 2002 Stock Award and Incentive Plan. In addition, in consideration for modifying and replacing the pre-tax income formula provided in his prior employment agreement for determining his annual bonus, and for entering into the amended employment agreement, Mr. Friedman was granted the right to be issued an aggregate of 1,080,000 shares of restricted stock. The first tranche of restricted stock, totaling 240,000 shares, was granted at the time the agreement became effective, and the second tranche of restricted stock, totaling 120,000 shares, was granted on January 1, 2004. In each subsequent year of the employment agreement term, Mr. Friedman will receive 120,000 shares of restricted stock. The grant of these shares is in accordance with our 2002 Stock Award and Incentive Plan, and the vesting of each tranche of restricted stock is subject to our achieving pre-tax income in excess of $2,000,000 in the fiscal year that the grant is made. Each tranche of restricted stock granted or to be granted from January 1, 2004 through January 1, 2008 is subject to a two-year vesting period, which may be accelerated to one year if we achieve certain earnings per share growth targets. Each tranche of restricted stock to be granted thereafter through January 1, 2010, is subject to a one-year vesting period. Finally, the agreement provides Mr. Friedman with the opportunity, commencing at age 67, to retire and receive a single-life annuity retirement payment equal to $975,000 a year for a period of 10 years, or in the event of his death during such retirement period, his estate will receive a death benefit equal to the difference between $2,925,000 and any prior retirement benefits previously paid to him; provided, however, that Mr. Friedman must agree to serve as Chairman Emeritus of our Board of Directors, if requested to do so by such Board.
Mr. Bermans amended and restated employment agreement, pursuant to which he serves as our President and Chief Operating Officer, provides for an annual base salary in 2004 of $990,000. Mr. Bermans agreement expires December 31, 2010. His base salary is subject to annual increases determined by our Board of Directors, but in an amount not less than $25,000 per annum. For our fiscal year ended December 31, 2003, Mr. Berman received a bonus of $1,327,140. For each fiscal year between 2004 through 2010, Mr. Bermans bonus will depend on our achieving certain earnings per share growth targets. The earnings per share growth targets for 2004 have been set, but the earnings per share growth targets for subsequent fiscal years will be determined annually by the Compensation Committee of our Board of Directors. Depending on the levels of earnings per share
56
Mr. Bennetts amended and restated our employment agreement, pursuant to which Mr. Bennett serves as our Executive Vice President and Chief Financial Officer, expires December 31, 2006. Mr. Bennetts annual base salary in 2004 is $320,000 and is subject to annual increases in an amount, not less than $20,000, determined by our Board of Directors. In addition, as consideration for relinquishing the prior formula for determining his annual bonus, and for entering into the amended agreement, Mr. Bennett was awarded at the time his agreement became effective 120,000 shares of restricted stock, 60,000 of such shares vested on January 1, 2004 and the remaining 60,000 shares will vest on January 1, 2005, provided Mr. Bennett is then employed by us. This grant of restricted stock was in accordance with our 2002 Stock Award and Incentive Plan.
Mr. Biancos amended and restated employment agreement, pursuant to which he serves as our Executive Vice President and Chief Merchandising Officer, provides for an annual base salary in 2004 of $725,000. Mr. Biancos agreement expires December 31, 2007. His base salary is subject to annual increases determined by our Board of Directors, but in an amount not less than $25,000 per annum. For our fiscal year ended December 31, 2003, Mr. Bianco did not receive a bonus. For each fiscal year between 2004 through 2007, Mr. Biancos bonus will depend on our achieving certain earnings per share growth targets. The earnings per share growth targets for 2004 will be determined annually by the Compensation Committee of our Board of Directors. Depending on the levels of earnings per share growth that we achieve in each fiscal year, Mr. Bianco will receive an annual bonus of from 0% to up to 200% of his base salary. This bonus will be paid in accordance with the terms and conditions of our 2002 Stock Award and Incentive Plan. In addition, in consideration for modifying and replacing the pre-tax income formula provided in his prior employment agreement for determining his annual bonus, and for entering into the amended employment agreement, Mr. Bianco was granted the right to be issued an aggregate of 480,000 shares of restricted stock. The first tranche of restricted stock, totaling 96,000 shares, was granted at the time the agreement became effective, and the second tranche of restricted stock, totaling 96,000 shares, was granted on January 1, 2004. In each subsequent year of the employment agreement term, Mr. Bianco will receive 96,000 shares of restricted stock. The grant of these shares is in accordance with our 2002 Stock Award and Incentive Plan, and the vesting of each tranche of restricted stock is subject to our achieving pre-tax income in excess of $2,000,000 in the fiscal year that the grant is made. Each tranche of restricted stock granted or to be granted from January 1,
57
If we terminate Mr. Friedmans, Mr. Bermans, Mr. Biancos or Mr. Bennetts employment other than for cause or if a Named Officer resigns because of our material breach of the employment agreement or because we cause a material change in his employment, we are required to make a lump-sum severance payment in an amount equal to his base salary and bonus during the balance of the term of the employment agreement, based on his then applicable annual base salary and bonus. In the event of the termination of his employment under certain circumstances after a Change of Control (as defined in each employment agreement), we are required to make a one-time payment of an amount equal to 2.99 times of the base amount of such Named Officer determined in accordance with the applicable provisions of the Internal Revenue Code.
The foregoing is only a summary of the material terms of our employment agreements with the Named Officers. For a complete description, copies of such agreements are annexed herein in their entirety as exhibits or are otherwise incorporated herein by reference.
