Comparison of the Three Months Ended March 31, 2011 and 2012
Traditional Toys and Electronics. Net sales of our Traditional Toys and Electronics segment were $41.6 million in the three months ended March 31, 2012, compared to $38.2 million in the prior year period, representing an increase of $3.4 million, or 8.9%. The increase in net sales was primarily due to the launch of Monsuno® toy line, increased unit sales of Cabbage Patch Kids® dolls, large baby dolls and accessories based on Disney Princess® characters and the inclusion of our latest acquisition, Moose Mountain . This was offset in part by decreases in unit sales of some products, including Pirates of the Caribbean® action figures and accessories, Real Construction® activity products and electronics based on the Plug it in and Play TV Games® brand.
Role Play, Novelty and Seasonal Toys. Net sales of our Role Play, Novelty and Seasonal Toys were $31.8 million in the three months ended March 31, 2012, compared to $34.2 million in the prior year period, representing a decrease of $2.4 million, or 7.0%. The decrease in net sales was primarily due to decreases in unit sales of our role-play and dress-up toys, including those based on Disney Princess® and Disney Fairies®, offset in part by increases in unit sales of our Halloween costumes and accessories, and our kids outdoor furniture and activity tables.
Traditional Toys and Electronics. Cost of sales of our Traditional Toys and Electronics segment was $27.3 million, or 65.7% of related net sales, for the three months ended March 31, 2012, compared to $28.6 million, or 74.9% of related net sales, in the prior year period, representing a decrease of $1.3 million, or 4.5%. The dollar decrease and the decrease in percentage of cost of sales to net sales is driven by a decrease of $1.8 million in royalty expense. The decrease in royalty expense is due to changes in product mix from products with higher royalty rates to products with lower royalty rates or proprietary brands with no royalty rates. Depreciation of molds and tools in the segment was comparable year over year.
Role Play, Novelty and Seasonal Toys. Cost of sales of our Role Play, Novelty and Seasonal Toys segment was $22.5 million, or 70.8% of related net sales, in 2012, compared to $19.4 million, or 56.7% of related net sales, in the prior year period representing a increase of $3.1 million, or 16.0%. Product costs were comparable year over year, however, increased as a percentage of sales due to higher costs on the lower volume of purchases. Royalty expense increased by $3.3 million and increased as a percentage of sales due to a one-time credit in the period ending March 31, 2011. Our depreciation of molds and tools in the segment are comparable year over year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $43.0 million in the three months ended March 31, 2012 and $39.1 million in the prior year period, constituting 58.5% and 54.0% of net sales, respectively. Selling, general and administrative expenses increased $3.9 million from the prior year period primarily due to an increase of advertising expenses related to the launch of Monsuno ($2.0 million), legal and financial advising fees related to the unsolicited indication of interest to acquire the Company ($1.4 million), bonus expense ($1.6 million), salary and employee benefits ($1.5 million), legal fees ($0.5 million), offset in part by bad debt recovery ($1.3 million), and decreases in amortization of intangible assets ($0.5 million), stock based compensation expense ($0.5 million), expenses related to cooperative advertising ($0.9 million) and accounting fees ($0.2 million). Selling, general and administrative expenses have increased as a percentage of sales due to the incorporation of Moose Mountain overhead and other non-variable expenses.
Other Expense
Our equity in the net income/ (loss) from our animation joint venture is charged to other expense. Operations of the joint venture commenced in the fourth quarter of 2010. There was nominal activity in the three months ended March 31, 2012.
Interest income in the three months ended March 31, 2012 was $0.2 million, comparable to $0.1 million in the three months ended March 31, 2011.
Interest Expense
Interest expense was $2.0 million in the three months ended March 31, 2012, as compared to $2.0 million in the prior period. In the three months ended March 31, 2012, we booked interest expense of $2.0 million related to our convertible senior notes payable. In the three months ended March 31, 2011, we booked interest expense of $1.9 million related to our convertible senior notes payable and net interest expense of $0.1 million related to uncertain tax positions taken or expected to be taken in a tax return.
