JAKKS PACIFIC INC - Quarter Report: 2009 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended June 30, 2009
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ______ to ______
Commission
file number: 0-28104
JAKKS Pacific,
Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
95-4527222
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification No.)
|
22619 Pacific Coast Highway
Malibu, California
|
90265
|
|
(Address of Principal Executive Offices)
|
(Zip Code)
|
Registrant’s
telephone number, including area code: (310) 456-7799
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 that 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 ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
|
Accelerated filer
o
|
Non-accelerated filer
¨
(Do not check if a smaller
reporting company)
|
Smaller reporting company
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
The
number of shares outstanding of the issuer’s common stock is 27,928,231 (as of
August 13, 2009).
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
Quarter
Ended June 30, 2009
ITEMS
IN FORM 10-Q
Page
|
|||
Part I
|
FINANCIAL
INFORMATION
|
|
|
Item 1.
|
Financial
Statements
|
||
Condensed
Consolidated Balance Sheets - December 31, 2008 and June 30, 2009
(unaudited)
|
2
|
||
Condensed
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2008 and 2009 (unaudited)
|
3
|
||
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2008 and 2009 (unaudited)
|
4
|
||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
5
|
||
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
|
Item 4.
|
Controls
and Procedures
|
30
|
|
Part II
|
OTHER
INFORMATION
|
||
Item 1.
|
Legal
Proceedings
|
31
|
|
Item 1A.
|
Risk
Factors
|
34
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
None
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
None
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None
|
|
Item 5.
|
Other
Information
|
None
|
|
Item 6.
|
Exhibits
|
41
|
|
Signatures
|
42
|
||
Exhibit 31.1
|
|||
Exhibit 31.2
|
|||
Exhibit 31.3
|
|||
Exhibit 32.1
|
|||
Exhibit 32.2
|
|||
Exhibit 32.3
|
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”, “expect” or words of similar import, we are making
forward-looking statements. We believe that the assumptions and expectations
reflected in such forward-looking statements are reasonable and are 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 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
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
December 31,
2008
|
June 30,
2009
|
|||||||
(*)
|
(Unaudited)
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$
|
169,520
|
$
|
122,406
|
||||
Marketable
securities
|
195
|
199
|
||||||
Accounts
receivable, net of allowances for uncollectible accounts of $2,005 and
$1,577, respectively
|
147,587
|
115,777
|
||||||
Inventory
|
87,944
|
76,563
|
||||||
Prepaid
expenses and other current assets
|
29,670
|
28,629
|
||||||
Income
tax receivable
|
22,288
|
41,120
|
||||||
Deferred
income taxes
|
17,993
|
82,443
|
||||||
Total
current assets
|
475,197
|
467,137
|
||||||
Property
and equipment
|
||||||||
Office
furniture and equipment
|
12,390
|
12,883
|
||||||
Molds
and tooling
|
63,075
|
62,189
|
||||||
Leasehold
improvements
|
5,947
|
6,185
|
||||||
Total
|
81,412
|
81,257
|
||||||
Less
accumulated depreciation and amortization
|
52,914
|
51,280
|
||||||
Property
and equipment, net
|
28,498
|
29,977
|
||||||
Investment
in video game joint venture
|
53,184
|
34,683
|
||||||
Goodwill,
net
|
427,693
|
—
|
||||||
Trademarks,
net
|
10,491
|
2,308
|
||||||
Intangibles
and other, net
|
33,061
|
49,607
|
||||||
Total
assets
|
$
|
1,028,124
|
$
|
583,712
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$
|
57,432
|
$
|
66,490
|
||||
Accrued
expenses
|
61,780
|
42,489
|
||||||
Reserve
for sales returns and allowances
|
23,317
|
15,793
|
||||||
Capital
lease obligation
|
417
|
340
|
||||||
Income
taxes payable
|
7,190
|
—
|
||||||
Convertible
senior notes
|
—
|
98,000
|
||||||
Total
current liabilities
|
150,136
|
223,112
|
||||||
Deferred
income taxes
|
26,237
|
17,140
|
||||||
Income
tax payable
|
4,686
|
4,686
|
||||||
Other
liabilities
|
2,112
|
6,592
|
||||||
Convertible
senior notes
|
98,000
|
—
|
||||||
Total
liabilities
|
281,171
|
251,530
|
||||||
Stockholders’
equity
|
||||||||
Preferred
stock, $.001 par value; 5,000,000 shares authorized; nil
outstanding
|
—
|
—
|
||||||
Common
stock, $.001 par value; 100,000,000 shares authorized; 27,521,278 and
27,928,231 shares issued and outstanding, respectively
|
28
|
28
|
||||||
Additional
paid-in capital
|
292,809
|
295,399
|
||||||
Retained
earnings
|
458,345
|
40,984
|
||||||
Accumulated
comprehensive loss
|
(4,229
|
)
|
(4,229
|
)
|
||||
Total
stockholders’ equity
|
746,953
|
332,182
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
1,028,124
|
$
|
583,712
|
(*)
|
Derived from audited financial
statements
|
See notes
to condensed consolidated financial statements.
2
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
Three Months Ended
June 30,
(Unaudited)
|
Six Months Ended
June 30,
(Unaudited)
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
As Adjusted
(Note 13)
|
|
As Adjusted
(Note 13)
|
|
|||||||||||||
Net
sales
|
$ | 145,291 | $ | 144,809 | $ | 276,226 | $ | 253,494 | ||||||||
Cost
of sales
|
92,366 | 150,885 | 174,804 | 222,589 | ||||||||||||
Gross
profit (loss)
|
52,925 | (6,076 | ) | 101,422 | 30,905 | |||||||||||
Selling,
general and administrative expenses
|
46,490 | 53,756 | 94,825 | 108,310 | ||||||||||||
Write-down
of intangible assets
|
— | 8,221 | — | 8,221 | ||||||||||||
Write-down
of goodwill
|
— | 407,125 | — | 407,125 | ||||||||||||
Income
(loss) from operations
|
6,435 | (475,178 | ) | 6,597 | (492,751 | ) | ||||||||||
Profit
(loss) from video game joint venture
|
1,295 | (22,901 | ) | 3,727 | (20,005 | ) | ||||||||||
Interest
Income
|
773 | 69 | 2,093 | 248 | ||||||||||||
Interest
Expense, net of benefit
|
(1,642 | ) | (1,266 | ) | (3,200 | ) | (2,533 | ) | ||||||||
Income
(loss) before provision (benefit) for income taxes
|
6,861 | (499,276 | ) | 9,217 | (515,041 | ) | ||||||||||
Provision
(benefit) for income taxes
|
2,091 | (92,714 | ) | 2,857 | (97,680 | ) | ||||||||||
Net
income (loss)
|
$ | 4,770 | $ | (406,562 | ) | $ | 6,360 | $ | (417,361 | ) | ||||||
Earnings
(loss) per share – basic
|
$ | 0.17 | $ | (14.96 | ) | $ | 0.23 | $ | (15.35 | ) | ||||||
Earnings
(loss) per share – diluted
|
$ | 0.17 | $ | (14.96 | ) | $ | 0.23 | $ | (15.35 | ) |
See notes
to condensed consolidated financial statements.
3
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
Six
Months Ended
June
30,
(Unaudited)
|
||||||||
2008
|
2009
|
|||||||
|
As
Adjusted
(Note
13)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$
|
6,360
|
$
|
(417,361
|
)
|
|||
Adjustments
to reconcile net income (loss) to net cash used by operating
activities:
|
||||||||
Depreciation
and amortization
|
10,283
|
11,417
|
||||||
Share-based
compensation expense
|
4,011
|
3,979
|
||||||
(Profit)
loss from video game joint venture
|
(3,973
|
)
|
18,332
|
|||||
Loss
on disposal of property and equipment
|
43
|
2,341
|
||||||
Deferred
income taxes
|
(90
|
)
|
(73,547
|
)
|
||||
Write-down
of intangible assets
|
—
|
8,221
|
||||||
Write-down
of goodwill
|
—
|
407,125
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
72,005
|
31,810
|
||||||
Inventory
|
(8,115
|
)
|
8,742
|
|||||
Prepaid
expenses and other current assets
|
(14,479
|
)
|
1,342
|
|||||
Income
tax receivable
|
(8,919
|
)
|
(18,832
|
)
|
||||
Accounts
payable
|
866
|
9,058
|
||||||
Accrued
expenses
|
(28,630
|
)
|
(6,942
|
)
|
||||
Income
taxes payable
|
(21,997
|
)
|
(7,190
|
)
|
||||
Reserve
for sales returns and allowances
|
(14,396
|
)
|
(7,524
|
)
|
||||
Other
liabilities
|
781
|
4,481
|
||||||
Total
adjustments
|
(12,610
|
)
|
392,813
|
|||||
Net
cash used by operating activities
|
(6,250
|
)
|
(24,548
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property and equipment
|
(12,776
|
)
|
(10,912
|
)
|
||||
Change
in other assets
|
125
|
2,068
|
||||||
Cash
paid for net assets of business acquired
|
(14,993
|
)
|
(12,253
|
)
|
||||
Net
purchase of marketable securities
|
(2
|
)
|
(4
|
)
|
||||
Net
cash used by investing activities
|
(27,646
|
)
|
(21,101
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Net
proceeds from stock options exercised
|
2,831
|
—
|
||||||
Common
stock surrendered
|
(2,968
|
)
|
(1,389
|
)
|
||||
Common
stock repurchased
|
(30,002
|
)
|
—
|
|||||
Repayment
of capital lease obligation
|
—
|
(76
|
)
|
|||||
Net
cash used in financing activities
|
(30,139
|
)
|
(1,465
|
)
|
||||
Net
decrease in cash and cash equivalents
|
(64,035
|
)
|
(47,114
|
)
|
||||
Cash
and cash equivalents, beginning of period
|
241,250
|
169,520
|
||||||
Cash
and cash equivalents, end of period
|
$
|
177,215
|
$
|
122,406
|
||||
Cash
paid during the period for:
|
||||||||
Income
taxes
|
$
|
36,877
|
$
|
2,224
|
||||
Interest
|
$
|
2,341
|
$
|
2,281
|
Non cash
investing and financing activity:
In
January and March 2008, two executive officers surrendered an aggregate of
122,202 shares of restricted stock at a value of $3.0 million to cover their
income taxes due on the 2008 vesting of restricted shares granted to them in
2006, 2007 and 2008. This restricted stock was subsequently retired by the
Company.
In
January 2009, two executive officers surrendered an aggregate of 74,836 shares
of restricted stock at a value of $1.4 million to cover their income taxes due
on the 2009 vesting of restricted shares granted to them in 2007 and 2008. This
restricted stock was subsequently retired by the Company.
See Notes
8 and 9 for additional supplemental information to the condensed consolidated
statements of cash flows.
See notes
to condensed consolidated financial statements.
4
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June
30, 2009
Note
1 — Basis of Presentation
The
accompanying unaudited interim condensed consolidated financial statements
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures are
adequate to prevent the information presented from being misleading. These
financial statements should be read in conjunction with Management’s Discussion
and Analysis of financial condition and results of operations and the financial
statements and the notes thereto included in the Company’s Form 10-K, which
contains audited financial information for the three years in the period ended
December 31, 2008.
The
information provided in this report reflects all adjustments (consisting solely
of normal recurring items) that are, in the opinion of management, necessary to
present fairly the financial position and the results of operations for the
periods presented. Interim results are not necessarily indicative of results to
be expected for a full year.
Certain
reclassifications have been made to prior year balances in order to conform to
the current year presentation.
The
condensed consolidated financial statements include the accounts of JAKKS
Pacific, Inc. and its wholly-owned subsidiaries (collectively “the
Company”).
Note
2 — Business Segments, Geographic Data, Sales by Product Group, and Major
Customers
The
Company is a worldwide producer and marketer of children’s toys and other
consumer products, principally engaged in the design, development, production,
marketing and distribution of its diverse portfolio. The Company’s reportable
segments are Traditional Toys, Craft/Activity/Writing Products, and Pet
Products, each of which includes worldwide sales.
The
Traditional Toys segment includes action figures, vehicles, playsets, plush
products, dolls, accessories, pretend play products including Halloween costumes
and accessories, dress-up costumes and accessories, electronic products, novelty
toys, collectibles, construction toys, compounds, infant and pre-school toys,
water toys, kites, and related products.
Craft/Activity/Writing
Products include do-it-yourself kits, pens, pencils, stationery products,
crayons, markers, paints, and other related craft and activity
products.
Pet
Products include pet toys, treats, apparel and related pet
products.
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
various segments based on sales volumes. Segment assets are comprised of
accounts receivable and inventories, net of applicable reserves and allowances,
goodwill and other assets.
5
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
2 — Business Segments, Geographic Data, Sales by Product Group, and Major
Customers - (continued)
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 as of December 31, 2008 and June 30, 2009 and for the three and
six months ended June 30, 2008 and 2009 are as follows (in
thousands):
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Net
Sales
|
|
|||||||||||||||
Traditional
Toys
|
$ | 131,127 | $ | 126,458 | $ | 250,645 | $ | 224,050 | ||||||||
Craft/Activity/Writing
Products
|
10,570 | 14,818 | 16,658 | 22,378 | ||||||||||||
Pet
Products
|
3,594 | 3,533 | 8,923 | 7,066 | ||||||||||||
$ | 145,291 | $ | 144,809 | $ | 276,226 | $ | 253,494 |
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2008
As Adjusted
(Note 13)
|
2009
|
2008
As Adjusted (Note 13) |
2009
|
|||||||||||||
Operating
Income (Loss)
|
||||||||||||||||
Traditional
Toys
|
$ | 5,892 | (373,944 | ) | $ | 6,133 | $ | (389,724 | ) | |||||||
Craft/Activity/Writing
Products
|
405 | (89,790 | ) | 363 | (91,012 | ) | ||||||||||
Pet
Products
|
138 | (11,444 | ) | 101 | (12,015 | ) | ||||||||||
$ | 6,435 | (475,178 | ) | $ | 6,597 | $ | (492,751 | ) |
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2008
As Adjusted (Note 13) |
2009
|
2008 As
Adjusted (Note 13) |
2009
|
|||||||||||||
Depreciation
and Amortization Expense
|
||||||||||||||||
Traditional
Toys
|
$ | 5,163 | $ | 5,886 | $ | 9,655 | 10,444 | |||||||||
Craft/Activity/Writing
Products
|
276 | 573 | 493 | 751 | ||||||||||||
Pet
Products
|
43 | 130 | 135 | 222 | ||||||||||||
$ | 5,482 | $ | 6,589 | $ | 10,283 | $ | 11,417 |
December 31,
|
June 30,
|
|||||||
2008
|
2009
|
|||||||
Assets
|
||||||||
Traditional
Toys
|
$ | 877,606 | $ | 531,845 | ||||
Craft/Activity/Writing
Products
|
128,036 | 42,736 | ||||||
Pet
Products
|
22,482 | 9,131 | ||||||
$ | 1,028,124 | $ | 583,712 |
6
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
2 — Business Segments, Geographic Data, Sales by Product Group, and Major
Customers - (continued)
The
following tables present information about the Company by geographic area as of
December 31, 2008 and June 30, 2009 and for the three and six months ended June
30, 2008 and 2009 (in thousands):
December 31,
2008
|
June 30,
2009
|
|||||||
Long-lived
Assets
|
||||||||
United
States
|
$ | 26,179 | $ | 27,722 | ||||
Hong
Kong
|
2,319 | 2,255 | ||||||
$ | 28,498 | $ | 29,977 |
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Net
Sales by Geographic Area
|
||||||||||||||||
United
States
|
$ | 112,783 | $ | 120,807 | $ | 220,252 | 210,879 | |||||||||
Europe
|
9,713 | 6,152 | 16,442 | 12,288 | ||||||||||||
Canada
|
4,377 | 5,563 | 9,288 | 9,968 | ||||||||||||
Hong
Kong
|
10,593 | 6,292 | 16,600 | 9,539 | ||||||||||||
Other
|
7,825 | 5,995 | 13,644 | 10,820 | ||||||||||||
$ | 145,291 | $ | 144,809 | $ | 276,226 | $ | 253,494 |
Major
Customers
Net sales
to major customers for the three and six months ended June 30, 2008 and 2009
were as follows (in thousands, except for percentages):
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||||||||||||||||||
Amount
|
Percentage of
Net Sales |
Amount
|
Percentage of
Net Sales |
Amount
|
Percentage of
Net Sales |
Amount
|
Percentage of
Net Sales |
|||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Wal-Mart
|
$ | 34,697 | 23.9 | % | $ | 23,008 | 15.9 | % | $ | 80,936 | 29.3 | % | $ | 58,553 | 23.1 | % | ||||||||||||||||
Toys
‘R’ Us
|
9,942 | 6.8 | 14,698 | 10.1 | 22,321 | 8.1 | 25,834 | 10.2 | ||||||||||||||||||||||||
Target
|
28,889 | 19.9 | 34,235 | 23.6 | 45,617 | 16.5 | 49,982 | 19.7 | ||||||||||||||||||||||||
$ | 73,528 | 50.6 | % | $ | 71,941 | 49.6 | % | $ | 148,874 | 53.9 | % | $ | 134,319 | 53.0 | % |
No other
customer accounted for more than 10% of the Company’s total net
sales.