The following table sets forth certain information regarding
options exercised and exercisable during 2003, and the
value of options held as of December 31, 2003 by the Named
Officers:
Aggregated Option/SAR Exercises in Last Fiscal Year
Number of Securities
Value of Unexercised
Underlying Unexercised
In-the-Money
Shares
Options/SARs
Options/SARs
Acquired
at Fiscal Year End
at Fiscal Year End(2)
on
Value
Name
Exercise (#)
Realized ($)(1)
Exercisable
Unexercisable
Exercisable
Unexercisable
187,500
1,364,063
175,341
181,913
647,986
313,404
227,494
223,544
923,093
533,007
38,864
66,339
173,358
276,088
72,954
149,325
147,457
233,814
(1) | The product of (x) the difference between $12.50 (the closing sale price on October 22, 2003, the date the option was exercised) and $5.225, the exercise price of the option, multiplied by (y) the number of exercised options. |
(2) | The product of (x) the difference between $13.15 (the closing sale price of the common stock on December 31, 2003) and the aggregate exercise price of such options, multiplied by (y) the number of unexercised options. |
Compensation of Directors
Directors currently receive an annual cash stipend in the amount of $10,000 for serving on the Board, and are reimbursed for reasonable expenses incurred in attending meetings. In addition, our Option Plan provides for each newly elected non-employee director to receive at the commencement of his term an option to purchase 37,500 shares of our common stock at their then current fair market value, and for grants to our non-employee directors: (i) on January 1 and July 1 of each year of an option to purchase 7,500 shares of our common stock at their then current fair market value, and (ii) on January 1 of each year of 1,000 shares of restricted stock beginning on January 1, 2004. Options granted to a non-employee director expire upon the termination of the directors services for cause, but may be exercised at any time during a one-year period after such person ceases to serve as a director for any other reason.
58
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a director or member of a compensation committee (or other board committee performing equivalent functions) of any other entity, one of whose executive officers served as a director or a member of our Compensation Committee.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table sets forth certain information as of
March 12, 2004 with respect to the beneficial ownership of
our common stock by (1) each person known by us to own
beneficially more than 5% of the outstanding shares of our
common stock, (2) each of our directors, (3) each
Named Officer, and (4) all our directors and executive
officers as a group.
Amount and
Nature of
Percent of
Name and Address of
Beneficial
Outstanding
Beneficial Owner(1)(2)
Ownership(s)(3)
Shares
2,672,300
(4)
11.0
%
1,404,500
(5)
6.1
3,044,400
(6)
9.3
1,424,707
(7)
5.6
2,855,211
(8)
11.3
1,633,402
(9)
6.5
760,797
(10)
3.0
629,123
(11)
2.5
194,706
(12)
*
314,343
(13)
1.2
61,000
(14)
*
77,519
(15)
*
68,144
(16)
*
79,457
(17)
*
2,181,906
(18)
8.4
%
* | Less than 1% of our outstanding shares. |
(1) | Unless otherwise indicated, such persons address is c/o JAKKS Pacific, Inc., 22619 Pacific Coast Highway, Malibu, California 90265. |
(2) | The number of shares of common stock beneficially owned by each person or entity is determined under the rules promulgated by the Securities and Exchange Commission. Under such rules, beneficial ownership includes any shares as to which the person or entity has sole or shared voting power or investment power. The percentage of our outstanding shares is calculated by including among the shares owned by such person any shares which such person or entity has the right to acquire within 60 days after March 15, 2004. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of such shares. |
(3) | Exercises sole voting power and sole investment power with respect to such shares. |
(4) | The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. All the information with respect to this beneficial owner was extracted solely from its Schedule 13G/A filed on February 17, 2004. |
59
(5) | Mr. William Nasgovitz, principal and controlling member of Heartland Advisors, Inc. (HAI), has also reported beneficial ownership of these shares. The address of each of HAI and Mr. Nasgovitz is 789 North Water Street, Milwaukee, WI 53202. All the information presented in this Item with respect to these beneficial owners was extracted solely from the Schedule 13G jointly filed on February 13, 2004. |
(6) | The address of Royce & Associates, LLC is 1414 Avenue of the Americas, New York, New York 10019. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G filed on February 3, 2004. |
(7) | Messrs. Charles B. Johnson and Rupert H. Johnson, principals and controlling members of Franklin Resources Inc. (FRI), have also reported beneficial ownership of these shares. The address of each of FRI and Messrs. Johnson is One Franklin Parkway, San Mateo, CA 94403. All the information presented in this Item with respect to these beneficial owners was extracted solely from the Schedule 13G jointly filed on February 13, 2004. |
(8) | The address of Third Avenue Management LLC is 622 Third Avenue, New York, NY 10017. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G/A filed on January 8, 2004. |
(9) | The address of Dimensional Fund Advisors, Inc. is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G filed on February 6, 2004. |
(10) | Includes 3,186 shares held in trusts for the benefit of children of Mr. Friedman. Also includes 175,339 shares of common stock issuable upon the conversion of options held by Mr. Friedman. Also includes 120,000 shares of common stock issued on January 1, 2004 pursuant to the terms of Mr. Friedmans January 1, 2003 Employment Agreement, which shares are further subject to the terms of our January 1, 2004 Restricted Stock Award Agreement with Mr. Friedman (the Friedman Agreement). The Friedman Agreement provides that Mr. Friedman will forfeit his rights to all 120,000 shares unless certain conditions precedent are met prior to January 1, 2005, including the condition that our Pre-Tax Income (as defined in the Friedman Agreement) for 2004 exceeds $2,000,000, whereupon the forfeited shares will become authorized but unissued shares of our common stock. The Friedman Agreement further prohibits Mr. Friedman from selling, assigning, transferring, pledging or otherwise encumbering (a) 60,000 of the 120,000 shares prior to January 1, 2005 and (b) the remaining 60,000 shares prior to January 1, 2006; provided, however, that if our Pre-Tax Income for 2004 exceeds $2,000,000 and our Adjusted EPS Growth (as defined in the Friedman Agreement) for 2004 increases by certain percentages as set forth in the Friedman Agreement, the vesting of some or all of the 60,000 shares that would otherwise vest on January 1, 2006 will be accelerated to the date the Adjusted EPS Growth is determined. |