Our income tax benefit, which includes federal, state and foreign income taxes, and discrete items, was $5.2 million, or an effective tax rate of 24.5% for the three months ended March 31, 2012. During the comparable period in 2011, the income tax benefit was $6.1 million, or an effective tax rate of 36.7%.
The income tax benefit for the three months ended March 31, 2012 included a discrete tax benefit of $0.4 million related to a reduction in tax reserves resulting from closed statutes. Absent these discrete tax benefits, the Company’s effective tax rate would be 22.8%.
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. 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 and Halloween 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.
Liquidity and Capital Resources
As of March 31, 2012 we had working capital of $354.7 million, compared to $374.7 million as of December 31, 2011. The decrease was primarily attributable to seasonably low accounts receivable balances offset partially by lower accrued expenses and accounts payable balances.
Operating activities provided net cash of $6.1 million in the first three months of 2012, as compared to providing net cash of $9.6 million in the prior year period. Net cash was provided primarily from receipt of payments for outstanding receivables. Our accounts receivable turnover as measured by days sales for the quarter outstanding in accounts receivable was 72 days as of March 31, 2012, comparable to 71 days as of March 31, 2011. 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 March 31, 2012, we had cash and cash equivalents of $254.6 million.
Our investing activities used net cash of $6.2 million in the three months ended March 31, 2012, as compared to $8.5 million in the prior year period, consisting primarily of cash paid for the purchase of office furniture and equipment and molds and tooling of $3.2 million used in the manufacture of our products, the Tollytots earn-out of $1.7 million, and the Moose Mountain working capital adjustment of $0.7 million. 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 March 31, 2012, these agreements required future aggregate minimum guarantees of $53.4 million, exclusive of $45.7 million in advances already paid. Of this $53.4 million future minimum guarantee, $37.2 million is due over the next twelve months.
Our financing activities used net cash of $2.6 million in the three months ended March 31, 2012, as compared to $5.0 million in the prior year period, consisting primarily of cash paid for dividends to our shareholders.
In October 2008, the Company acquired substantially all of the assets of Tollytots Limited. The total initial consideration of $26.8 million consisted of $12.0 million in cash and the assumption of liabilities in the amount of $14.8 million, and resulted in goodwill of $4.1 million, all of which has been determined to be impaired and was written off in the quarter ended June 30, 2009. 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 was recorded as goodwill when earned. In the first earn-out period ended December 31, 2009, no portion of the earn-out was earned, while $1.7 million was earned for each of the second and third earn-out periods ended December 31, 2010 and 2011. 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, 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 $23.8 million consisted of $20.4 million in cash and the assumption of liabilities in the amount of $3.4 million, and resulted in goodwill of $13.2 million, all of which has been determined to be impaired and was written off in the quarter ended June 30, 2009. 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 was recorded as goodwill when earned. For the earn-out periods ended September 30, 2009, 2010 and 2011, $1.9 million, $1.9 million and $1.8 million were earned, respectively. 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 October 2011, the Company acquired all of the stock of Moose Mountain Toymakers Limited, a Hong Kong company, and a related New Jersey company, Moose Mountain Marketing, Inc. (collectively, “Moose Mountain”). The total initial consideration of $32.2 million consisted of $16.7 million in cash and the assumption of liabilities in the amount of $15.5 million, and resulted in goodwill of $14.2 million. In addition, the Company agreed to pay an earn-out of up to an aggregate amount of $5.3 million in cash over the three calendar years following the acquisition based on the achievement of certain financial performance criteria. The fair value of the expected earn-out of $4.6 million was included in goodwill and assumed liabilities as of December 31, 2011. All future changes to the earn-out liability will be charged to income. Moose Mountain is a leading designer and producer of foot to floor ride-ons, inflatable environments, wagons, pinball machines and tents and was included in our results of operations from the date of acquisition.
During the first quarter of 2012, an aggregate of $1.7 million of earn-out was paid in connection with the Tollytots acquisition, in addition to a working capital adjustment of $0.7 million in connection with the Moose Mountain acquisition.