At
December 31, 2008 and June 30, 2009, the Company’s three largest customers
accounted for approximately 74.0% and 50.1%, respectively, of net accounts
receivable. The concentration of the Company’s business with a relatively small
number of customers may expose the Company to material adverse effects if one or
more of its large customers were to experience financial difficulty. The Company
performs ongoing credit evaluations of its top customers and maintains an
allowance for potential credit losses.
7
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3 — Inventory
Inventory,
which includes the ex-factory cost of goods, in-bound freight, duty and
warehouse costs, is stated at the lower of cost (first-in, first-out) or market
and consists of the following (in thousands):
December 31,
2008
|
June 30,
2009
|
|||||||
Raw
materials
|
$ | 3,778 | $ | 4,001 | ||||
Finished
goods
|
84,166 | 72,562 | ||||||
$ | 87,944 | $ | 76,563 |
Note
4 — Revenue Recognition and Reserve for Sales Returns and
Allowances
Revenue
is recognized upon the shipment of goods to customers or their agents, depending
on terms, provided that there are no uncertainties regarding customer
acceptance, the sales price is fixed or determinable, and collectability is
reasonably assured and not contingent upon resale.
Generally,
the Company does not allow for product returns. It provides a negotiated
allowance for breakage or defects to its customers, which is recorded when the
related revenue is recognized. However, the Company does make occasional
exceptions to this policy and consequently accrues a return allowance in gross
sales based on historic return amounts and management estimates. The Company
also will occasionally grant credits to facilitate markdowns and sales of slow
moving merchandise. These credits are recorded as a reduction of gross sales at
the time of occurrence.
The
Company also participates in cooperative advertising arrangements with some
customers, whereby it allows a discount from invoiced product amounts in
exchange for customer purchased advertising that features the Company’s
products. Typically, these discounts range from 1% to 6% of gross sales, and are
generally based on product purchases or on specific advertising campaigns. Such
amounts are accrued when the related revenue is recognized or when the
advertising campaign is initiated. These cooperative advertising arrangements
are accounted for as direct selling expenses.
The
Company’s reserve for sales returns and allowances amounted to $23.3 million as
of December 31, 2008, compared to $15.8 million as of June 30, 2009. This
decrease was due primarily to certain customers taking their year-end allowances
related to 2008 and current year allowances during 2009.
Note
5 — Convertible Senior Notes
In June
2003, the Company sold an aggregate of $98.0 million of 4.625% Convertible
Senior Notes due June 15, 2023 and received net proceeds of approximately
$94.4 million. The notes are convertible into shares of the Company’s common
stock at an initial conversion price of $20.00 per share, or 50 shares per note,
subject to certain circumstances. The notes may be converted in each quarter
subsequent to any quarter in which the closing price of the Company’s common
stock is at or above a prescribed price for at least 20 trading days in the last
30 trading day period of the quarter. The prescribed price for the conversion
trigger is $24.00 through June 30, 2010, and increases nominally each quarter
thereafter. Cash interest is payable 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. After June 15, 2010, interest will accrue
on the outstanding notes until maturity. At maturity, 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, unless redeemed or converted
earlier. The notes were not convertible as of June 30, 2009 and are not
convertible during the third quarter of 2009.
8
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
5 — Convertible Senior Notes (continued)
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, 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, if any. Accordingly, the notes have been
reclassified as a short-term liability as of June, 30, 2009. Holders
of the notes may also require the Company 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, if any, and
may be paid in cash, in shares of common stock or a combination of cash and
shares of common stock.
Note 6 — Income
Taxes
The
Company’s income tax benefit, which includes federal, state and foreign income
taxes, discrete items of goodwill and trademark impairment, and the THQ/Jakks
joint venture settlement, was $97.7 million, or an effective tax benefit rate of
19.0% for the six months ended June 30, 2009. During the comparable period in
2008, the income tax provision was $2.9 million, or an effective tax provision
rate of 31.0%. The impairment of goodwill and trademarks, totaling
$64.5 million, and the THQ/Jakks joint venture settlement of $9.1 million, were
reductions to the tax benefit rate realized. Exclusive of
the discrete items, the second quarter 2009 effective tax benefit rate would be
31.8%, There were no discrete items in the second quarter of
2008.
As of
June 30, 2009, the Company had net deferred tax assets of approximately $65.3
million for which an allowance of $0.9 million has been provided since, in the
opinion of management, realization of the future benefit is
uncertain.
Current
interest on uncertain income tax liabilities is recognized as interest expense
in the consolidated statement of operations. During the six months ended June
30, 2009, the Company recognized $0.1 million of current year interest
expense.
Note
7 — 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):
Three Months Ended June 30,
|
||||||||||||||||||||||||
2008 As Adjusted (Note 13)
|
2009
|
|||||||||||||||||||||||
Income
|
Weighted
Average
Shares
|
Per-Share
|
Income /
(Loss)
|
Weighted
Average
Shares
|
Per-Share
|
|||||||||||||||||||
Earnings (loss) per share -
basic
|
|
|||||||||||||||||||||||
Income
available to common stockholders
|
$
|
4,770
|
27,288
|
$
|
0.17
|
$
|
(406,562
|
)
|
27,175
|
$
|
(14.96
|
)
|
||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||||||||||
Convertible
senior notes
|
737
|
4,900
|
—
|
—
|
||||||||||||||||||||
Options
and warrants
|
—
|
198
|
—
|
—
|
||||||||||||||||||||
Unvested
restricted stock grants
|
—
|
208
|
—
|
—
|
||||||||||||||||||||
Earnings (loss) per share -
diluted
|
||||||||||||||||||||||||
Income
available to common stockholders plus assumed exercises and
conversion
|
$
|
5,507
|
32,594
|
$
|
0.17
|
$
|
(406,562
|
)
|
27,175
|
$
|
(14.96
|
)
|
9
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
7 — Earnings Per Share (continued)
Six Months Ended June 30,
|
||||||||||||||||||||||||
2008 As Adjusted (Note 13)
|
2009
|
|||||||||||||||||||||||
Income
|
Weighted
Average
Shares
|
Per-Share
|
Income /
(Loss)
|
Weighted
Average
Shares
|
Per-Share
|
|||||||||||||||||||
Earnings (loss) per share -
basic
|
|
|||||||||||||||||||||||
Income
available to common stockholders
|
$
|
6,360
|
27,677
|
$
|
0.23
|
$
|
(417,361
|
)
|
27,187
|
$
|
(15.35
|
)
|
||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||||||||||
Options
and warrants
|
—
|
225
|
—
|
—
|
||||||||||||||||||||
Unvested
restricted stock grants
|
—
|
175
|
—
|
—
|
||||||||||||||||||||
Earnings (loss) per share -
diluted
|
||||||||||||||||||||||||
Income
available to common stockholders plus assumed exercises and
conversion
|
$
|
6,360
|
28,077
|
$
|
0.23
|
$
|
(417,361
|
)
|
27,187
|
$
|
(15.35
|
)
|
Basic
earnings per share has been computed using the weighted average number of common
shares outstanding. Diluted earnings per share has been computed using the
weighted average number of common shares and common share equivalents
outstanding (which consist of warrants, options and convertible debt to the
extent they are dilutive). For the three months ended June 30, 2009 and the six
months ended June 30, 2008 and 2009, the convertible notes interest and related
common share equivalent of 4,900,000 were excluded from the diluted earnings per
share calculation because they were anti-dilutive. For the three and
six months ended June 30, 2009, the diluted options and warrants of 15,027 and
30,279, respectively, and unvested restricted stock grants outstanding of
209,692 and 174,331, respectively, were excluded from the diluted earnings
per share calculation because they were anti-dilutive. Potentially dilutive
stock options of nil for the three and six months ended June 30, 2008,
respectively, were excluded from the computation of diluted earning per share as
the average market price of the Company’s common stock did not exceed the
weighted average exercise price of such options and to have included them would
have been anti-dilutive.
10
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
8 — Common 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.
In
January 2009, the Company issued an aggregate of 240,000 shares of restricted
stock at an aggregate value of approximately $5.0 million to two of its
executive officers, which vest, subject to certain Company financial performance
criteria, in January 2010, an aggregate of 30,340 shares of
restricted stock to its five non-employee directors, which vest in January 2010,
at an aggregate value of approximately $0.6 million, and an aggregate of 206,500
shares of restricted stock to its employees at an aggregate value of
approximately $3.8 million, which vest over a five-year period. Additionally,
74,836 shares of restricted stock previously received by two executive officers
were surrendered at a value of $1.4 million to cover their income taxes due on
the 2009 vesting of the restricted stock granted to them in 2007 and
2008. This restricted stock was subsequently retired by the
Company. Also, in January 2009, an employee surrendered 551 shares of
restricted stock at a value of $11,367 to cover his income taxes due on the
December 31, 2008 vested shares. In February 2009, the Company issued
3,000 shares of restricted stock at a value of approximately $0.05 million to an
employee, which vest over a five-year period. In June 2009, the Company issued
2,500 shares of restricted stock at a value of approximately $0.03 million to an
employee, which vest over a five-year period.
In
January 2008, the Company issued an aggregate of 240,000 shares of restricted
stock at an aggregate value of approximately $5.7 million to two of its
executive officers, which vested 50% in each of January 2009 and 2010 and an
aggregate of 25,340 shares of restricted stock to its five non-employee
directors, which vest in January 2009, at an aggregate value of approximately
$0.6 million. In February 2008, the Company issued an aggregate of 41,134 shares
of restricted stock as 2007 bonus compensation to two of its executive officers,
which vested immediately, at an aggregate value of approximately $1.0 million.
In February 2008, the Company issued 3,593 shares of restricted stock as 2007
bonus compensation at a value of approximately $0.1 million to an executive
officer, which vests 50% on each of March 1, 2009 and 2010. During the six
months ended June 30, 2008, the Company also issued 208,871 shares of
common stock on the exercise of options at a value of $2.8 million, and 122,202
shares of restricted stock previously received by two executive officers were
surrendered at a value of $3.0 million to cover their income taxes due on the
2008 vesting of the restricted shares granted to them in 2006, 2007 and 2008.
This surrendered restricted stock was subsequently retired by the Company. The
Company granted and issued an aggregate of 20,000 shares of restricted stock to
an employee at an aggregate value of approximately $0.5 million. In
February 2008, the Company’s Board of Directors authorized it to repurchase up
to $30.0 million of its common stock. In April and May 2008, the Company
repurchased an aggregate of 1,259,300 shares of its common stock at an average
price of $23.82 per share for a total cost of $30.0 million. The repurchased
stock represented approximately 4.4% of the Company’s then outstanding shares of
common stock at the time of the repurchase and was subsequently retired by the
Company.
All
issuances of common stock, including those issued pursuant to stock option and
warrant exercises, restricted stock grants and acquisitions, are issued from the
Company’s authorized but not issued and outstanding shares.
11
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
9 — Business Combinations
The
Company acquired the following entities to further enhance its existing product
lines and to continue diversification into other toy categories and seasonal
businesses:
In
October 2008, the Company acquired substantially all of the assets of Tollytots
Limited. The total initial consideration of $25.7 million consisted
of $12.0 million in cash and the assumption of liabilities in the amount of
$13.7 million, and resulted in goodwill of $3.1 million. In addition, the
Company agreed to pay an earn-out of up to an aggregate amount of $5.0 million
in cash over the three calendar years following the acquisition based on the
achievement of certain financial performance criteria, which will be recorded as
goodwill when and if earned. Tollytots is a leading designer and
producer of licensed baby dolls and baby doll pretend play accessories based on
well-known brands, and was included in its results of operations from the date
of acquisition. Pro forma results of operations are not provided
since the amounts are not material to the consolidated results of
operations.
In
October 2008, the Company acquired all of the stock of Kids Only, Inc. and a
related Hong Kong company, Kids Only Limited (collectively, “Kids
Only”). The total initial consideration of $23.3 million consisted of
$20.4 million in cash and the assumption of liabilities in the amount of $2.9
million, and resulted in goodwill of $12.7 million. In addition, the Company
agreed to pay an earn-out of up to an aggregate amount of $5.6 million in cash
over the three calendar years following the acquisition based on the achievement
of certain financial performance criteria, which will be recorded as goodwill
when and if earned. Kids Only is a leading designer and producer of
licensed indoor and outdoor kids’ furniture, and has an extensive portfolio
which also includes baby dolls and accessories, room décor and a myriad of other
children’s toy products, and was included in its results of operations from
the date of acquisition. Pro forma results of operations are not
provided since the amounts are not material to the consolidated results of
operations.
In
December 2008, the Company acquired certain assets of Disguise, Inc. and a
related Hong Kong company, Disguise Limited (collectively,
“Disguise”). The total initial consideration of $60.6 million
consisted of $38.6 million in cash and the assumption of liabilities in the
amount of $22.0 million, and resulted in goodwill of $30.6 million. The Company
has not finalized its purchase price allocation for Disguise and has engaged a
third party to perform studies and valuations of the estimated fair value of
assets and liabilities assumed. Disguise is a leading designer and
producer of Halloween and everyday costume play and was included in our results
of operations from the date of acquisition. Pro forma results of
operations are not provided since the amounts are not material to the
consolidated results of operations.
Refer to
Note 11 for information on the write-down of goodwill.
Note
10 — Joint Venture
The
Company owns a fifty percent interest in a joint venture with THQ Inc. (“THQ”)
which 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 and a renewal period at the option of the joint
venture expiring December 31, 2014 under which it acquired the exclusive
worldwide right to publish video games based on the WWE franchise on all
hardware platforms. The Company’s investment is accounted for using the cost
method due to the financial and operating structure of the venture and its lack
of significant influence over the joint venture. The Company’s 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 venture’s net sales
depending on the cumulative unit sales and platform of each particular game. The
preferred return is accrued in the quarter in which the licensed games are sold
and the preferred return is earned. The preferred return was subject
to change after June 30, 2006 and was to be set for the distribution period
beginning July 1, 2006 and ending December 31, 2009 (the “Next Distribution
Period”). The agreement provides that the parties will negotiate in good faith
and agree to the preferred return not less than 180 days prior to the start of
the Next Distribution Period. It further provides that if the parties are unable
to agree on a preferred return, the preferred return will be determined by
arbitration. The parties did not reach an agreement with respect to the
preferred return for the Next Distribution Period and the preferred return for
the Next Distribution Period was determined through arbitration (see Note
17). On July 24, 2009 a decision was rendered by the arbitrator
setting the preferred return rate at 6 %. Based on this
lower rate, an adjustment in the amount of $22.5 million was made and an
estimated receivable of $34.5 million for the cumulative preferred return for
the period from July 1, 2006 to June 30, 2009 has been accrued as of June 30,
2009. As of December 31, 2008 and June 30, 2009, the balance of the investment
in the video game joint venture includes the following components (in
thousands):
12
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
10 — Joint Venture (continued)
December 31,
|
June 30,
|
|||||||
2008
|
2009
|
|||||||
Preferred
return receivable
|
$ | 52,845 | $ | 34,514 | ||||
Investment
costs, net
|
339 | 169 | ||||||
$ | 53,184 | $ | 34,683 |
The Company’s 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 the three months ended June
30, 2008 and 2009, the Company earned a profit of $1.3 million and incurred a
loss of $22.9 million, respectively, from the joint venture. During
the six months ended June 30, 2008 and 2009, the Company earned a profit of $3.7
million and incurred a loss of $20.0 million, respectively, from the joint
venture. The losses in 2009 were due to the reduction from
approximately $56.2 million to approximately $33.7 million in the accrual of the
receivable from the joint venture that resulted from the arbitration setting the
preferred return rate at 6%, instead of the 10% rate that had been
accrued.
Note
11 — Goodwill
The
changes in the carrying amount of goodwill for the six months ended June 30,
2009 are as follows (in thousands):
|
Traditional
Toys
|
Craft/Activity/
Writing Products
|
Pet
Products
|
Total
|
||||||||||||
Balance
at beginning of the period
|
$
|
335,083
|
$
|
82,826
|
$
|
9,784
|
$
|
427,693
|
||||||||
Adjustments
to goodwill during the period
|
(20,568
|
)
|
—
|
—
|
(20,568
|
)
|
||||||||||
Write-down
of goodwill
|
(314,515
|
)
|
(82,826
|
)
|
(9,784
|
)
|
(407,125
|
)
|
||||||||
Balance
at end of the period
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
During
the six months ended June 30, 2009, the Company reclassified $21.0 million from
goodwill to intangibles and other assets for its Disguise
acquisition. The Company is in the process of finalizing its purchase
price allocation for its Disguise Acquisition and is working with a third party
to perform studies and valuations to the estimated fair value of assets and
liabilities assumed. Furthermore, the Company paid out an additional
working capital adjustment of $0.9 million for its Disguise
acquisition.
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”), the Company applies a fair value-based impairment test to the net book
value of goodwill and indefinite-lived intangible assets on an annual basis and,
if certain events or circumstances indicate that an impairment loss may have
been incurred, on an interim basis. The analysis of potential impairment of
goodwill requires a two-step process. The first step is the estimation of fair
value. If step one indicates that an impairment potentially exists, the second
step is performed to measure the amount of impairment, if any. Goodwill
impairment exists when the estimated fair value of goodwill is less than its
carrying value.