(11) | Includes 269,123 shares of common stock issuable upon the conversion of options held by Mr. Berman. Also includes 120,000 shares of common stock issued on January 1, 2004 pursuant to the terms of Mr. Bermans January 1, 2003 Employment Agreement, which shares are further subject to the terms of our January 1, 2004 Restricted Stock Award Agreement with Mr. Berman (the Berman Agreement). The Berman Agreement provides that Mr. Berman will forfeit his rights to all 120,000 shares unless certain conditions precedent are met prior to January 1, 2005, including the condition that our Pre-Tax Income (as defined in the Berman Agreement) for 2004 exceeds $2,000,000, whereupon the forfeited shares will become authorized but unissued shares of our common stock. The Berman Agreement further prohibits Mr. Berman from selling, assigning, transferring, pledging or otherwise encumbering |
60
(a) 60,000 of the 120,000 shares prior to January 1, 2005 and (b) the remaining 60,000 shares prior to January 1, 2006; provided, however, that if our Pre-Tax Income for 2004 exceeds $2,000,000 and our Adjusted EPS Growth (as defined in the Berman Agreement) for 2004 increases by certain percentages as set forth in the Berman Agreement, the vesting of some or all of the 60,000 shares that would otherwise vest on January 1, 2006 will be accelerated to the date the Adjusted EPS Growth is determined. | |
(12) | Includes 47,456 shares which Mr. Bennett may purchase upon the exercise of certain stock options. Also includes 60,000 shares of common stock issued to Mr. Bennett pursuant to the terms of his Employment Agreement, which shares may not be sold, assigned, transferred or otherwise encumbered prior to January 1, 2005 and which shares may be transferred if Mr. Bennett is not then employed by us. |
(13) | Includes 82,293 shares which Mr. Bianco may purchase upon the exercise of certain stock options. Also includes 96,000 shares of common stock issued on January 1, 2004 pursuant to the terms of Mr. Biancos January 1, 2003 Employment Agreement, which shares are further subject to the terms of our January 1, 2004 Restricted Stock Award Agreement with Mr. Bianco (the Bianco Agreement). The Bianco Agreement provides that Mr. Bianco will forfeit his rights to all 96,000 shares unless certain conditions precedent are met prior to January 1, 2005, including the condition that our Pre-Tax Income (as defined in the Bianco Agreement) for 2004 exceeds $2,000,000, whereupon the forfeited shares will become authorized but unissued shares of our common stock. The Bianco Agreement further prohibits Mr. Bianco from selling, assigning, transferring, pledging or otherwise encumbering (a) 48,000 of the 96,000 shares prior to January 1, 2005 and (b) the remaining 48,000 shares prior to January 1, 2006; provided, however, that if our Pre-Tax Income for 2004 exceeds $2,000,000 and our Adjusted EPS Growth (as defined in the Bianco Agreement) for 2004 increases by certain percentages as set forth in the Bianco Agreement, the vesting of some or all of the 48,000 shares that would otherwise vest on January 1, 2006 will be accelerated to the date the Adjusted EPS Growth is determined. |
(14) | Includes 60,000 shares which Mr. Blatte may purchase upon the exercise of certain stock options and 1,000 shares of common stock issued on January 1, 2004, to all of our non-employee directors pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which such 1,000 shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2005. |
(15) | Includes 76,519 shares which Mr. Glick may purchase upon the exercise of certain stock options and 1,000 shares of Common Stock issued on January 1, 2004, to all of our non-employee directors pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which such 1,000 shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2005. |
(16) | Includes 67,144 shares which Mr. Miller may purchase upon the exercise of certain stock options and 1,000 shares of Common Stock issued on January 1, 2004, to all of our non-employee directors pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which such 1,000 shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2005. |
(17) | Includes 75,271 shares which Mr. Skala may purchase upon the exercise of certain stock options, 3,186 shares held by Mr. Skala as trustee under a trust for the benefit of Mr. Friedmans minor child and 1,000 shares of common stock issued on January 1, 2004, to all of our non-employee directors pursuant to our 2002 Stock Award and Incentive Plan, |
61
pursuant to which such 1,000 shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2005. | |
(18) | Includes 3,186 shares held in a trust for the benefit of Mr. Friedmans minor child and an aggregate of 853,148 shares which the directors and executive officers may purchase upon the exercise of certain stock options. |
Equity Compensation Plan Information
The table below sets forth the following information as of the fiscal year ended December 31, 2003 for (i) all compensation plans previously approved by our stockholders and (ii) all compensation plans not previously approved by our stockholders, if any:
(a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights; | |
(b) the weighted-average exercise price of such outstanding options, warrants and rights; | |
(c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans. |
Number of Securities | ||||||||||||
Remaining Available | ||||||||||||
Number of | Weighted-Average | for | ||||||||||
Securities to be | Exercise Price of | Future Issuance Under | ||||||||||
Issued upon Exercise | Outstanding | Equity Compensation | ||||||||||
of Outstanding | Options, | Plans (Excluding | ||||||||||
Options, | Warrants and | Securities Reflected in | ||||||||||
Warrants and Rights | Rights | Column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
|
|
|
|
|||||||||
Equity compensation plans approved by security
holders
|
2,268,461 | $ | 12.15 | 1,718,392 | ||||||||
Equity compensation plans not approved by
security holders
|
| | | |||||||||
|
|
|
||||||||||
Total
|
2,268,461 | $ | 12.15 | 1,718,392 |
Equity compensation plans approved by our stockholders include the 2002 Stock Award and Incentive Plan.
Item 13. Certain Relationships and Related Transactions
One of our directors, Murray L. Skala, is a partner in the law firm of Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP, which has performed, and is expected to continue to perform, legal services for us. In 2003, we incurred approximately $3,116,866 for legal fees and $525,559 for reimbursable expenses payable to that firm. As of December 31, 2002 and 2003, legal fees and reimbursable expenses of $656,724 and $721,837, respectively, were payable to this law firm.