In November 2009, we sold an aggregate principal amount of $100.0 million of 4.50% Convertible Senior Notes due 2014 (the “Notes”). The Notes, which are senior unsecured obligations the Company, pay interest semi-annually at a rate of 4.50% per annum and mature on November 1, 2014. The initial conversion rate is 63.2091 shares of our common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $15.82 per share of common stock), subject to adjustment in certain circumstances. As a result of the cash dividend of $0.10 per share declared by the Board of Directors paid October 3, 2011, January 2, 2012, and April 2, 2012, the new conversion rate will be 64.3434 shares of JAKKS common stock per $1,000 principal amount of notes (or approximately $15.54 per share). Prior to August 1, 2014, holders of the Notes may convert their Notes only upon specified events. Upon conversion, the Notes may be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. Holders of the Notes may require us to repurchase for cash all or some of their Notes upon the occurrence of a fundamental change (as defined in the Notes).
We believe that our cash flows from operations and cash and cash equivalents 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. Although a significant portion of our cash is held off-shore and is currently subject to a 25% repatriation tax, we intend to finance our long-term liquidity requirements out of net cash provided by operations and net cash and cash equivalents. As of March 31, 2012, we do not have any off-balance sheet arrangements.
Pursuant to the Clinton Group Agreement discussed above in Subsequent Events (see Notes to Condensed Consolidated Financial Statements – Note 16), we agreed, subject to certain conditions, to use our reasonable efforts to commence a tender offer to our shareholders to purchase our common stock (the “Common Stock”) with an aggregate value of at least $80,000,000 at a price per share equal to at least $20.00 per share no later than May 25, 2012. If the total amount of shares purchased in the tender offer is less than $80,000,000, we agreed to conduct subsequent self-tender offers or open market purchases until we have repurchased a minimum of $80,000,000 worth of shares. We are considering the manner of financing the tender offer and/or buy-back, including third party financing part of the cost, to minimize exposure to taxes on repatriation of earnings.
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.
In November 2009, we issued convertible senior notes payable of $100.0 million principal amount with a fixed interest rate of 4.50% per annum, which remain outstanding as of March 31, 2012. Accordingly, we are not generally subject to any direct risk of loss arising from changes in interest rates.
We have wholly-owned subsidiaries in Hong Kong, China, Canada, Spain, France 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. Our subsidiaries in the United Kingdom, Spain and France 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.
Item 1. Legal Proceedings
We are a party to, and certain of our property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of our business, but we do not believe that any of these claims or proceedings will have a material effect on our business, financial condition or results of operations.
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.
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:
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Age Compression: The phenomenon of children outgrowing toys at younger ages, particularly in favor of interactive and high technology products;
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Increasing use of technology;
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Shorter life cycles for individual products; and
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Higher consumer expectations for product quality, functionality and value.
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We cannot assure you that:
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our current products will continue to be popular with consumers;
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the product lines or products that we introduce will achieve any significant degree of market acceptance; or
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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.
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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:
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media associated with our character-related and theme-related product lines will be released at the times we expect or will be successful;
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the success of media associated with our existing character-related and theme-related product lines will result in substantial promotional value to our products;
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we will be successful in renewing licenses upon expiration on terms that are favorable to us; or
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we will be successful in obtaining licenses to produce new character-related and theme-related products in the future.
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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.
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Our current licenses require us to pay minimum royalties
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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.
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Some of our licenses are restricted as to use
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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.
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New licenses are difficult and expensive to obtain
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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.
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A limited number of licensors account for a large portion of our net sales
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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:
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greater financial resources;
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larger sales, marketing and product development departments;
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stronger name recognition;
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longer operating histories; and
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greater economies of scale.
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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.