During
the three months ended June 30, 2009, the Company determined that the
significant decline in its market capitalization is likely to be
sustained. The Company’s market capitalization was not
significantly affected by the dismissals subject to appeal of the WWE lawsuit,
and the lower revenue expectations for 2009 versus 2008 which indicated that an
interim goodwill impairment test was required under SFAS 142. As a result, the
Company determined that $407.1 million, or all of the goodwill related to
previous acquisitions, including the acquisition of Disguise in December 2008,
was impaired in accordance with SFAS 142. This amount is included in “Write-down
of Goodwill” in the accompanying condensed consolidated statements of
operations.
13
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
12 — Intangible Assets Other Than Goodwill
Intangible
assets consist primarily of licenses, product lines, customer relationships,
debt offering costs from the issuance of the Company’s convertible senior notes
and trademarks. Amortized intangible assets are included in the Intangibles and
other, net, in the accompanying balance sheets. Trademarks are disclosed
separately in the accompanying balance sheets. Intangible assets are as follows
(in thousands, except for weighted useful lives):
December 31, 2008
|
June 30, 2009
|
|||||||||||||||||||||||||||
Weighted
Useful
Lives
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Amount
|
||||||||||||||||||||||
(Years)
|
||||||||||||||||||||||||||||
Amortized
Intangible Assets:
|
|
|||||||||||||||||||||||||||
Acquired
order backlog
|
0.50
|
$
|
2,393
|
$
|
(2,165
|
)
|
$
|
228
|
$
|
2,393
|
$
|
(2,393
|
)
|
$
|
—
|
|||||||||||||
Licenses
|
4.84
|
67,088
|
(46,638
|
)
|
20,450
|
85,788
|
(49,726
|
)
|
36,062
|
|||||||||||||||||||
Product
lines
|
3.62
|
17,700
|
(17,700
|
)
|
—
|
19,100
|
(17,817
|
)
|
1,283
|
|||||||||||||||||||
Customer
relationships
|
5.33
|
4,096
|
(2,301
|
)
|
1,795
|
6,796
|
(2,675
|
)
|
4,121
|
|||||||||||||||||||
Non-compete/Employment
contracts
|
4.56
|
2,748
|
(2,703
|
)
|
45
|
3,133
|
(2,753
|
)
|
380
|
|||||||||||||||||||
Debt
offering costs
|
20.00
|
3,705
|
(1,033
|
)
|
2,612
|
3,705
|
(1,126
|
)
|
2,579
|
|||||||||||||||||||
Total
amortized intangible assets
|
97,730
|
(72,540
|
)
|
25,190
|
120,915
|
(76,490
|
)
|
44,425
|
||||||||||||||||||||
Unamortized
Intangible Assets:
|
||||||||||||||||||||||||||||
Trademarks
|
indefinite
|
10,491
|
—
|
10,491
|
2,308
|
—
|
2,308
|
|||||||||||||||||||||
$
|
108,221
|
$
|
(72,540
|
)
|
$
|
35,681
|
$
|
123,223
|
$
|
(76,490
|
)
|
$
|
46,733
|
Amortization
expense related to limited life intangible assets was $2.1 million and $2.3
million for the three months ended June 30, 2008 and 2009,
respectively. Amortization expense related to limited life intangible
assets was $4.3 million and $3.9 million for the six months ended June 30, 2008
and 2009, respectively.
As of
June 30, 2009, the Company determined that the tradenames “Child Guidance” and
“Play Along” and certain tradenames associated with its Craft and Activity
product lines would either be discontinued, or were
under-performing. Consequently, the intangible assets
associated with these tradenames were written off to “Write-down of Intangible
Assets,” resulting in a non-cash charge of $8.2 million.
Note
13 — Property and Equipment
Property
and equipment have historically been stated at cost and are being depreciated
using the straight-line method over their estimated useful lives as
follows:
Office
equipment
|
5
years
|
Automobiles
|
5
years
|
Furniture
and fixtures
|
5 -
7 years
|
Molds
and tooling
|
2 years
|
Leasehold
improvements
|
Shorter
of length of lease or 10
years
|
Effective
January 1, 2009, the Company changed its depreciation methodology for molds and
tools used in the manufacturing of its products from a straight-line basis to a
usage basis, which is more closely correlated to production of
goods. While both methods of depreciation allocation are acceptable,
the Company believes that the usage method more accurately matches costs with
revenues. Furthermore, the useful estimated life of molds and tools
was maintained at two years. The following financial statement line
items for the three months and six months ended June 30, 2008 were affected by
the change in accounting principle (in thousands):
14
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
13 — Property and Equipment (continued)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
Three Months Ended
June 30, 2008
|
Six Months Ended
June 30, 2008
|
|||||||||||||||||||||||
As
Computed under usage method |
As
Reported under Straight- line method |
Effect of
Change |
As
Computed under usage method |
As
Reported under Straight- line method |
Effect of
Change |
|||||||||||||||||||
Net
sales
|
$
|
145,291
|
$
|
145,291
|
$
|
—
|
$
|
276,226
|
$
|
276,226
|
$
|
—
|
||||||||||||
Cost
of sales
|
92,366
|
93,233
|
(867
|
)
|
174,804
|
176,727
|
(1,923
|
)
|
||||||||||||||||
Gross
Margin
|
$
|
52,925
|
$
|
52,058
|
$
|
867
|
$
|
101,422
|
$
|
99,499
|
$
|
1,923
|
||||||||||||
Income
from operations
|
$
|
6,435
|
$
|
5,568
|
$
|
867
|
$
|
6,597
|
$
|
4,674
|
$
|
1,923
|
||||||||||||
Income
before provision for income taxes
|
$
|
6,861
|
$
|
5,994
|
$
|
867
|
$
|
9,217
|
$
|
7,294
|
$
|
1,923
|
||||||||||||
Provision
for income taxes
|
2,091
|
1,838
|
253
|
2,857
|
2,261
|
596
|
||||||||||||||||||
Net
income
|
$
|
4,770
|
$
|
4,155
|
$
|
614
|
$
|
6,360
|
$
|
5,033
|
$
|
1,327
|
||||||||||||
Earnings
per share – basic
|
$
|
0.17
|
$
|
0.15
|
$
|
0.02
|
$
|
0.23
|
$
|
0.18
|
$
|
0.05
|
||||||||||||
Earnings
per share - diluted
|
$
|
0.17
|
$
|
0.15
|
$
|
0.02
|
$
|
0.23
|
$
|
0.18
|
$
|
0.05
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
As of June 30, 2008
|
||||||||||||
As
Computed under usage method |
As
Reported under Straight- line method |
Effect of
Change |
||||||||||
Income
taxes receivable
|
$ |
8,919
|
$ |
9,515
|
$ |
(596)
|
||||||
Property
and Equipment
|
||||||||||||
Office
furniture and equipment
|
$ |
10,743
|
$
|
10,743
|
$
|
—
|
||||||
Molds
and tooling
|
54,960
|
54,960
|
—
|
|||||||||
Leasehold
improvements
|
5,317
|
5,317
|
—
|
|||||||||
Total
|
71,020
|
71,020
|
—
|
|||||||||
Less
accumulated depreciation and amortization
|
42,625
|
44,548
|
(1,923
|
)
|
||||||||
Property
and equipment, net
|
$
|
28,396
|
$
|
26,472
|
$
|
1,923
|
||||||
Retained
earnings
|
$
|
—
|
$
|
—
|
$
|
—
|
As a
result of the accounting method change, there was a minimal cumulative
effect to the Company’s retained earnings as of January 1, 2009.
15
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
13 — Property and Equipment (continued)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
Six Months Ended
June 30, 2008
|
||||||||||||
As
Computed under usage method |
As
Reported under Straight- line method |
Effect of
Change |
||||||||||
Cash
flow used in operations
|
$
|
(6,250
|
)
|
$
|
(6,250
|
)
|
$
|
—
|
||||
Cash
Flow items impacted by change:
|
||||||||||||
Net
income
|
6,360
|
5,033
|
1,327
|
|||||||||
Depreciation
and amortization
|
10,283
|
12,206
|
(1,923
|
)
|
||||||||
Income
tax receivable
|
(8,919
|
)
|
(9,515
|
)
|
596
|
|||||||
Total
adjustments
|
—
|
—
|
—
|
|||||||||
Net
cash used by operating activities
|
(6,250
|
)
|
(6,250
|
)
|
—
|
|||||||
Net
cash used by investing activities
|
(27,646
|
)
|
(27,646
|
)
|
—
|
|||||||
Net
cash provided by (used in) operating activities
|
(30,139
|
)
|
(30,139
|
)
|
—
|
|||||||
Net
decrease in cash and cash equivalents
|
(64,035
|
)
|
(64,035
|
)
|
—
|
|||||||
Cash
and cash equivalents, beginning of period
|
241,250
|
241,250
|
—
|
|||||||||
Cash
and cash equivalents, end of period
|
$
|
177,215
|
$
|
177,215
|
$
|
—
|
Note
14 — Share-Based Payments
The
Company’s 2002 Stock Award and
Incentive Plan (the “Plan”) provides for the awarding of stock options
and restricted stock to employees, officers and non-employee directors. The Plan
is more fully described in Notes 14 and 16 to the Consolidated Financial
Statements in the Company’s 2008 Form 10-K.
The
Company accounts for grants of stock options and restricted stock in accordance
with the revised Statement of Financial Accounting Standards No. 123 (“FAS
123R”), Share-Based
Payment.
The
following table summarizes the total share-based compensation expense and
related tax benefits recognized for the three and six months ended June 30, 2008
and 2009 (in thousands):
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
|
|
|||||||||||||||
Stock
option compensation expense
|
$ | 127 | $ | (23 | ) | $ | 310 | $ | 86 | |||||||
Tax
benefit related to stock option compensation
|
$ | 45 | $ | (4 | ) | $ | 107 | $ | 34 | |||||||
Restricted
stock compensation expense
|
$ | 1,832 | $ | 2,008 | $ | 3,701 | $ | 3,893 | ||||||||
Tax
benefit related to restricted stock compensation
|
$ | 682 | $ | 759 | $ | 1,378 | $ | 1,477 |
16
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
14 — Share-Based Payments (continued)
Stock
option activity pursuant to the Plan for six months ended June 30, 2009 is
summarized as follows:
Plan Stock Options (*)
|
||||||||
Number of
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding,
December 31, 2008
|
477,515
|
$
|
19.55
|
|||||
Granted
|
—
|
$
|
—
|
|||||
Exercised
|
—
|
$
|
—
|
|||||
Cancelled
|
(7,125
|
)
|
$
|
22.01
|
||||
Outstanding,
June 30, 2009
|
470,390
|
$
|
19.51
|
* The
stock option activity excludes 100,000 of fully vested warrants issued during
2003 with an initial exercise price of $11.35 per share, which expire August 14,
2013 and are outstanding at June 30, 2009.
Restricted
stock award activity pursuant to the Plan for the six months ended June 30, 2009
is summarized as follows:
Restricted Stock Awards
|
||||||||
Number of
Shares |
Weighted
Average Exercise Price |
|||||||
Outstanding,
December 31, 2008
|
460,533 | $ | 21.93 | |||||
Awarded
|
482,340 | $ | 19.55 | |||||
Released
|
(151,125 | ) | $ | 23.25 | ||||
Forfeited
|
(4,900 | ) | $ | 16.66 | ||||
Outstanding,
June 30, 2009
|
786,848 | $ | 20.25 |
17
JAKKS
PACIFIC, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
15 — Comprehensive Income (Loss)
The table
below presents the components of the Company’s comprehensive income (loss) for
the three and six months ended June 30, 2008 and 2009 (in
thousands):
Three Months
Ended June 30, |
Six Months
Ended June 30, |
|||||||||||||||
2008
As Adjusted (Note 13) |
2009
|
2008
As Adjusted (Note 13) |
2009
|
|||||||||||||
|
||||||||||||||||
Net
income (loss)
|
$ | 4,770 | $ | (406,562 | ) | $ | 6,360 | $ | (417,361 | ) | ||||||
Other
comprehensive income (loss):
|
||||||||||||||||
Foreign
currency translation adjustment
|
8 | 6 | 20 | — | ||||||||||||
Comprehensive
income (loss)
|
$ | 4,778 | $ | (406,556 | ) | $ | 6,380 | $ | (417,361 | ) |
Note 16 — Recent Accounting
Pronouncements
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 (Revised) (“FAS 141(R)”), Business Combinations
. This statement contains specific guidance regarding the accounting
for costs of business acquisitions and for estimating contingent consideration
provisions at the time of acquisition. This new guidance replaces the previous
guidance in FAS 141. The Company will apply guidance of FAS 141(R) for any
future acquisitions.
Note
17 — Litigation
In
October 2004, the Company was named as a defendant in a lawsuit commenced by
World Wrestling Entertainment, Inc. (“WWE”) (the “WWE Action”). The complaint
also named as defendants, among others, the joint venture with THQ Inc., certain
of the Company’s foreign subsidiaries and the Company’s three executive
officers. The Complaint was amended, the antitrust claims were dismissed and, on
grounds not previously considered by the Court, a motion to dismiss the RICO
claim, the only remaining basis for jurisdiction, was argued and submitted in
September 2006. Discovery remained stayed. In December 2007 the Court
dismissed the WWE Action and WWE appealed. The Company sought reconsideration of
and filed a cross-appeal with respect to certain parts of the Court’s Orders.
The appeal and cross-appeal were in abeyance pending the determination of the
reconsideration motion. The reconsideration motion was granted in September 2008
and the Court held that the issue of the applicability of a January 2004 release
executed by WWE in favor of the Company would not be determined in connection
with the motion to dismiss. The cross-appeal was withdrawn without prejudice,
the briefing of the appeal was completed and argument was held on May 6,
2009. On May 19, 2009, the United States Court of Appeals for the
Second Circuit unanimously affirmed dismissal of the WWE Action on statute of
limitations grounds.
In
November 2004, several purported class action lawsuits were filed in the United
States District Court for the Southern District of New York, alleging damages
associated with the facts alleged in the WWE Action (the “Class Action”). A
motion to dismiss was filed, was fully briefed and argument occurred on November
30, 2006. The motion was granted without prejudice to seeking leave to amend;
such leave was granted to plaintiffs, an amended complaint was filed and
briefing has been completed with respect to a motion to dismiss, which was
scheduled for argument in October 2008. That date was adjourned by the Court.
The parties have notified the Court that an agreement in principle to settle
this matter has been reached. The agreement, which is subject to
agreement as to documentation and Court approval, will settle the matter for
$3.9 million, without any admission of liability on the part of the Company, or
its officers and directors. The Company expects a significant portion
of this settlement to be covered by insurance. Three shareholder derivative
actions have also been filed against the Company, nominally, and against certain
of the Company’s Board members (the “Derivative Actions”). The Derivative
Actions seek to hold the individual defendants liable for damages allegedly
caused to the Company by their actions, and, in one of the Derivative Actions,
seeks restitution to the Company of profits, benefits and other compensation
obtained by them. These actions are currently stayed or the time to answer has
been extended. Agreement in principle to resolve the Derivative Actions has been
reached, but it is subject to agreement on documentation, Board
approval and Court approval.
18
JAKKS PACIFIC, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
17 — Litigation (continued)
The
Company received notice from WWE alleging breaches of the video game license in
connection with sales of WWE video games in Japan and other countries in Asia.
The joint venture responded that WWE acquiesced in the arrangements, and
separately released any claim against the joint venture in connection therewith
and accordingly there is no breach of the joint venture’s video game
license. While the joint venture does not believe that WWE has a
valid claim, it tendered a protective “cure” of the alleged breaches with a full
reservation of rights. WWE “rejected” that cure and reserved its
rights. On October 12, 2006, WWE commenced a lawsuit in Connecticut
state court against THQ and the joint venture, involving the claim set forth
above concerning allegedly improper sales of WWE video games in Japan and other
countries in Asia (the “JV Action”). The lawsuit seeks, among other
things, a declaration that WWE is entitled to terminate the video game license
and monetary damages. A motion to strike one claim was argued on
March 12, 2007 and submitted to the Court. Thereafter, WWE
amended the complaint to import state law claims from the WWE Action. A motion
to strike and for summary judgment (the “Dispositive Motion”) was briefed and
argument took place on May 19, 2008. The Judge ordered the parties to file
supplemental briefing on May 23, 2008, upon which filing the motion was
submitted to the Court for decision. WWE filed a cross-motion for partial
summary judgment with respect to the Company’s Release defense. At the end of
August, the Court granted the Dispositive Motion. WWE moved to reargue that
decision and that motion was denied. WWE filed an appeal, which was assigned to
the Supreme Court of Connecticut. Briefing on the appeal is scheduled
to be completed in September 2009, with argument to be held thereafter. THQ
filed a cross-complaint which asserts claims by THQ and Mr. Farrell for
indemnification from the Company in the event that WWE prevails on any of its
claims against THQ and Farrell and also asserts claims by THQ that the Company
breached its fiduciary duties to THQ in connection with the videogame license
between WWE and THQ/JAKKS Pacific LLC and seeks equitable and legal relief,
including substantial monetary and exemplary damages against the Company in
connection with this claim. The Company has moved to sever and stay the
cross-claims pending WWE’s appeal of its dismissed claims to which the
cross-claims relate. That motion is in the process of being
briefed. The Company has also moved for summary judgment and to
strike the cross-claims, but these motions have not yet been
adjudicated. Regardless of the outcome of these motions, the Company
intends to contest all of these cross-claims vigorously.