In April 2000, we loaned $1,500,000 to each of Jack Friedman and Stephen G. Berman. The entire principal amount of each loan was originally due on April 28, 2003 and, until repaid, interest thereon is payable semi-annually at the rate of 6.5% per annum. Mr. Bermans indebtedness to us under his loan is secured by a deed of trust on certain real property. As of March 27, 2003, the outstanding principal balances of Mr. Friedmans and Mr. Bermans loans including interest accrued thereon were paid in full. Both loans were made to assist our executive officers in meeting certain personal financial obligations.
62
Michael Bianco, Jr., an Executive Vice President and our Chief Merchandising Officer, was one of the selling shareholders from whom we acquired Flying Colors Toys in October 1999. In connection with that acquisition, we agreed to pay an earn-out, in an amount not less than $2.5 million nor more than $4.5 million, in each of the three twelve-month periods following the closing if the gross profit of Flying Colors products achieve certain targeted levels during these periods. In each of 2001 and 2002, we paid $1,850,000 to Mr. Bianco on account of the earn-out for each of the twelve-month periods ended September 30, 2001 and 2002.
Item 14. Control and Procedures
(a) Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a date within 90 days of the filing date of this Annual Report on Form 10-K (the Evaluation Date) have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K report was being prepared.
(b) Changes in internal controls.
There have been no significant changes in our internal controls or in other factors which could significantly affect our disclosure controls subsequent to the date we conducted our evaluation.
Item 15. | Principal Accountant Fees and Services. |
The following are the fees billed us by our auditors, PKF, for
services rendered thereby during 2003 and 2002:
2002
2003
$
326,888
$
484,307
0
11,603
103,638
205,673
29,510
56,811
Audit Fees consist of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that are normally provided by PKF in connection with our statutory and regulatory filings or engagements.
Audit Related Fees consist of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.
Tax Fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees were fees for preparation of our tax returns, consultancy and advice on international and domestic tax structures and tax planning relating to our acquisition efforts.
All Other Fees consist of the aggregate fees billed for products and services provided by PKF and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees. Included in such Other Fees were fees for services rendered by PKF in connection with our private and public offerings conducted during such periods, as well as reviews related to our acquisition efforts.
63
Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining PKFs independence and determined that such services are appropriate.
Before the auditors are engaged to provides us audit or non-audit services, such engagement is approved by the Audit Committee of our Board of Directors.
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements (included in Item 8):
| Independent Auditors Report | |
| Consolidated Balance Sheets as of December 31, 2002 and 2003 | |
| Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003 | |
| Consolidated Statements of Other Comprehensive Income for the years ended December 31, 2001, 2002 and 2003 | |
| Consolidated Statements of Stockholders Equity for the years ended December 31, 2001, 2002 and 2003 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003 | |
| Notes to Consolidated Financial Statements |
(2) Financial Statement Schedules (included in Item 8)
| Schedule II Valuation and Qualifying Accounts |
(3) Exhibits
Exhibit
Number
Description
Amended and Restated Certificate of Incorporation
of the Company (1)
By-Laws of the Company (2)
Amendment to By-Laws of the Company (3)
Third Amended and Restated 1995 Stock Option Plan
(4)
1999 Amendment to Third Amended and Restated 1995
Stock Option Plan (5)
2000 Amendment to Third Amended and Restated 1995
Stock Option Plan (6)
2001 Amendment to Third Amended and Restated 1995
Stock Option Plan (7)
2002 Stock Award and Incentive Plan (8)
Amended and Restated Employment Agreement between
the Company and Jack Friedman, dated as of March 26, 2003
(36)
Amended and Restated Employment Agreement between
the Company and Stephen G. Berman dated as of March 26,
2003 (36)
Amended and Restated Employment Agreement between
the Company and Michael Bianco dated as of March 26, 2003
(36)
64
Exhibit
Number
Description
Amended and Restated Employment Agreement between
the Company and Joel M. Bennet, dated March 26, 2003 (36)
License Agreement with Titan Sports, Inc. dated
October 24, 1995 (2)
Amendment to License Agreement with Titan Sports,
Inc. dated April 22, 1996 (9)
Amendment to License Agreement with Titan Sports,
Inc. dated January 21, 1997 (9)
Amendment to License Agreement with Titan Sports,
Inc. dated December 3, 1997 (10)
Amendment to License Agreement with Titan Sports,
Inc. dated January 29, 1998 (10)
Amendment to License Agreement with Titan Sports,
Inc. dated June 24, 1998 (11)
Amendment to License Agreement with Titan Sports,
Inc. dated February 11, 1999 (11)
International License Agreement with Titan
Sports, Inc. dated February 10, 1997 (9)
Amendment to International License Agreement with
Titan Sports, Inc. dated December 3, 1997 (10)
Amendment to International License Agreement with
Titan Sports, Inc. dated January 29, 1998 (10)
Office Lease dated November 18, 1999 between
the Company and Winco Maliview Partners (12)
Term Note dated April 13, 2000 in the
principal amount of $1,500,000 made by Jack Friedman payable to
the order of the Company (13)
Installment Note dated April 26, 2000 in the
principal amount of $1,500,000 made by Stephen Berman and Ana
Berman payable to the order of the Company (14)
Deed of Trust dated April 26, 2000 made by
Stephen Berman and Ana Berman in favor of First American Title
Insurance Company, as Trustee (15)
Lease dated as of November 21, 2000 between
Grand Avenue Venture, LLC and JP Ferrero Parkway, Inc. (16)
Loan Agreement dated as of October 12, 2001
among JAKKS, certain other Borrowers, the Lenders named therein
and Bank of America, N.A., as Administrative Agent (17)
First Amendment to Loan Agreement and Consent and
Waiver dated as of March 8, 2002 (18)
Security Agreement (Borrowers) dated as of
October 12, 2001 among JAKKS, certain other Grantors, Bank
of America, as Administrative Agent, and the Lenders referred to
therein (19)
Trademark Security Agreement dated as of
October 12, 2001 among JAKKS, certain other Grantors, Bank
of America, as Administrative Agent, and the Lenders referred to
therein (20)
Patent Security Agreement dated as of
October 12, 2001 among JAKKS, certain other Grantors, Bank
of America, as Administrative Agent, and the Lenders referred to
therein (21)
Pledge Agreement dated as of October 12,
2001 among JAKKS, certain other Grantors, Bank of America, as
Administrative Agent, and the Lenders referred to
therein (22)
Lock Box Agreement dated as of October 12,
2001 among JAKKS, certain other Customers, Bank of America, as
Administrative Agent, and the Lenders referred to
therein (23)
Guaranty dated as of October 12, 2001 among
the Domestic Subsidiaries named therein, Bank of America, as
Administrative Agent, and the Lenders referred to
therein (24)
Security Agreement dated as of October 12,
2001 among the Grantors named therein, Bank of America, N.A., as
Administrative Agent, and the Lenders referred to
therein (25)
Stock Purchase Agreement dated as of
February 10, 2002 among JAKKS, Toymax and the Shareholders
named therein (26)
Agreement of Merger dated as of February 10,
2002 among JAKKS, JP/TII Acquisition Corp. and Toymax (27)
Letter Agreement dated March 11, 2002 among
Toymax, JAKKS and the selling stockholders named
therein (28)
65
Exhibit
Number
Description
Termination and Replacement of Manufacturing
Agreement dated March 11, 2002 among Toymax, Toymax (H.K.)