We may not be able to sustain or manage our 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 nine years, which was achieved through acquisitions of businesses, products and licenses. For example, revenues associated with companies we acquired since 2008 were approximately $218.5 million and $25.1 million, for the year ended December 31, 2011 and the three months ended March 31, 2012, respectively, representing 32.2% and 34.2% 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 2008 represented approximately 32.2% and 34.2% of our total revenues for the year ended December 31, 2011 and the three months ended March 31, 2012, respectively. Future acquisitions will succeed only if we can effectively assess characteristics of potential target companies and product lines, such as:
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attractiveness of products;
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suitability of distribution channels;
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management ability;
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financial condition and results of operations; and
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the degree to which acquired operations can be integrated with our operations.
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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:
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difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel and harmonizing diverse business strategies and methods of operation;
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diversion of management attention from operation of our existing business;
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loss of key personnel from acquired companies; and
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failure of an acquired business to achieve targeted financial results.
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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 56.6% and 45.5% of our net sales for the year ended December 31, 2011 and the three months ended March 31, 2012, 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 Stephen G. Berman, our President and Chief Executive Officer. We cannot assure you that we would be able to find an appropriate replacement for Mr. Berman if the need should arise, and any loss or interruption of 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.
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 three months ended March 31, 2012 and the year ended December 31, 2011 sales to our international customers comprised approximately 13.0% and 16.0%, 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;
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limitations, including taxes, on the repatriation of earnings;
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political instability, civil unrest and economic instability;
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greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;
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complications in complying with laws in varying jurisdictions and changes in governmental policies;
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greater difficulty and expenses associated with recovering from natural disasters;
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transportation delays and interruptions;
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the potential imposition of tariffs; and
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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.
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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.
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:
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product liability claims;
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loss of sales;
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diversion of resources;
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damage to our reputation;
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increased warranty and insurance costs; and
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removal of our products from the market.
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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, as required by the indenture governing the notes.
Our $100.0 million principal amount of 4.50% convertible senior notes mature on November 1, 2014. Holders of these notes may require us to purchase all or some of 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 not be amortized but instead be periodically evaluated for impairment based on the fair value of the reporting unit. In the second quarter of 2009, we recognized an impairment of our goodwill, for a non-cash charge to income of $407.1 million. Goodwill currently on our books and any goodwill associated with future acquisitions are subject to the same impairment risk.
|
Number
|
|
Description
|
| |
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of the Company(1)
|
|
3.2
|
|
Amended and Restated By-Laws of the Company(2)
|
|
4.3
|
|
Indenture, dated November 10, 2009, by and between the Registrant and Wells Fargo Bank, N.A. (4)
|
|
4.4
|
|
Form of 4.50% Senior Convertible Note (3)
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer(4)
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer(4)
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer(4)
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer(4)
|
| 101.INS |
|
XBRL Instance Document |
| 101.SCH |
|
XBRL Taxonomy Extension Schema Document |
| 101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
(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 Current Report on Form 8-K filed on October 21, 2011, and incorporated herein by reference.
|
| |
|
|
(3)
|
Filed previously as an exhibit to the Company’s Current Report on Form 8-K, filed on November 10, 2009, and incorporated herein by reference.
|
| |
|
|
(4)
|
Filed herewith.
|
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: May 10, 2012
|
By:
|
/s/ JOEL M. BENNETT
|
| |
|
Joel M. Bennett
|
| |
|
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
|
|
Number
|
|
Description
|
| |
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of the Company(1)
|
|
3.2
|
|
Amended and Restated By-Laws of the Company(2)
|
|
4.3
|
|
Indenture, dated November 10, 2009, by and between the Registrant and Wells Fargo Bank, N.A. (3)
|
|
4.4
|
|
Form of 4.50% Senior Convertible Note (3)
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer(4)
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer(4)
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer(4)
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer(4)
|
| 101.INS |
|
XBRL Instance Document |
| 101.SCH |
|
XBRL Taxonomy Extension Schema Document |
| 101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
(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 Current Report on Form 8-K filed on October 21, 2011, and incorporated herein by reference.
|
| |
|
|
(3)
|
Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on November 10, 2009, and incorporated herein by reference.
|
| |
|
|
(4)
|
Filed herewith.
|