WWE filed
a motion for partial summary judgment with respect to the claims remaining in
the JV Action which seeks a declaration that WWE may terminate the joint
venture’s videogame license. The joint venture has opposed this
motion and has filed a motion for summary judgment dismissing the JV Action as a
matter of law on multiple grounds. Discovery issues arose, a Court
conference was held on August 4, 2009 and a further order of the Court is
expected shortly.
In
connection with the joint venture with THQ (see Note 10), the Company receives
its profit through a preferred return based on net sales of the joint venture,
which was to be reset as of July 1, 2006 for the period through December 31,
2009 (the “Next Distribution Period”). The preferred return is accrued in the
quarter in which the licensed games are sold and the preferred return is
earned. The agreement with THQ provides for the parties to agree on
the reset of the preferred return or, if no agreement is reached, for
arbitration of the issue. No agreement was reached, and the preferred return for
the Next Distribution Period was determined through arbitration. On
July 24, 2009, an arbitrator rendered a decision setting the preferred return
rate at 6 %. Based on this lower rate, an adjustment in the amount of
$22.5 million was made and an estimated receivable of $34.5 million for the
cumulative preferred return for the period from July 1, 2006 to June 30, 2009
has been accrued as of June 30, 2009.
In order
to exercise the joint venture's right to renew the WWE videogame license for the
renewal period running from January 1, 2010 through December 31, 2014, the
Company, on behalf of the joint venture, sent out a Notice of Renewal to WWE on
June 30, 2009 (the “Renewal Notice”). THQ has commenced an
action in California Superior Court (the “California Action”) seeking a
declaratory judgment that JAKKS cannot renew the videogame license without THQ's
consent and that THQ is not obligated to consent. THQ also seeks a
declaratory judgment that the restrictive covenant contained in the joint
venture agreement is unenforceable. The Company has filed a demurrer
in the California Action. THQ also filed an arbitration in California
seeking a declaratory judgment that the same restrictive covenant is
unenforceable (the “California Arbitration”). The Company commenced
an arbitration in New York (the “New York Arbitration”) seeking,
among other things, a declaratory judgment that (a) it is empowered to serve the
Renewal Notice and (b) the restrictive covenant is enforceable. The
Company also seeks to hold THQ liable for its breach of fiduciary duty with
respect to its dealings with the Company and the LLC. The Company
also commenced an action in New York Supreme Court to enjoin the California
Arbitration. The application to enjoin the California Arbitration has
been argued and is awaiting decision. The Company has requested of
the American Arbitration Association that the New York Arbitration proceed and
the California Arbitration not proceed.
The
Company is a party to, and certain of its property is the subject of, various
other pending claims and legal proceedings that routinely arise in the ordinary
course of its business. Other than with respect to the claims in the WWE Action,
the JV Action and the matter of the reset of the preferred return from THQ in
connection with the joint venture, with respect to which the Company cannot give
assurance as to the outcome, 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.
19
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis of financial condition and results of
operations should be read together with our Condensed Consolidated Financial
Statements and Notes thereto which appear elsewhere herein.
Critical
Accounting Policies and Estimates
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 Note
2 to the Consolidated Financial Statements set forth in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008. 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 operations and
financial position include:
Allowance for
Doubtful Accounts. Our allowance for doubtful accounts is
based on management’s assessment of the business environment, customers’
financial condition, historical collection experience, accounts receivable
aging, customer disputes and the collectability of specific customer accounts.
If there were a deterioration of a major customer’s 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. The allowance for doubtful accounts is
also affected by the time at which uncollectible accounts receivable balances
are actually written off.
Major
customers’ accounts are monitored on an ongoing basis; more in depth reviews are
performed based on changes in customer’s financial condition and/or the level of
credit being extended. When a significant event occurs, such as a bankruptcy
filing by a specific customer, and on a quarterly basis, the allowance is
reviewed for adequacy and the balance or accrual rate is adjusted to reflect
current risk prospects.
Revenue
Recognition. Our revenue recognition policy is to recognize revenue when
persuasive evidence of an arrangement exists, title transfer has occurred
(product shipment), the price is fixed or readily determinable, and
collectability is probable. We recognize revenue in accordance with Staff
Accounting Bulletin No. 104, “Revenue Recognition.” Sales are recorded net
of sales returns and discounts, which are estimated at the time of shipment
based upon historical data. JAKKS routinely enters into arrangements with its
customers to provide sales incentives, support customer promotions, and provide
allowances for returns and defective merchandise. Such programs are based
primarily on customer purchases, customer performance of specified promotional
activities, and other specified factors such as sales to consumers. Accruals for
these programs are recorded as sales adjustments that reduce gross revenue in
the period the related revenue is recognized.
Goodwill and
other indefinite-lived intangible assets. In accordance
with Statement of Financial Accounting Standards 142 (“FAS 142”), Goodwill and Other Intangible
Assets, goodwill and indefinite-lived intangible assets are not
amortized, but are tested for impairment at least annually at the reporting unit
level.
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.
|
Due to
the subjective nature of the impairment analysis significant changes in the
assumptions used to develop the estimate could materially affect the conclusion
regarding the future cash flows necessary to support the valuation of long-lived
assets, including goodwill. The valuation of goodwill involves a high degree of
judgment and consists of a comparison of the fair value of a reporting unit with
its book value. Based on the assumptions underlying the valuation, impairment is
determined by estimating the fair value of a reporting unit and comparing that
value to the reporting unit’s book value. If the implied fair value is more than
the book value of the reporting unit, an impairment loss is not indicated. If
impairment exists, the fair value of the reporting unit is allocated to all of
its assets and liabilities excluding goodwill, with the excess amount
representing the fair value of goodwill. An impairment loss is measured as the
amount by which the book value of the reporting unit’s goodwill exceeds the
estimated fair value of that goodwill.
20
As of
June 30, 2009, the Company determined that the significant decline in its market
capitalization is likely to be sustained. The Company’s market
capitalization was not significantly affected by the substantial resolution of
the WWE lawsuit, and the lower revenue expectations for 2009 versus 2008 were
factors that indicated that an interim goodwill impairment test was required
under SFAS 142. As a result, the Company determined that $407.1 million, or all
of the goodwill related to previous acquisitions, including the acquisition of
Disguise in December 2008, was impaired in accordance with SFAS 142. This amount
is included in “Write-down of Goodwill” in the accompanying
consolidated statements of operations.
As of June 30, 2009, the
Company determined that the tradenames “Child Guidance” and “Play Along” and
certain tradenames associated with our Craft and Activity product lines would
either be discontinued, or were under performing. Consequently,
the intangible assets associated with these tradenames were written off to
“Write-down of Intangible Assets”, resulting in a non-cash charge of $8.2
million.
Intangible
assets amounted to $46.7 million as of June 30, 2009.
Reserve for
Inventory Obsolescence. We value our inventory at the lower of
cost or market. Based upon a consideration of quantities on hand, actual and
projected sales volume, anticipated product selling prices and product lines
planned to be discontinued, slow-moving and obsolete inventory is written down
to its net realizable value.
Failure
to accurately predict and respond to consumer demand could result in the Company
under producing popular items or over producing less popular items. Furthermore,
significant changes in demand for our products would impact management’s
estimates in establishing our inventory provision.
Management
estimates are monitored on a quarterly basis and a further adjustment to reduce
inventory to its net realizable value is recorded, as an increase to cost of
sales, when deemed necessary under the lower of cost or market
standard.
Income Allocation
for Income Taxes. Our quarterly income tax provision and
related income tax assets and liabilities are based on estimated annual income
as allocated to the various tax jurisdictions based upon our transfer pricing
study, US and foreign statutory income tax rates, and tax regulations and
planning opportunities in the various jurisdictions in which the Company
operates. Significant judgment is required in interpreting tax
regulations in the US and foreign jurisdictions, and in evaluating worldwide
uncertain tax positions. Actual results could differ materially from
those judgments, and changes from such judgments could materially affect our
consolidated financial statements.
Discrete Items
for Income Taxes. Significant discrete tax items were recognized in
the current period. As previously indicated in the Income Taxes note, the
discrete items included goodwill impairment, trademark impairment, and the
THQ/Jakks joint venture settlement. A portion of the goodwill impairment
is treated as a permanent adjustment for the tax provision and is considered
non-deductible for tax purposes. Further explanation of the impairment can
be found in the Goodwill and other indefinite-lived intangible assets section above.
Further explanation on the THQ/Jakks joint venture settlement can be
found in the Litigation note.
Income taxes and
interest and penalties related to income tax payable. We do
not file a consolidated return with our foreign subsidiaries. We file
federal and state returns and our foreign subsidiaries each file Hong Kong
returns, as applicable. Deferred taxes are provided on an asset and
liability method whereby deferred tax assets are recognized as deductible
temporary differences and operating loss and tax credit 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.
As of
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48 (“FIN
48”), Accounting for
Uncertainty in Income Taxes, which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return. As of the
date of adoption, tax benefits that are subject to challenge by tax authorities
are analyzed and accounted for in the income tax provision. The
cumulative effect of the potential liability for unrecognized tax benefits prior
to the adoption of FIN 48, along with the associated interest and penalties, are
recognized as a reduction in the January 1, 2007 balance of retained
earnings.
We
accrue a tax reserve for additional income taxes and interest, which may become
payable in future years as a result of audit adjustments by tax
authorities. The reserve is based on management’s assessment of all
relevant information, and is periodically reviewed and adjusted as circumstances
warrant. As of June 30, 2009, our income tax reserves are
approximately $11.9 million and relate to the potential income tax audit
adjustments, primarily in the areas of income allocation and transfer
pricing.
21
We
recognize current period interest expense and the reversal of previously
recognized interest expense that has been determined to not be assessable due to
the expiration of the related audit period or other compelling factors on the
income tax liability for unrecognized tax benefits as interest expense, and
penalties and penalty reversals related to the income taxes payable as
other expense in our consolidated statements of operations.
Share-Based
Compensation. We grant restricted stock and options to purchase our
common stock to our employees (including officers) and non-employee directors
under our 2002 Stock Award and Incentive Plan (the “Plan”), which incorporated
the shares remaining under our Third Amended and Restated 1995 Stock Option
Plan. The benefits provided under the Plan are share-based payments subject to
the provisions of revised Statement of Financial Accounting Standards No. 123
(Revised) (FAS 123R), Share-Based Payment. We
estimate the value of share-based awards on the date of grant using the
Black-Scholes option-pricing model. The determination of the fair value of
share-based payment awards on the date of grant using an option-pricing model is
affected by our stock price, as well as assumptions regarding a number of
complex and subjective variables. These variables include our expected stock
price volatility over the term of the awards, actual and projected employee
stock option exercise behaviors, cancellations, terminations, risk-free interest
rates and expected dividends.
Recent
Developments
In
October 2008, we acquired substantially all of the assets of Tollytots
Limited. The total initial consideration of $25.7 million consisted
of $12.0 million in cash and the assumption of liabilities in the amount of
$13.7 million, and resulted in goodwill of $3.1 million. In addition, we agreed
to pay an earn-out of up to an aggregate amount of $5.0 million in cash over the
three calendar years following the acquisition based on the achievement of
certain financial performance criteria, which will be recorded as goodwill when
and if earned. Tollytots is a leading designer and producer
of licensed baby dolls and baby doll pretend play accessories based
on well-known brands and was included in our results of operations from the date
of acquisition.
In
October 2008, we acquired all of the stock of Kids Only, Inc. and a related Hong
Kong company, Kids Only Limited (collectively, “Kids Only”). The
total initial consideration of $23.3 million consisted of $20.4 million in cash
and the assumption of liabilities in the amount of $2.9 million, and resulted in
goodwill of $12.7 million. In addition, we agreed to pay an earn-out of up to an
aggregate amount of $5.6 million in cash over the three calendar years following
the acquisition based on the achievement of certain financial performance
criteria, which will be recorded as goodwill when and if earned. Kids Only is a
leading designer and producer of licensed indoor and outdoor kids’ furniture,
and has an extensive portfolio which also includes baby dolls and accessories,
room décor and a myriad of other children’s toy products and was
included in our results of operations from the date of acquisition.
In
December 2008, we acquired certain assets of Disguise, Inc. and a related Hong
Kong company, Disguise Limited (collectively, “Disguise”). The total
initial consideration of $60.6 million consisted of $38.6 million in cash and
the assumption of liabilities in the amount of $22.0 million, and resulted in
goodwill of $30.6 million. We have not finalized our purchase price allocation
for Disguise and have engaged a third party to perform studies and valuations of
the estimated fair value of assets and liabilities assumed. Disguise
is a leading designer and producer of Halloween and everyday costume play and
was included in our results of operations from the date of
acquisition.
The goodwill from all of these acquisitions (as well as all other
acquisitions) has been written down. See Note 11 of the Notes to Condensed
Consolidated Financial Statements, supra.
22
Results
of Operations
The
following unaudited table sets forth, for the periods indicated, certain
statement of income data as a percentage of net sales.
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
|
||||||||||||||||
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost
of sales
|
63.6 | 104.2 | 63.3 | 87.8 | ||||||||||||
Gross
profit (loss)
|
36.4 | (4.2 | ) | 36.7 | 12.2 | |||||||||||
Selling,
general and administrative expenses
|
32.0 | 37.1 | 34.3 | 42.8 | ||||||||||||
Write-down
of intangible assets
|
— | 5.7 | — | 3.2 | ||||||||||||
Write-down
of goodwill
|
— | 281.1 | — | 160.6 | ||||||||||||
Income
(loss) from operations
|
4.4 | (328.1 | ) | 2.4 | (194.4 | ) | ||||||||||
Profit
(loss) from video game joint venture
|
0.9 | (15.8 | ) | 1.3 | (7.9 | ) | ||||||||||
Interest
income
|
0.5 | — | 0.8 | 0.1 | ||||||||||||
Interest
expense, net of benefit
|
(1.1 | ) | (0.9 | ) | (1.2 | ) | (1.0 | ) | ||||||||
Income
(loss) before provision (benefit) for income taxes
|
4.7 | (344.8 | ) | 3.3 | (203.2 | ) | ||||||||||
Provision
(benefit) for income taxes
|
1.4 | (64.0 | ) | 1.0 | (38.5 | ) | ||||||||||
Net
income (loss)
|
3.3 | % | (280.8 | %) | 2.3 | % | (164.7 | %) |
The following unaudited
table summarizes, for the periods indicated, certain income statement data by
segment (in thousands).
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
|
|
|||||||||||||||
Net
Sales
|
||||||||||||||||
Traditional
Toys
|
$ | 131,127 | $ | 126,458 | $ | 250,645 | $ | 224,050 | ||||||||
Craft/Activity/Writing
Products
|
10,570 | 14,818 | 16,658 | 22,378 | ||||||||||||
Pet
Products
|
3,594 | 3,533 | 8,923 | 7,066 | ||||||||||||
145,291 | 144,809 | 276,226 | 253,494 | |||||||||||||
Cost
of Sales
|
||||||||||||||||
Traditional
Toys
|
82,589 | 132,880 | 157,059 | 196,088 | ||||||||||||
Craft/Activity/Writing
Products
|
6,640 | 13,784 | 11,324 | 18,991 | ||||||||||||
Pet
Products
|
3,137 | 4,221 | 6,421 | 7,510 | ||||||||||||
92,366 | 150,885 | 174,804 | 222,589 | |||||||||||||
Gross
Profit (Loss)
|
||||||||||||||||
Traditional
Toys
|
48,538 | (6,422 | ) | 93,586 | 27,962 | |||||||||||
Craft/Activity/Writing
Products
|
3,930 | 1,034 | 5,334 | 3,387 | ||||||||||||
Pet
Products
|
457 | (688 | ) | 2,502 | (444 | ) | ||||||||||
$ | 52,925 | $ | (6,076 | ) | $ | 101,422 | $ | 30,905 |
23
Comparison
of the Three Months Ended June 30, 2009 and 2008
Net Sales
Traditional
Toys. Net sales of our Traditional Toys segment were $126.5
million in 2009, compared to $131.1 million in 2008, representing a decrease of
$4.6 million, or 3.5%. The decrease in net sales was primarily due to
lower unit sales of our WWE®, Narnia® and Pokemon® action
figures and accessories, and other JAKKS products, including Plug It In &
Play TV Games™, Neopets® and Care Bears® plush, Speedstacks®, JAKKS™ dolls and
pretend play products based on Hannah Montana®, Camp Rock™ dolls, and junior
sports products. This was offset in part by increases in unit sales of
some products, including Club Penguin™ and Smurfs® plush, Cabbage Patch
Kids®, In My Pocket & Friends™ , SpongeBob Squarepants and Discovery
Kids® toys, Fly Wheels® and Nascar® vehicles, UltiMotion™
electronics, and role-play and dress-up toys, including those based on Disney
classic princesses and fairies characters, and the contribution to sales from
our Tollytots, Kids Only and Disguise acquisitions of $29.2
million.