Limited, Jauntiway Investments Limited, et al. (29)
Termination of Agency Agreements and Stock
Options dated March 11, 2002 among Tai Nam Industrial
Company Limited, David Ki Kwan Chu, Frances Shuk Kuen Leung,
Toymax, et al. (30)
Registration Rights Agreement dated as of
March 11, 2002 among JAKKS, Best Phase Limited, Hargo
(Barbados) Limited, Harvey Goldberg and Steven A.
Lebensfeld (31)
Termination of Employment Agreement dated
March 11, 2002 among Steven Lebensfeld, Toymax and
JAKKS (32)
Employment Agreement dated as of March 11,
2002 between JAKKS and Steven Lebensfeld (33)
Termination of Employment Agreement dated
March 11, 2002 among Harvey Goldberg, 1515037 Ontario Ltd.,
Toymax and JAKKS (34)
Consulting Agreement dated as of March 11,
2002 among JAKKS, 1515037 Ontario Ltd. and Harvey
Goldberg (35)
Form of Restricted Stock Agreement (36)
Code of Ethics (*)
Subsidiaries of the Company (*)
Rule 13a-14(a)/15d-14(a) Certification of
Jack Friedman (*)
Rule 13a-14(a)/15d-14(a) Certification of
Joel Bennett (*)
Section 1350 Certification of Jack Friedman
(*)
Section 1350 Certification of Joel Bennett
(*)
(1) | Incorporated by reference to Appendix 2 of the Companys Schedule 14A Proxy Statement filed August 23, 2002. |
(2) | Filed previously as an exhibit to the Companys Registration Statement on Form SB-2 (Reg. No. 333-2048-LA), effective May 1, 1996, and incorporated herein by reference. |
(3) | Filed previously as an exhibit to the Companys Registration Statement on Form SB-2 (Reg. No. 333-22583), effective May 1, 1997, and incorporated herein by reference. |
(4) | Filed previously as Appendix A to the Companys definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, filed June 23, 1998, and incorporated herein by reference. |
(5) | Filed previously as an exhibit to the Companys Registration Statement on Form S-8 (Reg. No. 333-90055), filed November 1, 1999, and incorporated herein by reference. |
(6) | Filed previously as exhibit 4.1 to the Companys Registration Statement on Form S-8 (Reg. No. 333-40392), filed June 29, 2000, and incorporated herein by reference. |
(7) | Incorporated by reference to Appendix B to the Companys Schedule 14A Proxy Statement, filed June 11, 2001. |
(8) | Filed previously as exhibit 4.1 to the Companys Registration Statement on Form S-8 (Reg. No. 333-101665), filed December 5, 2002, and incorporated herein by reference. |
(9) | Filed previously as an exhibit to the Companys Annual Report on Form 10-KSB for its fiscal year ended December 31, 1996, and incorporated herein by reference. |
(10) | Filed previously as an exhibit to the Companys Annual Report on Form 10-KSB for its fiscal year ended December 31, 1997, and incorporated herein by reference. |
(11) | Filed previously as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, filed April 22, 1999, and incorporated herein by reference. |
66
(12) | Filed previously as an exhibit to the Companys Annual Report on Form 10-K for its fiscal year ended December 31, 1999, filed March 30, 2000, and incorporated herein by reference. |
(13) | Incorporated by reference to exhibit 10.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 14, 2000. |
(14) | Incorporated by reference to exhibit 10.2 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 14, 2000. |
(15) | Incorporated by reference to exhibit 10.3 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 14, 2000. |
(16) | Incorporated by reference to exhibit 10.58 of the Companys Annual Report on Form 10-K for its fiscal year ended December 31, 2000, filed April 2, 2001. |
(17) | Incorporated by reference to exhibit 15(A) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(18) | Incorporated by reference to exhibit 15(B) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(19) | Incorporated by reference to exhibit 15(C) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(20) | Incorporated by reference to exhibit 15(D) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(21) | Incorporated by reference to exhibit 15(E) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(22) | Incorporated by reference to exhibit 15(F) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(23) | Incorporated by reference to exhibit 15(G) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(24) | Incorporated by reference to exhibit 15(H) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(25) | Incorporated by reference to exhibit 15(I) of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(26) | Incorporated by reference to exhibit 1 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(27) | Incorporated by reference to exhibit 2 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(28) | Incorporated by reference to exhibit 3 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(29) | Incorporated by reference to exhibit 4 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(30) | Incorporated by reference to exhibit 5 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(31) | Incorporated by reference to exhibit 6 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(32) | Incorporated by reference to exhibit 7 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
67
(33) | Incorporated by reference to exhibit 8 of the Companys Statement on Schedule 13D relating to Toymax International, Inc. filed March 20, 2002. |
(34) | Incorporated by reference to exhibit 9 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(35) | Incorporated by reference to exhibit 10 of the Companys Statement on Schedule 13D relating to Toymax International, Inc, filed March 20, 2002. |