Craft/Activity/Writing
Product. Net sales of our Craft/Activity/Writing Products were
$14.8 million in 2009, compared to $10.6 million in 2008, representing an
increase of $4.2 million, or 39.6%. The increase in net sales was
primarily due to increases in unit sales of our Girl Gourmet™ and Spa
Factory™ activity toys and our Flying Colors® and Vivid Velvet® activities
products, offset in part by decreases in unit sales of Creepy Crawlers
activities products, our Spinz™ writing instruments and our Pentech™ and Color
Workshop® writing instruments and related products.
Pet Products. Net
sales of our Pet Products were $3.5 million in 2009, compared to $3.6 million in
2008, representing a decrease of $0.1 million, or 2.8%. The decrease
is mainly attributable to the less available shelf space for pet products at
some of our major customer retail stores, and lower unit sales of
consumable pet products. Sales of pet products were led by our AKG licensed line
of products.
Cost of
Sales
Traditional
Toys. Cost of sales of our Traditional Toys segment was $132.9
million, or 105.1% of related net sales, in 2009, compared to $82.6 million, or
63.0% of related net sales, in 2008, representing an increase of $50.3 million,
or 60.9%. This increase is primarily due to charges of $18.8
million related to the write-down of certain excess and impaired inventory and
$32.6 related to the write-down of license advances and minimum guarantees that
are not expected to be earned out through sales of that licensed product.
Excluding these one time charges, cost of sales decreased by $1.1 million to
$81.5 million, or 64.4% of net sales, which primarily consisted
of a decrease in product costs of $0.4 million, which is in line with the lower
volume of sales. Product costs as a percentage of sales increased
primarily due to the mix of the product sold with higher product
cost. Furthermore, royalty expense for our Traditional Toys segment
decreased by $1.2 million and as a percentage of net sales due to lower
volume of sales and to changes in the product mix. Our depreciation of molds and
tools increased by $0.5 million primarily due to increased purchases of molds
and tools in this segment.
Craft/Activity/Writing
Products. Cost of sales of our Craft/Activity/Writing Products
segment was $13.8 million, or 93.0% of related net sales, in 2009, compared to
$6.6 million, or 62.8% of related net sales, in 2008, representing an increase
of $7.2 million, or 109.1%. This increase is primarily due to charges
of $4.5 million related to the write-down of certain excess and impaired
inventory and $0.3 related to the write-down of license advances and minimum
guarantees that are not expected to be earned out through sales of that licensed
product. Excluding these one time charges, cost of sales increased by
$2.4 million to $9.0 million, or 60.8% of net sales, which primarily consisted
of an increase in product costs of $2.6 million, which is in line with the
higher volume of sales. Product costs as a percentage of net sales
increased primarily due to the mix of the product sold and higher sales of
closeout product. Royalty expense decreased by $0.4 million and as a
percentage of net sales due to changes in the product mix to more products with
higher royalty rates from products with lower royalty rates or proprietary
products with no royalty rates.
Pet Products. Cost
of sales of our Pet Pal line of products was $4.2 million, or 119.5% of related
net sales, in 2009, compared to $3.1 million, or 87.3% of related net sales, in
2008, representing an increase of $1.1 million, or 35.5%. This
increase is primarily due to charges of $0.8 million related to the write-down
of certain excess and impaired inventory and $0.4 related to the write-down of
license advances and minimum guarantees that are not expected to be earned out
through sales of that licensed product. Excluding these one time
charges, cost of sales was comparable year over year. Product costs
increased by $0.6 million, which is in line with the higher volume of
sales. Product costs as a percentage of net sales increased primarily due
to the mix of the product sold and sell-off of closeout
product. Royalty expense decreased by $0.6 million and as a
percentage of sales due to changes in the product mix to products with lower
royalty rates or proprietary products with no royalty rates from more products
with higher royalty rates.
24
Selling, General and
Administrative Expenses
Selling, general and administrative
expenses were $53.8 million in 2009 and $46.5 million in 2008, constituting
37.1% and 32.0% of net sales, respectively. The overall increase of
$7.3 million in such costs was primarily due to the addition of overhead related
to the operations of Tollytots, Kids Only and Disguise ($8.0 million) and an
increase in general and administrative expenses ($2.9 million), and, offset in
part by decreases in product development ($2.4 million) and direct
selling expenses ($1.2 million), . The increase in the acquired
companies’ overhead is mainly due to the fixed overhead and high seasonality of
the Disguise acquisition, with the majority of its sales projected in the third
quarter of 2009. The increase in general and administrative expenses
is primarily due to increases in legal expense ($2.0 million), net of insurance
reimbursements and temporary help ($0.3 million) and a loss incurred from
disposal of molds and tools used for production of our inventory ($2.3 million),
offset in part by decrease in travel and entertainment expense ($0.9 million)
and donation expense ($0.8 million). Product development expenses decreased
as a result of tighter control of spending on product development, offset in
part by higher product testing expenses.. The decrease in direct
selling expenses is primarily due to a decrease in advertising and promotional
expenses of $2.1 million in 2009 in support of several of our product lines),
offset in part by an increases in sales commissions ($0.4 million ) and other
direct selling expenses of $0.5 million to support the increase in domestic
sales. From time to time, we may increase or decrease our advertising
efforts, if we deem it appropriate for particular
products.
Write-down of Intangible
Assets
As of
June 30, 2009, we determined that the tradenames “Child
Guidance,” “Play Along” and certain tradenames associated with our
Crafts and Activities product lines would either be discontinued, or were
under-performing. Consequently, the intangible assets
associated with these tradenames were written off to “Write-down of Intangible
Assets”, resulting in a non-cash charge of $8.2 million.
Write-down of
Goodwill
During
the three months ended June 30, 2009, we determined that the significant decline
in our market capitalization is likely to be sustained. Our
market capitalization did not change significantly despite the dismissals
subject to appeal of the WWE lawsuit, and the lower revenue expectations for
2009 versus 2008 which indicated that an interim goodwill impairment test
was required under SFAS 142. As a result, we determined that $407.1 million, or
all of the goodwill related to previous acquisitions, including the acquisition
of Disguise in December 2008, was impaired in accordance with SFAS 142. This
amount is included in “Write-down of Goodwill” in the accompanying condensed
consolidated statements of operations.
Profit from Video Game Joint
Venture
We
incurred a loss from our video game joint venture in 2009 of $22.9 million, as
compared to profit of $1.3 million in 2008, primarily due to the arbitration
ruling which resulted in a decrease of $22.5 million to the
preferred return payment from a rate of 10% of net sales of the WWE video games
sold by the joint venture to a rate of 6% of net sales and to legal fees of $1.1
million which offset profit of $0.7 million resulting in a loss of $0.4 million
for the quarter before the adjustment to the receivable. As a result
of the decision, JAKKS has reduced its receivable from THQ for the period
beginning July 1, 2006 and ending March 31, 2009 from approximately $56.2
million to approximately $33.7 million and recorded a non-cash charge of
approximately $22.5 million in the second quarter. The joint
venture’s
right to renew the WWE video game license expires December 31, 2009 subject to
renewal through December 31, 2014. If extended, the amount of the preferred
return we will receive from the joint venture after December 31, 2009 is subject
to change (see “Risk Factors”, infra, and Note 17 of
the Notes to Condensed Consolidated Financial Statements, supra ).
Interest
Income
Interest
income in 2009 was $0.1 million, as compared to $0.8 million in
2008. The decrease is due to lower interest rates during 2009
compared to 2008 and lower average cash balances.
Interest
Expense
Interest
expense was $1.3 million in 2009, as compared to $1.6 million in 2008. In 2009,
we booked interest expense of $1.1 million related to our convertible senior
notes payable and net interest expense of $0.2 million related to FIN 48
pursuant to our January 1, 2007 adoption of the provisions of FIN 48. In 2008,
we booked interest expense of $1.1 million related to our convertible senior
notes payable and net interest expense $0.5 million related to FIN 48 pursuant
to our January 1, 2007 adoption of the provisions of FIN 48.
Provision for Income
Taxes
Our
income tax benefit, which includes federal, state and foreign income taxes,
discrete items of goodwill and trademark impairment, and the THQ/Jakks joint
venture settlement, was $92.7 million, or an effective tax benefit rate of 18.6%
for the three months ended June 30, 2009. During the comparable period in 2008,
the income tax provision was $2.1 million, or an effective tax provision rate of
30.5%. The impairment of goodwill and trademarks, totaling $64.5
million, and the THQ/Jakks joint venture settlement of $9.1 million, was a
reduction to the tax benefit rate realized. Exclusive of
the discrete items, the 2009 effective tax benefit rate would be
31.8%. There were no discrete items in the second quarter of
2008.
25
As of
June 30, 2009, the Company had net deferred tax assets of approximately $65.3
million for which an allowance of $0.9 million has been provided since, in the
opinion of management, realization of the future benefit is
uncertain.
Comparison
of the Six Months Ended June 30, 2009 and 2008
Net Sales
Traditional Toys.
Net sales of our Traditional Toys segment were $224.1 million in
2009, compared to $250.1 million in 2008, representing a decrease of $26.0
million, or 10.4%. The decrease in net sales was primarily due to
lower unit sales of our WWE®, Narnia® and Pokemon® action figures and
accessories, and other JAKKS products, including Plug It In & Play TV
Games™, Neopets®, Doodle Bears® and Care Bears® plush, Cabbage Patch Kids®,
Speedstacks®, JAKKS™ dolls and pretend play products based on Hannah Montana®,
Camp Rock™ dolls, Sweet Secrets and junior sports products. This was offset
in part by increases in unit sales of some products, including Club
Penguin™ and Smurfs® plush,, In My Pocket & Friends™, SpongeBob Squarepants
and Discovery Kids® toys, Fly Wheels® and Nascar® vehicles,
UltiMotion™ electronics, and role-play and dress-up toys, including those based
on Disney classic princesses and fairies characters, and the contribution to
sales from our Tollytots, Kids Only and Disguise acquisitions of $38.7
million.
Craft/Activity/Writing
Products. Net sales of our Craft/Activity/Writing Products
were $22.4 million in 2009, compared to $16.7 million in 2008, representing an
increase of $5.7 million, or 34.1%. The increase in net sales was
primarily due to increases in unit sales of our Girl Gourmet™ and Spa Factory™
activity toys, offset in part by decreases in unit sales of our Creepy Crawlers
activities products, our Spinz™ writing instruments and our Pentech™ and Color
Workshop® writing instruments and related products.
Pet Products. Net
sales of our Pet Products were $7.1 million in 2009, compared to $8.9 million in
2008, representing a decrease of $1.8 million, or 20.2%. The decrease
is mainly attributable to the less available shelf space for pet products at
some of our major customer retail stores, and lower unit sales of consumable pet
products. Sales of pet products were led by our AKG licensed line of
products.
Cost of
Sales
Traditional
Toys. Cost of sales of our Traditional Toys segment was $196.1
million, or 87.5% of related net sales, in 2009, compared to $157.0 million, or
62.7% of related net sales, in 2008, representing an increase of $39.1 million,
or 24.9%. This dollar increase is primarily due to charges of $18.8
million related to the write-down of certain excess and impaired inventory and
$32.6 related to the write-down of license advances and minimum guarantees that
are not expected to be earned through sales of that licensed product. Excluding
these one time charges, cost of sales decreased by $12.3 million to $144.7
million, or 64.6% of net sales, which primarily consisted of a decrease in
product costs of $9.8 million, which is in line with the lower volume of
sales. Product costs as a percentage of sales increased primarily due
to the mix of the product sold with lower product cost. Furthermore,
royalty expense for our Traditional Toys segment decreased by $3.5 million and
as a percentage of net sales due to lower volume of sales and to changes in
the product mix. Our depreciation of molds and tools increased by $0.9 million
primarily due to increased purchases of molds and tools in this
segment.
Craft/Activity/Writing
Products. Cost of sales of our Craft/Activity/Writing Products
segment was $19.0 million, or 84.9% of related net sales, in 2009, compared to
$11.3 million, or 68.0% of related net sales, in 2008, representing an increase
of $7.7 million, or 68.1%. This increase is primarily due to charges
of $4.5 million related to the write-down of certain excess and impaired
inventory and $0.3 related to the write-down of license advances and minimum
guarantees that are not expected to be earned out through sales of that
licensed product. Excluding these one time charges, cost of sales
increased by $2.9 million to $14.2 million, or 63.4% of net sales, which
primarily consisted of an increase in product costs of $2.0 million, which is in
line with the higher volume of sales. Product costs as a percentage
of net sales increased primarily due to the mix of the product sold and higher
sales of closeout product. Royalty expense increased by $0.8 million
and as a percentage of net sales due to changes in the product mix to more
products with higher royalty rates from products with lower royalty rates or
proprietary products with no royalty rates.
Pet Products. Cost
of sales of our Pet Pal line of products was $7.5 million, or 106.3% of related
net sales, in 2009, compared to $6.4 million, or 72.0% of related net sales, in
2008, representing an increase of $1.1 million, or 17.2%. This
increase is primarily due to charges of $0.8 million related to the write-down
of certain excess and impaired inventory and $0.4 related to the write-down of
license advances and minimum guarantees that are not expected to be earned
out through sales of that licensed product. Excluding these one time
charges, cost of sales was comparable year over year. Product costs
increased by $0.1 million, which is in line with the higher volume of
sales. Product costs as a percentage of net sales increased primarily due
to the mix of the product sold and sell-off of closeout
product. Royalty expense decreased by $0.1 million, but increased as
a percentage of sales due to changes in the product mix to more products with
higher royalty rates from products with lower royalty rates or
proprietary products with no royalty rates.
26
Selling, General and
Administrative Expenses
Selling,
general and administrative expenses were $108.3 million in 2009 and $94.8
million in 2008, constituting 42.7% and 34.3% of net sales,
respectively. The overall increase of $13.5 million in such costs was
primarily due to the addition of overhead related to the operations of
Tollytots, Kids Only and Disguise ($16.0 million), offset in part by decreases
in amortization expense related to intangible assets other than goodwill ($0.6
million), product development ($0.8 million), direct selling expenses ($1.4
million), general and administrative expenses ($0.1 million). The
increase in the acquired companies’ overhead is mainly due to the fixed overhead
and high seasonality of the Disguise acquisition, with the majority of its sales
projected in the third quarter of 2009. Product development expenses
decreased as a result of tighter control of spending on product development,
offset in part by higher product testing expenses. The decrease in
direct selling expenses is primarily due to a decrease in advertising and
promotional expenses of $3.0 million in 2009 in support of several of our
product lines, offset in part by increases in sales commissions ($0.3 million)
and other direct selling expenses of $1.3 million to support the increase in
domestic sales. From time to time, we may increase or decrease our
advertising efforts, if we deem it appropriate for particular
products. The decrease in general and administrative expenses is
primarily due to decreases in bonus expense which is based on EPS growth ($0.5
million), outside services ($0.6 million) and donation expense ($0.8 million),
travel and entertainment ($1.0 million), offset in part by an increase in
employee relocation expense ($0.6 million) and a loss incurred from disposal of
molds and tools used for production of our inventory ($2.3
million).
Write-down of Intangible
Assets
As of
June 30, 2009, we determined that the tradenames “Child
Guidance,” “Play Along” and certain tradenames associated with our
Crafts and Activities product lines would either be discontinued, or were
under-performing. Consequently, the intangible assets
associated with these tradenames were written off to “Write-down of Intangible
Assets”, resulting in a non-cash charge of $8.2 million.
Write-down of
Goodwill
During
the three months ended June 30, 2009, we determined that the significant decline
in our market capitalization is likely to be
sustained. Our market capitalization did not change
significantly despite the dismissals subject to appeal of the WWE lawsuit, and
the lower revenue expectations for 2009 versus 2008 which indicated that an
interim goodwill impairment test was required under SFAS 142. As a result, we
determined that $407.1 million, or all of the goodwill related to previous
acquisitions, including the acquisition of Disguise in December 2008, was
impaired in accordance with SFAS 142. This amount is included in “Write-down of
Goodwill” in the accompanying condensed consolidated statements of
operations.
Profit from Video Game Joint
Venture
We
incurred a loss from our video game joint venture in 2009 of $20.0 million, as
compared to a profit of $3.7 million in 2008, primarily due to the arbitration
ruling which resulted in a decrease of $22.5 million to the preferred return
payment from a rate of 10% of net sales of the WWE video games sold by the joint
venture to a rate of 6% of net sales and to legal fees of $1.5 million which
partially offset profit of $4.0 million resulting in a net profit of $2.5
million for the six months ended before the adjustment to the
receivable. As a result of the decision, JAKKS has reduced its receivable
from THQ for the period beginning July 1, 2006 and ending March 31, 2009 from
approximately $56.2 million to approximately $33.7 million and recorded a
non-cash charge of approximately $22.5 million in the second
quarter. The joint venture’s right to renew
the WWE video game license expires December 31, 2009 subject to renewal
through December 31, 2014. If extended, the amount of the preferred return
we will receive from the joint venture after December 31, 2009 is subject to
change (see “Risk Factors”, infra, and Note 17 of
the Notes to Condensed Consolidated Financial Statements, supra ).