(36) | Filed previously as an exhibit to the Companys Annual Report on Form 10-K for its fiscal year ended December 31, 2002, filed March 31, 2003, incorporated herein by reference. |
(*) | Filed herewith. |
(b) | Reports on Form 8-K |
We filed Current Reports on Form 8-K on October 21, 2003 relating to our announcement of earnings for the third quarter of 2003 and on October 31, 2003 relating to our announcement that our Chief Executive Officer and Chief Financial Officer would be speaking at an investor conference. |
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 15, 2004
JAKKS PACIFIC, INC. |
By: | /s/ JACK FRIEDMAN |
|
|
Jack Friedman | |
Chairman and | |
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||||
|
|
|
||||
/s/ JACK FRIEDMAN
Jack Friedman |
Chairman of the Board
of Directors and Chief Executive Officer (Principal Executive Officer) |
March 15, 2004 | ||||
/s/ JOEL M. BENNETT
Joel M. Bennett |
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
March 15, 2004 | ||||
/s/ STEPHEN G. BERMAN
Stephen G. Berman |
Director | March 15, 2004 | ||||
/s/ DAVID C. BLATTE
David C. Blatte |
Director | March 15, 2004 | ||||
/s/ ROBERT E. GLICK
Robert E. Glick |
Director | March 15, 2004 | ||||
/s/ MICHAEL G. MILLER
Michael G. Miller |
Director | March 15, 2004 | ||||
/s/ MURRAY L. SKALA
Murray L. Skala |
Director | March 15, 2004 |
69
EXHIBIT INDEX
70
71
72
Exhibit
Number
Description
Amended and Restated Certificate of Incorporation
of the Company (1)
By-Laws of the Company (2)
Amendment to By-Laws of the Company (3)
Third Amended and Restated 1995 Stock Option Plan
(4)
1999 Amendment to Third Amended and Restated 1995
Stock Option Plan (5)
2000 Amendment to Third Amended and Restated 1995
Stock Option Plan (6)
2001 Amendment to Third Amended and Restated 1995
Stock Option Plan (7)
2002 Stock Award and Incentive Plan (8)
Amended and Restated Employment Agreement between
the Company and Jack Friedman, dated as of March 26, 2003
(36)
Amended and Restated Employment Agreement between
the Company and Stephen G. Berman dated as of March 26,
2003 (36)
Amended and Restated Employment Agreement between
the Company and Michael Bianco dated as of March 26, 2003
(36)
Amended and Restated Employment Agreement between
the Company and Joel M. Bennet, dated March 26, 2003 (36)
License Agreement with Titan Sports, Inc. dated
October 24, 1995 (2)
Amendment to License Agreement with Titan Sports,
Inc. dated April 22, 1996 (9)
Amendment to License Agreement with Titan Sports,
Inc. dated January 21, 1997 (9)
Amendment to License Agreement with Titan Sports,
Inc. dated December 3, 1997 (10)
Amendment to License Agreement with Titan Sports,
Inc. dated January 29, 1998 (10)
Amendment to License Agreement with Titan Sports,
Inc. dated June 24, 1998 (11)
Amendment to License Agreement with Titan Sports,
Inc. dated February 11, 1999 (11)
International License Agreement with Titan
Sports, Inc. dated February 10, 1997 (9)
Amendment to International License Agreement with
Titan Sports, Inc. dated December 3, 1997 (10)
Amendment to International License Agreement with
Titan Sports, Inc. dated January 29, 1998 (10)
Office Lease dated November 18, 1999 between
the Company and Winco Maliview Partners (12)
Term Note dated April 13, 2000 in the
principal amount of $1,500,000 made by Jack Friedman payable to
the order of the Company (13)
Installment Note dated April 26, 2000 in the
principal amount of $1,500,000 made by Stephen Berman and Ana
Berman payable to the order of the Company (14)
Deed of Trust dated April 26, 2000 made by
Stephen Berman and Ana Berman in favor of First American Title
Insurance Company, as Trustee (15)
Lease dated as of November 21, 2000 between
Grand Avenue Venture, LLC and JP Ferrero Parkway, Inc. (16)
Loan Agreement dated as of October 12, 2001
among JAKKS, certain other Borrowers, the Lenders named therein
and Bank of America, N.A., as Administrative Agent (17)
First Amendment to Loan Agreement and Consent and
Waiver dated as of March 8, 2002 (18)
Security Agreement (Borrowers) dated as of
October 12, 2001 among JAKKS, certain other Grantors, Bank
of America, as Administrative Agent, and the Lenders referred to
therein (19)
Table of Contents
Exhibit
Number
Description
Trademark Security Agreement dated as of
October 12, 2001 among JAKKS, certain other Grantors, Bank
of America, as Administrative Agent, and the Lenders referred to
therein (20)
Patent Security Agreement dated as of
October 12, 2001 among JAKKS, certain other Grantors, Bank
of America, as Administrative Agent, and the Lenders referred to
therein (21)
Pledge Agreement dated as of October 12,
2001 among JAKKS, certain other Grantors, Bank of America, as
Administrative Agent, and the Lenders referred to
therein (22)
Lock Box Agreement dated as of October 12,
2001 among JAKKS, certain other Customers, Bank of America, as
Administrative Agent, and the Lenders referred to
therein (23)
Guaranty dated as of October 12, 2001 among
the Domestic Subsidiaries named therein, Bank of America, as
Administrative Agent, and the Lenders referred to
therein (24)
Security Agreement dated as of October 12,
2001 among the Grantors named therein, Bank of America, N.A., as
Administrative Agent, and the Lenders referred to
therein (25)
Stock Purchase Agreement dated as of
February 10, 2002 among JAKKS, Toymax and the Shareholders
named therein (26)
Agreement of Merger dated as of February 10,
2002 among JAKKS, JP/TII Acquisition Corp. and Toymax (27)
Letter Agreement dated March 11, 2002 among
Toymax, JAKKS and the selling stockholders named
therein (28)
Termination and Replacement of Manufacturing
Agreement dated March 11, 2002 among Toymax, Toymax (H.K.)
Limited, Jauntiway Investments Limited, et al. (29)
Termination of Agency Agreements and Stock
Options dated March 11, 2002 among Tai Nam Industrial
Company Limited, David Ki Kwan Chu, Frances Shuk Kuen Leung,
Toymax, et al. (30)
Registration Rights Agreement dated as of
March 11, 2002 among JAKKS, Best Phase Limited, Hargo
(Barbados) Limited, Harvey Goldberg and Steven A.
Lebensfeld (31)
Termination of Employment Agreement dated
March 11, 2002 among Steven Lebensfeld, Toymax and
JAKKS (32)
Employment Agreement dated as of March 11,
2002 between JAKKS and Steven Lebensfeld (33)
Termination of Employment Agreement dated
March 11, 2002 among Harvey Goldberg, 1515037 Ontario Ltd.,
Toymax and JAKKS (34)
Consulting Agreement dated as of March 11,
2002 among JAKKS, 1515037 Ontario Ltd. and Harvey
Goldberg (35)
Form of Restricted Stock Agreement (36)
Code of Ethics (*)
Subsidiaries of the Company (*)
Rule 13a-14(a)/15d-14(a) Certification of
Jack Friedman (*)
Rule 13a-14(a)/15d-14(a) Certification of
Joel Bennett (*)
Section 1350 Certification of Jack Friedman
(*)
Section 1350 Certification of Joel Bennett
(*)
(1)
Incorporated by reference to Appendix 2 of the
Companys Schedule 14A Proxy Statement filed
August 23, 2002.
(2)
Filed previously as an exhibit to the Companys
Registration Statement on Form SB-2 (Reg.
No. 333-2048-LA), effective May 1, 1996, and
incorporated herein by reference.
(3)
Filed previously as an exhibit to the Companys
Registration Statement on Form SB-2 (Reg.
No. 333-22583), effective May 1, 1997, and
incorporated herein by reference.
Table of Contents
(4)
Filed previously as Appendix A to the Companys
definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders, filed June 23, 1998, and incorporated herein
by reference.
(5)
Filed previously as an exhibit to the Companys
Registration Statement on Form S-8 (Reg. No. 333-90055), filed
November 1, 1999, and incorporated herein by reference.
(6)
Filed previously as exhibit 4.1 to the Companys
Registration Statement on Form S-8 (Reg.
No. 333-40392), filed June 29, 2000, and incorporated
herein by reference.
(7)
Incorporated by reference to Appendix B to the Companys
Schedule 14A Proxy Statement, filed June 11, 2001.
(8)
Filed previously as exhibit 4.1 to the Companys
Registration Statement on Form S-8 (Reg.
No. 333-101665), filed December 5, 2002, and
incorporated herein by reference.
(9)
Filed previously as an exhibit to the Companys Annual
Report on Form 10-KSB for its fiscal year ended
December 31, 1996, and incorporated herein by reference.
(10)
Filed previously as an exhibit to the Companys Annual
Report on Form 10-KSB for its fiscal year ended
December 31, 1997, and incorporated herein by reference.
(11)
Filed previously as an exhibit to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999,
filed April 22, 1999, and incorporated herein by reference.
(12)
Filed previously as an exhibit to the Companys Annual
Report on Form 10-K for its fiscal year ended
December 31, 1999, filed March 30, 2000, and
incorporated herein by reference.
(13)
Incorporated by reference to exhibit 10.1 of the Companys
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, filed August 14, 2000.
(14)
Incorporated by reference to exhibit 10.2 of the Companys
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, filed August 14, 2000.
(15)
Incorporated by reference to exhibit 10.3 of the Companys
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, filed August 14, 2000.
(16)
Incorporated by reference to exhibit 10.58 of the
Companys Annual Report on Form 10-K for its fiscal
year ended December 31, 2000, filed April 2, 2001.
(17)
Incorporated by reference to exhibit 15(A) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(18)
Incorporated by reference to exhibit 15(B) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(19)
Incorporated by reference to exhibit 15(C) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(20)
Incorporated by reference to exhibit 15(D) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(21)
Incorporated by reference to exhibit 15(E) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(22)
Incorporated by reference to exhibit 15(F) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(23)
Incorporated by reference to exhibit 15(G) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(24)
Incorporated by reference to exhibit 15(H) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
Table of Contents
(25)
Incorporated by reference to exhibit 15(I) of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(26)
Incorporated by reference to exhibit 1 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(27)
Incorporated by reference to exhibit 2 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(28)
Incorporated by reference to exhibit 3 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(29)
Incorporated by reference to exhibit 4 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(30)
Incorporated by reference to exhibit 5 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(31)
Incorporated by reference to exhibit 6 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(32)
Incorporated by reference to exhibit 7 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(33)
Incorporated by reference to exhibit 8 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc. filed March 20, 2002.
(34)
Incorporated by reference to exhibit 9 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(35)
Incorporated by reference to exhibit 10 of the
Companys Statement on Schedule 13D relating to Toymax
International, Inc, filed March 20, 2002.