Interest
Income
Interest
income in 2009 was $0.2 million, as compared to $2.1 million in
2008. The decrease is due to lower interest rates during 2009
compared to 2008 and lower average cash balances.
Interest
Expense
Interest
expense was $2.5 million in 2009, as compared to $3.2 million in 2008. In 2009,
we booked interest expense of $2.2 million related to our convertible senior
notes payable and net interest expense of $0.3 million related to FIN 48
pursuant to our January 1, 2007 adoption of the provisions of FIN 48. In 2008,
we booked interest expense of $2.2 million related to our convertible senior
notes payable and net interest expense $0.8 million related to FIN 48 pursuant
to our January 1, 2007 adoption of the provisions of FIN 48.
27
Provision for Income
Taxes
Our
income tax benefit, which includes federal, state and foreign income taxes,
discrete items of goodwill and trademark impairment, and the THQ joint venture
settlement, was $97.7 million, or an effective tax benefit rate of 19.0% for the
six months ended June 30, 2009. During the comparable period in 2008, the income
tax provision was $2.9 million, or an effective tax provision rate of
31.0%. The impairment of goodwill and trademarks, totaling $64.5
million, and the THQ/Jakks joint venture settlement of $9.1 million, was a
reduction to the tax benefit rate realized. Exclusive of the discrete items, the
effective tax benefit rate for 2009 would be 31.8%. There were no
discrete items in the second quarter of 2008.
As of
June 30, 2009, the Company had net deferred tax assets of approximately $65.3
million for which an allowance of $0.9 million has been provided since, in the
opinion of management, realization of the future benefit is
uncertain.
Seasonality
and Backlog
The
retail toy industry is inherently seasonal. Generally, our sales have been
highest during the third and fourth quarters, and collections for those sales
have been highest during the succeeding fourth and first fiscal quarters. Sales
of writing instrument products are likewise seasonal, with sales highest during
the second and third quarters, as are our Go Fly a Kite®, Funnoodle® pool toys
and junior sports products, which are largely sold in the first and second
quarters. Our working capital needs have been highest during the third and
fourth quarters.
While we
have taken steps to level sales over the entire year, sales are expected to
remain heavily influenced by the seasonality of our toy products. The result of
these seasonal patterns is that operating results and demand for working capital
may vary significantly by quarter. Orders placed with us for shipment are
cancelable until the date of shipment. The combination of seasonal demand and
the potential for order cancellation makes accurate forecasting of future sales
difficult and causes us to believe that backlog may not be an accurate indicator
of our future sales. Similarly, financial results for a particular quarter may
not be indicative of results for the entire year.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 (Revised) (“FAS 141(R)”), Business
Combinations. This statement contains specific guidance
regarding the accounting for costs of business acquisitions and for estimating
contingent consideration provisions at the time of acquisition. This new
guidance replaces the previous guidance in FAS 141. We will apply guidance of
FAS 141(R) for any future acquisitions.
Liquidity
and Capital Resources
As of
June 30, 2009, we had working capital of $244.0 million, compared to $325.1
million as of December 31, 2008. This decrease was primarily attributable
to the reclassification of our $98.0 million convertible senior notes payable
from long-term to short-term liabilities, our operating activities and earn-out
and working capital adjustment payments related to our recent
acquisitions.
Operating
activities used net cash of $24.5 million in 2009, as compared to $6.3 million
in 2008. Net cash was used primarily due to our net loss and changes in working
capital, offset in part by non-cash charges. Our accounts receivable turnover as
measured by days sales for the quarter outstanding in accounts receivable was 72
days as of June 30, 2009, an increase from 64 days as of June 30, 2008. Other
than open purchase orders issued in the normal course of business, we have no
obligations to purchase finished goods from our manufacturers. As of June 30,
2009, we had cash and cash equivalents of $122.4 million.
Our
investing activities used net cash of $21.1 million in 2009, as compared to
$27.6 million in 2008, consisting primarily of cash paid for the Creative
Designs earn-out of $5.7 million, the working capital adjustment for Tollytots
of $1.8 million, the working capital adjustment for Kid Only of $3.5
million, the working capital adjustment for Disguise of $1.2 million, and the
purchase of office furniture and equipment and molds and tooling of $10.9
million used in the manufacture of our products, offset in part by the change in
other assets of $2.1 million. In 2008, our investing activities consisted
primarily of cash paid for the Creative Designs earn-out of $6.7 million, the
Play Along earn-out of $6.7 million, the Pet Pal earn-out of $1.7 million and
the purchase of office furniture and equipment and molds and tooling of $12.8
million used in the manufacture of our products and other assets. As part of our
strategy to develop and market new products, we have entered into various
character and product licenses with royalties generally ranging from 1% to 14%
payable on net sales of such products. As of June 30, 2009, these agreements
required future aggregate minimum guarantees of $109.2 million, exclusive of
$52.3 million in advances already paid. Of this $109.2 million future minimum
guarantee, $45.7 million is due over the next twelve months.
Our
financing activities used net cash of $1.5 million in 2009, consisting of cash
paid for the repurchase of restricted stock. In 2008, financing activities used
net cash of $30.0 million, consisting of cash paid for the repurchase of our
common stock.
28
In
October 2008, we acquired substantially all of the assets of Tollytots
Limited. The total initial consideration of $25.7 million consisted
of $12.0 million in cash and the assumption of liabilities in the amount of
$13.7 million, and resulted in goodwill of $3.1 million. In addition, we agreed
to pay an earn-out of up to an aggregate amount of $5.0 million in cash over the
three calendar years following the acquisition based on the achievement of
certain financial performance criteria, which will be recorded as goodwill when
and if earned. Tollytots is a leading designer and producer of
licensed baby dolls and baby doll pretend play accessories based on well-known
brands and was included in our results of operations from the date of
acquisition. Pro forma results of operations are not provided since
the amounts are not material to the consolidated results of operations.
In
October 2008, we acquired all of the stock of Kids Only, Inc. and a related Hong
Kong company, Kids Only Limited (collectively, “Kids Only”). The
total initial consideration of $23.3 million consisted of $20.4 million in cash
and the assumption of liabilities in the amount of $2.9 million, and resulted in
goodwill of $12.7 million. In addition, we agreed to pay an earn-out of up to an
aggregate amount of $5.6 million in cash over the three calendar years following
the acquisition based on the achievement of certain financial performance
criteria, which will be recorded as goodwill when and if earned. Kids
Only is a leading designer and producer of licensed indoor and outdoor kids’
furniture, and has an extensive portfolio which also includes baby dolls and
accessories, room décor and a myriad of other children’s toy
products and was included in our results of operations from the date
of acquisition. Pro forma results of operations are not provided
since the amounts are not material to the consolidated results of
operations.
In
December 2008, we acquired certain assets of Disguise, Inc. and a related Hong
Kong company, Disguise Limited (collectively, “Disguise”). The total
initial consideration of $60.6 million consisted of $38.6 million in cash and
the assumption of liabilities in the amount of $22.0 million, and resulted in
goodwill of $30.6 million. We have not finalized its purchase price allocation
for Disguise and have engaged a third party to perform studies and valuations of
the estimated fair value of assets and liabilities assumed. Disguise
is a leading designer and producer of Halloween and everyday costume play and
was included in our results of operations from the date of
acquisition. Pro forma results of operations are not provided since
the amounts are not material to the consolidated results of
operations.
In June
2003, we sold an aggregate of $98.0 million of 4.625% Convertible Senior Notes
due June 15, 2023 and received net proceeds of approximately $94.4 million. The
notes are convertible into shares of our common stock at an initial conversion
price of $20.00 per share, or 50 shares per note, subject to certain
circumstances. The notes may be converted in each quarter subsequent to any
quarter in which the closing price of our common stock is at or above a
prescribed price for at least 20 trading days in the last 30 trading day period
of the quarter. The prescribed price for the conversion trigger is $24.00
through June 30, 2010, and increases nominally each quarter thereafter. Cash
interest is payable 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. After June 15, 2010, interest will accrue on the outstanding
notes until maturity. At maturity, we 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, unless redeemed or converted earlier. The notes
were not convertible as of June 30, 2009 and are not convertible during the
third quarter of 2009.
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, 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, if any.
Accordingly, the notes have been reclassified as a short-term liability as of
June, 30, 2009. 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, if any, and 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 flow from operations and cash and cash equivalents on hand
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. We intend to finance our long-term
liquidity requirements out of net cash provided by operations and cash on
hand.
29
Item 3. 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. Historically, we have not used
derivative instruments or engaged in hedging activities to minimize our market
risk.
Interest
Rate Risk
In June
2003, we issued convertible senior notes payable of $98.0 million with a fixed
interest rate of 4.625% per annum, which remain outstanding as of June 30, 2009.
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, China and the United Kingdom. Sales made
by the Hong Kong subsidiaries are denominated in U.S. dollars. However,
purchases of inventory are typically denominated in Hong Kong dollars and local
operating expenses are denominated in the local currency of the subsidiary,
thereby creating exposure to changes in exchange rates. Changes in the local
currency/U.S. dollar exchange rates may positively or negatively affect our
operating results. 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 Chinese Yuan relative to the U.S.
dollar. We incorporated a subsidiary in the United Kingdom in late
2008 and have limited operations and, therefore, we have a nominal currency
translation risk at this time.
Item
4. Controls and Procedures
Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this Report, have concluded that as of that date, our
disclosure controls and procedures were effective. There were no changes in our
internal control over financial reporting identified in connection with the
evaluation required by Exchange Act Rule 13a-15(d) that occurred during the
period covered by this Report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
30
PART
II
OTHER
INFORMATION
Item 1. Legal
Proceedings
On
October 19, 2004, we were named as defendants in a lawsuit commenced by WWE in
the U.S. District Court for the Southern District of New York concerning our toy
licenses with WWE and the video game license between WWE and the joint venture
company operated by THQ and us, encaptioned World Wrestling Entertainment, Inc.
v. JAKKS Pacific, Inc., et al., 1:04-CV-08223-KMK (the “WWE Action”). The
complaint also named as defendants THQ, the joint venture, certain of our
foreign subsidiaries, Jack Friedman (our Chairman and Co-Chief Executive
Officer), Stephen Berman (our Co-Chief Executive Officer, President and
Secretary and a member of our Board of Directors), Joel Bennett (our Executive
Vice President and Chief Financial Officer), Stanley Shenker and Associates,
Inc., Bell Licensing, LLC, Stanley Shenker and James Bell.
WWE
sought treble, punitive and other damages (including disgorgement of profits) in
an undisclosed amount and a declaration that the video game license with the
joint venture, which is scheduled to expire in 2009 (subject to the joint
venture’s right to extend that license for an additional five years), and an
amendment to our toy licenses with WWE, which are scheduled to expire in 2009,
are void and unenforceable. This action alleged violations by the defendants of
the Racketeer Influenced and Corrupt Organization Act (“RICO”) and the
anti-bribery provisions of the Robinson-Patman Act, and various claims under
state law.
On
February 16, 2005, we filed a motion to dismiss the WWE Action. On March 30,
2005, the day before WWE’s opposition to our motion was due, WWE filed an
Amended Complaint seeking, among other things, to add the Chief Executive
Officer of THQ as a defendant and to add a claim under the Sherman Act. The
Court allowed the filing of the Amended Complaint and ordered a two-stage
resolution of the viability of the Complaint, with motions to dismiss the
federal jurisdiction claims based on certain threshold issues to proceed and all
other matters to be deferred for consideration if the Complaint survived
scrutiny with respect to the threshold issues. The Court also stayed discovery
pending the determination of the motions to dismiss.
The
motions to dismiss the Amended Complaint based on these threshold issues were
fully briefed and argued and, on March 31, 2006, the Court granted the part of
our motion seeking dismissal of the Robinson-Patman Act and Sherman Act claims
and denied the part of our motion seeking to dismiss the RICO claims on the
basis of the threshold issue that was briefed (the “March 31
Order”).
On
April 7, 2006, we sought certification to appeal from the portion of the March
31 Order denying our motion to dismiss the RICO claim on the one ground that was
briefed. Shortly thereafter, WWE filed a motion for reargument with respect to
the portion of the March 31 Order that dismissed the Sherman Act claim and,
alternatively, sought judgment with respect to the Sherman Act claim so that it
could pursue an immediate appeal. At a court conference on April 26, 2006 the
Court deferred the requests for judgment and for certification and set up
briefing schedules with respect to our motion to dismiss the RICO claim on
grounds that were not the subject of the first round of briefing, and our motion
to dismiss the action based on the release contained in a January 15, 2004
Settlement Agreement and General Release between WWE and the Company (the
“Release”). The Court also established a briefing schedule for WWE’s motion for
reargument of the dismissal of the Sherman Act claim. These motions were argued
and submitted in September 2006. Discovery remained stayed.
On
November 30, 2007, the Court indicated that the WWE Action would be dismissed.
On December 21, 2007 the Court dismissed the WWE Action with prejudice (the
"December 2007 Order") based on (1) the failure to plead RICO injury; (2) the
bar of the RICO statute of limitations; (3) the denial of WWE’s motion for
reconsideration of the Sherman Act claim; and (4) the lack of subject matter
jurisdiction with respect to the pendent state law claims. Thereafter, WWE filed
an appeal to the Second Circuit Court of Appeals. We filed a motion for
reconsideration of the part of the December 2007 Order that stated that the
Release did not bar the WWE Action. That motion was fully briefed and submitted
to the Court. In September 2008, the Court granted the motion and held that the
applicability of a January 2004 release executed by WWE in favor of the Company
would not be determined in connection with the motion to dismiss the action. We
also filed a cross-appeal based on the Court's earlier order denying our request
to dismiss based on the lack of a cognizable enterprise and based on the
December 2007 Order's statement with respect to the Release. WWE moved to
dismiss our cross-appeal. It was withdrawn without prejudice to our right to
argue these issues as grounds for affirmance of the December 2007 Order. The
appeal briefing was completed and argument was held on May 6,
2009. On May 19, 2009, the Second Circuit Court of Appeals
unanimously affirmed dismissal of the WWE Action on statute of limitations
grounds.
31
In
November 2004, several purported class action lawsuits were filed in the United
States District Court for the Southern District of New York: (1) Garcia v. JAKKS
Pacific, Inc. et al., Civil Action No. 04-8807 (filed on November 5, 2004), (2)
Jonco Investors, LLC v. JAKKS Pacific, Inc. et al., Civil Action No. 04-9021
(filed on November 16, 2004), (3) Kahn v. JAKKS Pacific, Inc. et al., Civil
Action No. 04-8910 (filed on November 10, 2004), (4) Quantum Equities L.L.C. v.
JAKKS Pacific, Inc. et al., Civil Action No. 04-8877 (filed on November 9,
2004), and (5) Irvine v. JAKKS Pacific, Inc. et al., Civil Action No. 04-9078
(filed on November 16, 2004) (the “Class Actions”). The complaints in the Class
Actions alleged that defendants issued positive statements concerning increasing
sales of our WWE licensed products which were false and misleading because the
WWE licenses had allegedly been obtained through a pattern of commercial
bribery, our relationship with the WWE was being negatively impacted by the
WWE’s contentions and there was an increased risk that the WWE would either seek
modification or nullification of the licensing agreements with us. Plaintiffs
also alleged that we misleadingly failed to disclose the alleged fact that the
WWE licenses were obtained through an unlawful bribery scheme. The plaintiffs in
the Class Actions were described as purchasers of our common stock, who
purchased from as early as October 26, 1999 to as late as October 19, 2004. The
Class Actions sought compensatory and other damages in an undisclosed amount,
alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rule 10b-5 promulgated thereunder by each of the defendants
(namely the Company and Messrs. Friedman, Berman and Bennett), and violations of
Section 20(a) of the Exchange Act by Messrs. Friedman, Berman and Bennett. On
January 25, 2005, the Court consolidated the Class Actions under the caption In
re JAKKS Pacific, Inc. Shareholders Class Action Litigation, Civil Action No.
04-8807. On May 11, 2005, the Court appointed co-lead counsels and provided
until July 11, 2005 for an amended complaint to be filed; and a briefing
schedule thereafter with respect to a motion to dismiss. The motion to dismiss
was fully briefed and argument occurred on November 30, 2006. The motion was
granted in January 2008 to the extent that the Class Actions were dismissed
without prejudice to plaintiffs’ right to seek leave to file an amended
complaint based on statements that the WWE licenses were obtained from the WWE
as a result of the long-term relationship with WWE. A motion seeking leave to
file an amended complaint was granted and an amended complaint filed. Briefing
was completed with respect to a motion to dismiss that was scheduled for
argument in October 2008. The Court adjourned the argument date. The
parties have notified the Court that an agreement in principle to resolve this
action has been reached. The agreement, which is subject to agreement
as to documentation and Court approval, will settle the matter for $3.9 million,
without any admission of liability on the part of the Company, or its officers
and directors.