(36)
Filed previously as an exhibit to the Companys Annual
Report on Form 10-K for its fiscal year ended
December 31, 2002, filed March 31, 2003, and
incorporated herein by reference.
(*)
Filed herewith.
73
EXHIBIT 14
This Code of Ethics (the Code) has been adopted by the Board of Directors (the Board) of JAKKS Pacific, Inc. (the Company) in accordance with the requirements of Rule 406 of Regulation S-K promulgated under the Securities Act of 1933, as amended, and the governance rules of the Nasdaq Stock Market, and summarizes the standards applicable to the Companys employees, including its executive officers, and the members of the Board (the Subject Parties).
As a public company, it is of critical importance that filings with the Securities and Exchange Commission and others be accurate and timely. The Subject Parties bear a special responsibility for promoting integrity throughout the Company, with responsibilities to stakeholders both inside and outside of the Company. The Subject Parties have a special role both to adhere to these principles themselves, and also to ensure that a culture exists throughout the Company as a whole that ensures the fair, timely and accurate reporting of the Companys financial results and condition.
Because of this special role, the Subject Parties are bound by this Code to:
| act with honesty and integrity, practice and promote ethical conduct, and disclose to the Companys General Counsel, the Board or any committee established by the Company for the purpose of receiving such disclosures (the Committee), any material transaction or relationship that reasonably could be expected to give rise to actual or apparent conflicts of interest between any Subject Partys personal and professional relationships; | |
| provide information in the Subject Partys possession that is complete, objective, relevant, and otherwise necessary to ensure the Company provides full, fair, accurate, timely and understandable disclosure in the reports and documents that the Company files with, or submits, to, the Securities and Exchange Commission or others, and in other public communications made by the Company; | |
| comply with applicable laws, rules, standards, best practices and regulations of federal, state, provincial and local governments, and other appropriate private and public regulatory, listing and standard-setting agencies; and | |
| avoid any breach of fiduciary duty, any self-interested transactions with the Company without full disclosure to the Board or Committee, and promptly report to the Companys General Counsel, the Board or the Committee any conduct that he or she believes is or may be in violation of law, regulations, business ethics or of any provision of this Code, including any transaction or relationship that reasonably could be expected to give rise to such a violation. |
Any waiver of or amendment to this Code may only be made by the Board and will be promptly disclosed in accordance with applicable laws, rules and regulations. Requests for waivers of any provision of this Code must be made in writing to the Board.
If a Subject Party is faced with a difficult ethical decision or has doubts as to the appropriate course of action in a particular situation, he or she should consult with the Companys General Counsel, the Board or the Committee. Each Subject Party will be held accountable for adherence to this Code. Violations of this Code, including failures to report actual or potential violations by others, will be viewed by the Company as a severe disciplinary matter that may result in a personnel action, up to and including termination of employment. If a Subject Party believes that a violation of this Code has occurred, he or she is required to promptly inform the Board or the Committee.
74
EXHIBIT 21
JAKKS SUBSIDIARIES
Subsidiary
Jurisdiction
Hong Kong
Hong Kong
United Kingdom
Hong Kong
New York
Delaware
Delaware
Hong Kong
Delaware
Delaware
Delaware
Delaware
California
Michigan
Hong Kong
California
Delaware
United Kingdom
Delaware
Delaware
Delaware
Delaware
New York
Hong Kong
Delaware
Hong Kong
Delaware
Hong Kong
Nevada
75
EXHIBIT 31.1
CERTIFICATIONS
I, Jack Friedman, certify that:
76
Date: March 15, 2004
A signed original of this written statement required by
Section 906 has been provided to the registrant and will be
retained by the registrant and furnished to the Securities and
Exchange Commission or its Staff upon request.
1. I have reviewed this annual
report on Form 10-K of JAKKS Pacific, Inc.;
2. Based on my knowledge, this
annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the
period covered by this annual report;
3. Based on my knowledge, the
financial statements, and other financial information included
in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this
annual report;
4. The registrants other
certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial statements for external
purposes in accordance with generally accepted accounting
principles.
c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants fourth fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial
reporting; and
5. The registrants other
certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of the
registrants board of directors:
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
By: /s/ JACK FRIEDMAN
_______________________________________
Jack Friedman
Chairman and Chief Executive Officer
77
EXHIBIT 31.2
CERTIFICATIONS
I, Joel M. Bennett, certify that:
78
Date: March 15, 2004
A signed original of this written statement required by
Section 906 has been provided to the registrant and will be
retained by the registrant and furnished to the Securities and
Exchange Commission or its Staff upon request.
1. I have reviewed this annual
report on Form 10-K of JAKKS Pacific, Inc.;
2. Based on my knowledge, this
annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the
period covered by this annual report;
3. Based on my knowledge, the
financial statements, and other financial information included
in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this
annual report;
4. The registrants other
certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial statements for external
purposes in accordance with generally accepted accounting
principles.
c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants fourth fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial
reporting; and
5. The registrants other
certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of the
registrants board of directors:
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
By: /s/ JOEL M. BENNETT
_______________________________________
Joel M. Bennett
Chief Financial Officer
79
EXHIBIT 32.1
Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of JAKKS Pacific, Inc. (Registrant), hereby certifies that the Registrants Annual Report on Form 10-K for the year ended December 31, 2003 (the Report) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 15, 2004
/s/ JACK FRIEDMAN | |
|
|
JACK FRIEDMAN | |
Chairman and Chief Executive Officer |
80
EXHIBIT 32.2
Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of JAKKS Pacific, Inc. (Registrant), hereby certifies that the Registrants Annual Report on Form 10-K for the year ended December 31, 2003 (the Report) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 15, 2004
/s/ JOEL BENNETT | |
|
|
JOEL BENNETT | |
Executive Vice President and | |
Chief Financial Officer |
81