We
believe that the claims in the WWE Action are without merit and, if necessary,
will continue to defend vigorously against the WWE Action.
On
December 2, 2004, a shareholder derivative action was filed in the Southern
District of New York by Freeport Partner, LLC against us, nominally, and against
Messrs. Friedman, Berman and Bennett, Freeport Partners v. Friedman, et al.,
Civil Action No. 04-9441 (the “Derivative Action”). The Derivative Action seeks
to hold the individual defendants liable for damages allegedly caused to us by
their actions and in particular to hold them liable on a contribution theory
with respect to any liability we incur in connection with the Class Actions. On
or about February 10, 2005, a second shareholder derivative action was filed in
the Southern District of New York by David Oppenheim against us, nominally, and
against Messrs. Friedman, Berman, Bennett, Blatte, Glick, Miller and Skala,
Civil Action 05-2046 (the “Second Derivative Action”). The Second Derivative
Action seeks to hold the individual defendants liable for damages allegedly
caused to us by their actions as a result of alleged breaches of their fiduciary
duties. On or about March 16, 2005, a third shareholder derivative action was
filed. It is captioned Warr v. Friedman, Berman, Bennett, Blatte, Glick, Miller,
Skala, and JAKKS (as a nominal defendant), and it was filed in the Superior
Court of California, Los Angeles County (the “Third Derivative Action”). The
Third Derivative Action seeks to hold the individual defendants liable for (1)
damages allegedly caused to us by their alleged breaches of fiduciary duty,
abuse of control, gross mismanagement, waste of corporate assets and unjust
enrichment; and (2) restitution to us of profits, benefits and other
compensation obtained by them. Stays/and or extensions of time to answer are in
place with respect to the derivative actions. Agreement in principle to resolve
the Derivative Actions has been reached, but it is subject to Board
approval and Court approval.
On March
1, 2005, we delivered a Notice of Breach of Settlement Agreement and Demand for
Indemnification to WWE (the “Notification”). The Notification asserted that
WWE’s filing of the WWE Action violated a Covenant Not to Sue contained in a
January 15, 2004 Settlement Agreement and General Release (“General Release”)
entered into between WWE and us and, therefore, that we were demanding
indemnification, pursuant to the Indemnification provision contained in the
General Release, for all losses that the WWE’s actions have caused or will cause
to us and our officers, including but not limited to any losses sustained by us
in connection with the Class Actions. On March 4, 2005, in a letter from its
outside counsel, WWE asserted that the General Release does not cover the claims
in the WWE Action.
On March
30, 2006, WWE’s counsel wrote a letter alleging breaches by the joint venture of
the video game agreement relating to the manner of distribution and the payment
of royalties to WWE with respect to sales of the WWE video games in Japan. WWE
has demanded that the alleged breaches be cured within the time periods provided
in the video game license, while reserving all of its rights, including its
alleged right of termination of the video game license.
On April
28, 2006 the joint venture responded, asserting, among other things, that WWE
had acquiesced in the manner of distribution in Japan and the payment of
royalties with respect to such sales and, in addition, had separately released
the joint venture from any claims with respect to such matter, including the
payment of royalties with respect to such sales, and that there is therefore no
basis for an allegation of a breach of the license agreement. While the joint
venture does not believe that WWE has a valid claim, it tendered a protective
“cure” of the alleged breaches with a full reservation of rights. WWE “rejected”
that cure and reserved its rights.
32
On
October 12, 2006, WWE commenced a lawsuit in Connecticut state court against THQ
and THQ/JAKKS Pacific LLC (the “LLC”), involving a claim set forth above
concerning allegedly improper sales of WWE video games in Japan and other
countries in Asia (the “Connecticut Action”). The lawsuit seeks, among other
things, a declaration that WWE is entitled to terminate the video game license
and monetary damages and raised Connecticut Unfair Trade Practices Act (“CUTPA”)
and contract claims against THQ and the LLC. A motion to strike the CUTPA claim
was denied in May 2007. Cross-motions for summary judgment were
filed. Discovery issues arose, a Court conference to address issues
relating to discovery occurred on August 4, 2009, and a further order of
the Court is expected shortly.
In March
2007, WWE filed a motion seeking leave to amend its complaint in the Connecticut
Action to add the principal part of the state law claims present in the WWE
Action to the Connecticut Action. That motion further sought, inter alia, to add
our Company and Messrs. Friedman, Berman and Bennett (the “Individual
Defendants”) as defendants in the Connecticut Action. The motion was argued on
May 8, 2007 and was granted from the bench, subject to a decision that the
schedule was suspended and no discovery matters would be addressed until
pleading motions were resolved. In June 2007, our Company and the Individual
Defendants moved for a stay of the Connecticut Action, inter alia , based on the
pendency of the WWE Action. On July 30, 2007, in light of the pending motion to
dismiss in the WWE Action, the Court ordered a 120-day stay of the Connecticut
Action (the "Stay"). In November 2007 we moved for a continuation of the Stay.
WWE served discovery and sought leave to file an amended complaint alleging the
state law claims from the WWE Action. Thereafter we moved for a conference and a
stay of discovery. A conference was held on January 14, 2008 at which WWE was
allowed to amend its complaint to assert the state law claims set forth in the
WWE Action and a briefing schedule was established with respect to a combined
motion to strike and a motion for summary judgment (the "Dispositive Motion").
This motion was briefed and argument was held on May 19, 2008. WWE cross-moved
for partial summary judgment striking our Release defense. In August 2008, the
Dispositive Motion was granted. WWE filed a motion for reargument which was
denied. Thereafter, WWE filed an appeal. This appeal has
been assigned to the Connecticut Supreme Court. Briefing on the
appeal is scheduled to be completed in September 2009, with argument to be held
thereafter. In July 2008, THQ filed a cross-complaint which asserts claims
by THQ and Mr. Farrell for indemnification from the Company in the event that
WWE prevails on any of its claims against THQ and Farrell and also asserts
claims by THQ that the Company breached its fiduciary duties to THQ in
connection with the videogame license between WWE and THQ/JAKKS Pacific LLC and
seeks equitable and legal relief, including substantial monetary and exemplary
damages against the Company in connection with this claim. The Company requested
that THQ revise its claims and THQ objected to this request. The Company
moved to sever and stay the cross-claims pending WWE’s appeal of its dismissed
claims to which the cross-claims relate. That motion has been fully
briefed and submitted for decision unless the Court deems argument
necessary. On July 31, 2009, the Company withdrew the request to
revise and moved for summary judgment and to strike the
cross-complaint. This matter has not yet been resolved. The Company
intends to contest all of these claims vigorously.
We
believe that the claims in the Connecticut Action are without merit and we
intend to defend vigorously against them. However, because this action is
subject to appeal, we cannot assure you as to the outcome of the action, nor can
we estimate the range of our potential losses. THQ and the LLC have stated that
they believe the claims in the Connecticut Action prior to the additional claims
in the amended complaint are without merit and have filed an opposition to WWE’s
motion for partial summary judgment and filed a motion for summary judgment
dismissing the remaining claims in the Connecticut Action as a matter of law on
multiple grounds and they intend to continue to defend themselves vigorously. In
connection with the above motion and cross-motions for summary judgment,
discovery issues arose and, as set forth above, were addressed at a court
conference on August 4, 2009, and a further Court order is expected
shortly. However, because this action is in its preliminary stage, we cannot
assure you as to the outcome, nor can we estimate the range of our potential
losses, if any.
Our
agreement with THQ provides for payment of a preferred return to us in
connection with our joint venture. The preferred return is subject to change
after June 30, 2006 and is to be set for the distribution period beginning July
1, 2006 and ending December 31, 2009 (the “Next Distribution Period”). The
agreement provides that the parties will negotiate in good faith and agree to
the preferred return not less than 180 days prior to the start of the Next
Distribution Period. It further provides that if the parties are unable to agree
on a preferred return, the preferred return will be determined by arbitration.
The parties were unable to reach an agreement with respect to the preferred
return for the Next Distribution Period and the preferred return was submitted
for determination through arbitration. On July 24, 2009, a decision was
rendered by the arbitrator setting the preferred return rate at 6%.
In order
to exercise the joint venture's right to renew the WWE videogame license for the
renewal period running from January 1, 2010 through December 31, 2014, the
Company, on behalf of the joint venture, sent out a Notice of Renewal to WWE on
June 30, 2009 (the “Renewal Notice”). THQ has commenced an
action in California Superior Court (the “California Action”) seeking a
declaratory judgment that JAKKS cannot renew the videogame license without THQ's
consent and that THQ is not obligated to consent. THQ also seeks a
declaratory judgment that the restrictive covenant contained in the joint
venture agreement is unenforceable. The Company has filed a demurrer
in the California Action. THQ also filed an arbitration in California
seeking a declaratory judgment that the same restrictive covenant is
unenforceable (the “California Arbitration”). The Company commenced
an arbitration in New York (the “New York Arbitration”) seeking,
among other things, a declaratory judgment that (a) it is empowered to serve the
Renewal Notice and (b) the restrictive covenant is enforceable. The
Company also seeks to hold THQ liable for its breach of fiduciary duty with
respect to its dealings with the Company and the LLC. The Company
also commenced an action in New York Supreme Court to enjoin the California
Arbitration. The application to enjoin the California Arbitration has
been argued and is awaiting decision. The Company has requested of
the American Arbitration Association that the New York Arbitration proceed and
the California Arbitration not proceed.
While the
parties have been in contact with each other to begin negotiations with respect
to the Preferred Return for the Distribution Period beginning January 1,
2010 and ending December 31, 2014 (the “Renewal Distribution Period”), no
agreement has been reached to date with respect to the preferred return to us in
connection with the Renewal Distribution Period.
We are a
party to, and certain of our property is the subject of, various other 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.
33
Item
1A. Risk Factors
From time
to time, including in this Quarterly Report on Form 10-Q, we publish
forward-looking statements, as disclosed in our Disclosure Regarding
Forward-Looking Statements beginning immediately following the Table of Contents
of this Report. We note that a variety of factors could cause our actual results
and experience to differ materially from the anticipated results or other
expectations expressed or anticipated in our forward-looking statements. The
factors listed below are the risks and uncertainties that may arise and that may
be detailed from time to time in our public announcements and our filings with
the Securities and Exchange Commission, such as on Forms 8-K, 10-Q and 10-K. We
undertake no obligation to make any revisions to the forward-looking statements
contained in this Report to reflect events or circumstances occurring after the
date of the filing of this report.
The
outcome of litigation in which we have been named as a defendant is
unpredictable and a materially adverse decision in any such matter could have a
material adverse affect on our financial position and results of
operations.
We are
defendants in litigation matters, as described under “Legal Proceedings” in our
periodic reports filed pursuant to the Securities Exchange Act of 1934,
including the lawsuit commenced by WWE and the purported securities class action
and derivative action claims stemming from the WWE lawsuit (see “Legal
Proceedings”). These claims may divert financial and management resources that
would otherwise be used to benefit our operations. Although we believe that we
have meritorious defenses to the claims made in each and all of the litigation
matters to which we have been named a party, and intend to contest each lawsuit
vigorously, no assurances can be given that the results of these matters will be
favorable to us. A materially adverse resolution of any of these lawsuits could
have a material adverse effect on our financial position and results of
operations.
Our
inability to redesign, restyle and extend our existing core products and product
lines as consumer preferences evolve, and to develop, introduce and gain
customer acceptance of new products and product lines, may materially and
adversely impact our business, financial condition and results of
operations.
Our
business and operating results depend largely upon the appeal of our products.
Our continued success in the toy industry will depend on our ability to
redesign, restyle and extend our existing core products and product lines as
consumer preferences evolve, and to develop, introduce and gain customer
acceptance of new products and product lines. Several trends in recent years
have presented challenges for the toy industry, including:
|
·
|
Age
Compression: The phenomenon of children outgrowing toys at younger ages,
particularly in favor of interactive and high technology
products;
|
|
·
|
Increasing
use of technology;
|
|
·
|
Shorter life
cycles for individual products;
and
|
|
·
|
Higher
consumer expectations for product quality, functionality and
value.
|
We cannot
assure you that:
|
·
|
our current
products will continue to be popular with
consumers;
|
|
·
|
the product
lines or products that we introduce will achieve any significant degree of
market acceptance; or
|
|
·
|
the life
cycles of our products will be sufficient to permit us to recover
licensing, design, manufacturing, marketing and other costs associated
with those products.
|
Our
failure to achieve any or all of the foregoing benchmarks may cause the
infrastructure of our operations to fail, thereby adversely affecting our
business, financial condition and results of operations.
The
failure of our character-related and theme-related products to become and/or
remain popular with children may materially and adversely impact our business,
financial condition and results of operations.
The
success of many of our character-related and theme-related products depends on
the popularity of characters in movies, television programs, live wrestling
exhibitions, auto racing events and other media. We cannot assure you
that:
34
|
·
|
media
associated with our character-related and theme-related product lines will
be released at the times we expect or will be
successful;
|
|
·
|
the success
of media associated with our existing character-related and theme-related
product lines will result in substantial promotional value to our
products;
|
|
·
|
we will be
successful in renewing licenses upon expiration on terms that are
favorable to us; or
|
|
·
|
we will be
successful in obtaining licenses to produce new character-related and
theme-related products in the
future.
|
Our
failure to achieve any or all of the foregoing benchmarks may cause the
infrastructure of our operations to fail, thereby adversely affecting our
business, financial condition and results of operations.
There
are risks associated with our license agreements.
|
·
|
Our current
licenses require us to pay minimum
royalties
|
Sales of
products under trademarks or trade or brand names licensed from others account
for substantially all of our net sales. Product licenses allow us to capitalize
on characters, designs, concepts and inventions owned by others or developed by
toy inventors and designers. Our license agreements generally require us to make
specified minimum royalty payments, even if we fail to sell a sufficient number
of units to cover these amounts. In addition, under certain of our license
agreements, if we fail to achieve certain prescribed sales targets, we may be
unable to retain or renew these licenses.
|
·
|
Some of our
licenses are restricted as to
use
|
Under the
majority of our license agreements the licensors have the right to review and
approve our use of their licensed products, designs or materials before we may
make any sales. If a licensor refuses to permit our use of any licensed property
in the way we propose, or if their review process is delayed, our development or
sale of new products could be impeded.
|
·
|
New licenses
are difficult and expensive to
obtain
|
Our
continued success will depend substantially on our ability to obtain additional
licenses. Intensive competition exists for desirable licenses in our industry.
We cannot assure you that we will be able to secure or renew significant
licenses on terms acceptable to us. In addition, as we add licenses, the need to
fund additional royalty advances and guaranteed minimum royalty payments may
strain our cash resources.
|
·
|
A limited
number of licensors account for a large portion of our net
sales
|
We derive
a significant portion of our net sales from a limited number of licensors. If
one or more of these licensors were to terminate or fail to renew our license or
not grant us new licenses, our business, financial condition and results of
operations could be adversely affected.
The
toy industry is highly competitive and our inability to compete effectively may
materially and adversely impact our business, financial condition and results of
operations.
The toy
industry is highly competitive. Globally, certain of our competitors have
financial and strategic advantages over us, including:
|
·
|
greater
financial resources;
|
|
·
|
larger sales,
marketing and product development
departments;
|
|
·
|
stronger name
recognition;
|
|
·
|
longer
operating histories; and
|
|
·
|
greater
economies of scale.
|
35
In
addition, the toy industry has no significant barriers to entry. Competition is
based primarily on the ability to design and develop new toys, to procure
licenses for popular characters and trademarks and to successfully market
products. Many of our competitors offer similar products or alternatives to our
products. Our competitors have obtained and are likely to continue to obtain
licenses that overlap our licenses with respect to products, geographic areas
and markets. We cannot assure you that we will be able to obtain adequate shelf
space in retail stores to support our existing products or to expand our
products and product lines or that we will be able to continue to compete
effectively against current and future competitors.
An
adverse outcome in the litigation commenced against us and against our video
game joint venture with THQ by WWE, or with respect to the extension of the
joint venture’s license, or a decline in the popularity of WWE, could adversely
impact our interest in that joint venture.
The joint
venture with THQ depends entirely on a single license, which gives the venture
exclusive worldwide rights to produce and market video games based on World
Wrestling Entertainment characters and themes. An adverse outcome against us,
THQ or the joint venture in the lawsuit commenced by WWE, or an adverse outcome
against THQ or the joint venture in the lawsuit commenced by WWE against THQ and
the joint venture (see the first Risk Factor, above, and “Legal Proceedings”),
would adversely impact our rights under the joint venture’s single license,
which would adversely affect the joint venture’s and our business, financial
condition and results of operation.
As
disclosed in “Legal Proceedings” there are several proceedings relating to
renewal of the joint venture’s license from WWE with respect to the period
January 1, 2010 through December 31, 2014. If the extension is
determined to be invalid and the license expires on December 31, 2009, our
business, financial condition and results of operations will be adversely
affected commencing in fiscal 2010.
Furthermore,
the popularity of professional wrestling, in general, and World Wrestling
Entertainment, in particular, is subject to changing consumer tastes and
demands. The relative popularity of professional wrestling has fluctuated
significantly in recent years. A decline in the popularity of World Wrestling
Entertainment could adversely affect the joint venture’s and our business,
financial condition and results of operations.
The
termination of THQ’s manufacturing licenses and the inability of the joint
venture to otherwise obtain these licenses from other manufacturers would
materially adversely affect the joint venture’s and our business, financial
condition and results of operations.
The joint
venture relies on hardware manufacturers and THQ’s non-exclusive licenses with
them for the right to publish titles for their platforms and for the manufacture
of the joint venture’s titles. If THQ’s manufacturing licenses were to terminate
and the joint venture could not otherwise obtain these licenses from other
manufacturers, the joint venture would be unable to publish additional titles
for these manufacturers’ platforms, which would materially adversely affect the
joint venture’s and our business, financial condition and results of
operations.
The
failure of the joint venture or THQ to perform as anticipated could have a
material adverse affect on our financial position and results of
operations.
The joint
venture’s failure to timely develop titles for new platforms that achieve
significant market acceptance, to maintain net sales that are commensurate with
product development costs or to maintain compatibility between its personal
computer CD-ROM titles and the related hardware and operating systems would
adversely affect the joint venture’s and our business, financial condition and
results of operations.
Furthermore,
THQ controls day-to-day operations of the joint venture and all of its product
development and production operations. Accordingly, the joint venture relies
exclusively on THQ to manage these operations effectively. THQ’s failure to
effectively manage the joint venture would have a material adverse effect on the
joint venture’s and our business and results of operations. We are also
dependent upon THQ’s ability to manage cash flows of the joint venture. If THQ
is required to retain cash for operations, or because of statutory or
contractual restrictions, we may not receive cash payments for our share of
profits, on a timely basis, or at all.
The
amount of preferred return that we now receive from the joint venture is subject
to change, which could adversely affect our results of operations.
The joint
venture agreement and the arbitration determination (see Note 17) provide for us
to receive guaranteed preferred returns for the period from July 1, 2006 through
December 31, 2009 at 6% of the joint venture’s net sales. The preferred return
is subject to change after December 31, 2009 and is to be set for the
distribution period beginning January 1, 2010 and ending December 31, 2014
(the “Renewal Distribution Period”). The agreement provides that the parties
will negotiate in good faith and agree to the preferred return not less than
180 days prior to the start of the Renewal Distribution Period. It further
provides that if the parties are unable to agree on a preferred return, the
preferred return will be determined by arbitration. To date the parties have not
reached an agreement with respect to the preferred return for the Renewal
Distribution Period.
36
Any
adverse change to the preferred return for the Renewal Distribution Period as
well as the ongoing performance of the joint venture may result in our
experiencing reduced net income, which would adversely affect our results of
operations.
We
may not be able to sustain or manage our rapid growth, which may prevent us from
continuing to increase our net revenues.
We have
experienced rapid growth in our product lines resulting in higher net sales over
the last six years, which was achieved through acquisitions of businesses,
products and licenses. For example, revenues associated with companies we
acquired since 2006 were approximately $10.5 million and $38.7 million, for the
year ended December 31, 2008 and the six months ended June 30, 2009,
respectively, representing 1.2% and 15.3% of our total revenues for those
periods. As a result, comparing our period-to-period operating results may not
be meaningful and results of operations from prior periods may not be indicative
of future results. We cannot assure you that we will continue to experience
growth in, or maintain our present level of, net sales.
Our
growth strategy calls for us to continuously develop and diversify our toy
business by acquiring other companies, entering into additional license
agreements, refining our product lines and expanding into international markets,
which will place additional demands on our management, operational capacity and
financial resources and systems. The increased demand on management may
necessitate our recruitment and retention of qualified management personnel. We
cannot assure you that we will be able to recruit and retain qualified personnel
or expand and manage our operations effectively and profitably. To effectively
manage future growth, we must continue to expand our operational, financial and
management information systems and to train, motivate and manage our work force.
There can be no assurance that our operational, financial and management
information systems will be adequate to support our future operations. Failure
to expand our operational, financial and management information systems or to
train, motivate or manage employees could have a material adverse effect on our
business, financial condition and results of operations.
In
addition, implementation of our growth strategy is subject to risks beyond our
control, including competition, market acceptance of new products, changes in
economic conditions, our ability to obtain or renew licenses with commercially
reasonable terms and our ability to finance increased levels of accounts
receivable and inventory necessary to support our sales growth, if any.
Accordingly, we cannot assure you that our growth strategy will continue to be
implemented successfully.
If
we are unable to acquire and integrate companies and new product lines
successfully, we will be unable to implement a significant component of our
growth strategy.
Our
growth strategy depends in part upon our ability to acquire companies and new
product lines. Revenues associated with our acquisitions since 2006 represented
approximately 1.2% and 15.3% of our total revenues for the year ended December
31, 2008 and the three months ended June 30, 2009, respectively. Future
acquisitions will succeed only if we can effectively assess characteristics of
potential target companies and product lines, such as:
|
·
|
attractiveness
of products;
|
|
·
|
suitability
of distribution channels;
|
|
·
|
management
ability;
|
|
·
|
financial
condition and results of operations;
and
|
|
·
|
the degree to
which acquired operations can be integrated with our
operations.
|
37
We cannot
assure you that we can identify attractive acquisition candidates or negotiate
acceptable acquisition terms, and our failure to do so may adversely affect our
results of operations and our ability to sustain growth. Our acquisition
strategy involves a number of risks, each of which could adversely affect our
operating results, including:
|
·
|
difficulties
in integrating acquired businesses or product lines, assimilating new
facilities and personnel and harmonizing diverse business strategies and
methods of operation;
|
|
·
|
diversion of
management attention from operation of our existing
business;
|
|
·
|
loss of key
personnel from acquired companies;
and
|
|
·
|
failure of an
acquired business to achieve targeted financial
results.
|
A
limited number of customers account for a large portion of our net sales, so
that if one or more of our major customers were to experience difficulties in
fulfilling their obligations to us, cease doing business with us, significantly
reduce the amount of their purchases from us or return substantial amounts of
our products, it could have a material adverse effect on our business, financial
condition and results of operations.
Our three
largest customers accounted for 53.0% and 56.5% of our net sales for the six
months ended June 30, 2009 and the year ended December 31, 2008, respectively.
Except for outstanding purchase orders for specific products, we do not have
written contracts with or commitments from any of our customers. A substantial
reduction in or termination of orders from any of our largest customers could
adversely affect our business, financial condition and results of operations. In
addition, pressure by large customers seeking price reductions, financial
incentives, changes in other terms of sale or for us to bear the risks and the
cost of carrying inventory also could adversely affect our business, financial
condition and results of operations. If one or more of our major customers were
to experience difficulties in fulfilling their obligations to us, cease doing
business with us, significantly reduce the amount of their purchases from us or
return substantial amounts of our products, it could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the bankruptcy or other lack of success of one or more of our
significant retailers could negatively impact our revenues and bad debt
expense.
We
depend on our key personnel and any loss or interruption of either of their
services could adversely affect our business, financial condition and results of
operations.
Our
success is largely dependent upon the experience and continued services of Jack
Friedman, our Chairman and Co-Chief Executive Officer, and Stephen G. Berman,
our President and Co-Chief Executive Officer and Chief Operating Officer. We
cannot assure you that we would be able to find an appropriate replacement for
Mr. Friedman or Mr. Berman if the need should arise, and any loss or
interruption of Mr. Friedman’s or Mr. Berman’s services could adversely affect
our business, financial condition and results of operations.
We
depend on third-party manufacturers, and if our relationship with any of them is
harmed or if they independently encounter difficulties in their manufacturing
processes, we could experience product defects, production delays, cost overruns
or the inability to fulfill orders on a timely basis, any of which could
adversely affect our business, financial condition and results of
operations.
We depend
on many third-party manufacturers who develop, provide and use the tools, dies
and molds that we own to manufacture our products. However, we have limited
control over the manufacturing processes themselves. As a result, any
difficulties encountered by the third-party manufacturers that result in product
defects, production delays, cost overruns or the inability to fulfill orders on
a timely basis could adversely affect our business, financial condition and
results of operations.
We do not
have long-term contracts with our third-party manufacturers. Although we believe
we could secure other third-party manufacturers to produce our products, our
operations would be adversely affected if we lost our relationship with any of
our current suppliers or if our current suppliers’ operations or sea or air
transportation with our overseas manufacturers were disrupted or terminated even
for a relatively short period of time. Our tools, dies and molds are located at
the facilities of our third-party manufacturers.
Although
we do not purchase the raw materials used to manufacture our products, we are
potentially subject to variations in the prices we pay our third-party
manufacturers for products, depending on what they pay for their raw
materials.
38
We
have substantial sales and manufacturing operations outside of the United States
subjecting us to risks common to international operations.
We sell
products and operate facilities in numerous countries outside the United States.
For the six months ended June 30, 2009 and the year ended December 31, 2008
sales to our international customers comprised approximately 16.8% and 17.9%,
respectively, of our net sales. We expect our sales to international customers
to account for a greater portion of our revenues in future fiscal periods.
Additionally, we utilize third-party manufacturers located principally in China
which are subject to the risks normally associated with international
operations, including:
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·
|
currency
conversion risks and currency
fluctuations;
|
|
·
|
limitations,
including taxes, on the repatriation of
earnings;
|
|
·
|
political
instability, civil unrest and economic
instability;
|
|
·
|
greater
difficulty enforcing intellectual property rights and weaker laws
protecting such rights;
|
|
·
|
complications
in complying with laws in varying jurisdictions and changes in
governmental policies;
|
|
·
|
greater
difficulty and expenses associated with recovering from natural
disasters;
|
|
·
|
transportation
delays and interruptions;
|
|
·
|
the potential
imposition of tariffs; and
|
|
·
|
the pricing
of intercompany transactions may be challenged by taxing authorities in
both Hong Kong and the United States, with potential increases in income
taxes.
|
Our
reliance on external sources of manufacturing can be shifted, over a period of
time, to alternative sources of supply, should such changes be necessary.
However, if we were prevented from obtaining products or components for a
material portion of our product line due to medical, political, labor or other
factors beyond our control, our operations would be disrupted while alternative
sources of products were secured. Also, the imposition of trade sanctions by the
United States against a class of products imported by us from, or the loss of
“normal trade relations” status by China, could significantly increase our cost
of products imported from that nation. Because of the importance of our
international sales and international sourcing of manufacturing to our business,
our financial condition and results of operations could be significantly and
adversely affected if any of the risks described above were to
occur.
39
Our
business is subject to extensive government regulation and any violation by us
of such regulations could result in product liability claims, loss of sales,
diversion of resources, damage to our reputation, increased warranty costs or
removal of our products from the market, and we cannot assure you that our
product liability insurance for the foregoing will be sufficient.
Our
business is subject to various laws, including the Federal Hazardous Substances
Act, the Consumer Product Safety Act, the Flammable Fabrics Act and the rules
and regulations promulgated under these acts. These statutes are administered by
the Consumer Products Safety Commission (“CPSC”), which has the authority to
remove from the market products that are found to be defective and present a
substantial hazard or risk of serious injury or death. The CPSC can require a
manufacturer to recall, repair or replace these products under certain
circumstances. We cannot assure you that defects in our products will not be
alleged or found. Any such allegations or findings could result in:
|
·
|
product
liability claims;
|
|
·
|
loss of
sales;
|
|
·
|
diversion of
resources;
|
|
·
|
damage to our
reputation;
|
|
·
|
increased
warranty and insurance costs;
and
|
|
·
|
removal of
our products from the
market.
|
Any of
these results may adversely affect our business, financial condition and results
of operations. There can be no assurance that our product liability insurance
will be sufficient to avoid or limit our loss in the event of an adverse outcome
of any product liability claim.
We
depend on our proprietary rights, and our inability to safeguard and maintain
the same, or claims of third parties that we have violated their intellectual
property rights, could have a material adverse effect on our business, financial
condition and results of operations.
We rely
on trademark, copyright and trade secret protection, nondisclosure agreements
and licensing arrangements to establish, protect and enforce our proprietary
rights in our products. The laws of certain foreign countries may not protect
intellectual property rights to the same extent or in the same manner as the
laws of the United States. We cannot assure you that we or our licensors will be
able to successfully safeguard and maintain our proprietary rights. Further,
certain parties have commenced legal proceedings or made claims against us based
on our alleged patent infringement, misappropriation of trade secrets or other
violations of their intellectual property rights. We cannot assure you that
other parties will not assert intellectual property claims against us in the
future. These claims could divert our attention from operating our business or
result in unanticipated legal and other costs, which could adversely affect our
business, financial condition and results of operations.
Market
conditions and other third-party conduct could negatively impact our margins and
implementation of other business initiatives.
Economic
conditions, such as rising fuel prices, increased competition and decreased
consumer confidence, may adversely impact our margins. Such a weakened economic
and business climate could create uncertainty and adversely affect our sales and
profitability. Other conditions, such as the unavailability of electronics
components, may impede our ability to manufacture, source and ship new and
continuing products on a timely basis. Significant and sustained increases in
the price of oil could adversely impact the cost of the raw materials used in
the manufacture of our products, such as plastic.
We
may not have the funds necessary to purchase our outstanding convertible senior
notes upon a fundamental change or other purchase date, as required by the
indenture governing the notes.
On June
15, 2010, June 15, 2013 and June 15, 2018, holders of our convertible senior
notes may require us to purchase their notes, which repurchase may be made for
cash. In addition, holders may also require us to purchase their notes for cash
upon the occurrence of certain fundamental changes in our board composition or
ownership structure, if we liquidate or dissolve under certain circumstances or
if our common stock ceases being quoted on an established over-the-counter
trading market in the United States. If we do not have, or have access to,
sufficient funds to repurchase the notes, then we could be forced into
bankruptcy. In fact, we expect that we would require third-party financing, but
we cannot assure you that we would be able to obtain that financing on favorable
terms or at all.
We
have a history of making acquisitions which resulted in material amounts of
goodwill. Any future acquisitions may also result in material amounts
of goodwill which, if it becomes impaired, would result in a reduction in our
net income.
Goodwill
is the amount by which the cost of an acquisition exceeds the fair value of the
net assets we acquire. Current accounting standards require that goodwill no
longer be amortized but instead be periodically evaluated for impairment based
on the fair value of the reporting unit. As of June 30, 2009, we have recognized
a 100% impairment of our goodwill, for a non-cash charge to income of $407.1
million. Any goodwill associated with future acquisitions is subject
to the same impairment risk.
40
Item
6. Exhibits
Number
|
Description
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the
Company(1)
|
3.2.1
|
By-Laws
of the Company(2)
|
|
3.2.2
|
Amendment
to By-Laws of the Company(3)
|
|
4.1
|
Indenture,
dated as of June 9, 2003, by and between the Registrant and Wells Fargo
Bank, N.A.(4)
|
|
4.2
|
Form
of 4.625% Convertible Senior Note(4)
|
|
18
|
Auditor
Preferability Letter(5)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer(5)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer(5)
|
|
31.3
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer(5)
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer(5)
|
|
32.2
|
Section
1350 Certification of Chief Executive Officer(5)
|
|
32.3
|
Section
1350 Certification of Chief Financial
Officer(5)
|
(1)
|
Filed previously as Appendix 2 to
the Company’s Schedule 14A Proxy Statement filed August 23, 2002 and
incorporated herein by
reference.
|
(2)
|
Filed previously as an exhibit to
the Company’s 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 Company’s Registration Statement on Form SB-2 (Reg. No. 333-22583),
effective May 1, 1997, and incorporated herein by
reference.
|
(4)
|
Filed previously as an exhibit to
the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2003, filed on August 14, 2003, and incorporated herein by
reference.
|
(5)
|
Filed
herewith.
|
41
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
JAKKS
PACIFIC, INC.
|
||
Date:
August 14, 2009
|
By:
|
/s/ JOEL M. BENNETT
|
Joel M. Bennett
|
||
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
|
42
EXHIBIT
INDEX
Number
|
Description
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the
Company(1)
|
3.2.1
|
By-Laws
of the Company(2)
|
|
3.2.2
|
Amendment
to By-Laws of the Company(3)
|
|
4.1
|
Indenture,
dated as of June 9, 2003, by and between the Registrant and Wells Fargo
Bank, N.A.(4)
|
|
4.2
|
Form
of 4.625% Convertible Senior Note(4)
|
|
18
|
Auditor
Preferability Letter(5)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer(5)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer(5)
|
|
31.3
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer(5)
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer(5)
|
|
32.2
|
Section
1350 Certification of Chief Executive Officer(5)
|
|
32.3
|
Section
1350 Certification of Chief Financial
Officer(5)
|
(1)
|
Filed previously as Appendix 2 to
the Company’s Schedule 14A Proxy Statement filed August 23, 2002 and
incorporated herein by
reference.
|
(2)
|
Filed previously as an exhibit to
the Company’s 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 Company’s Registration Statement on Form SB-2 (Reg. No. 333-22583),
effective May 1, 1997, and incorporated herein by
reference.
|
(4)
|
Filed previously as an exhibit to
the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2003, filed on August 14, 2003, and incorporated herein by
reference.
|
(5)
|
Filed
herewith.
|
43