SEC Filing | JAKKS Pacific Inc.

1 ================================================================================ 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, 2000 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 (I.R.S. Employer incorporation or organization) Identification No.) 22761 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 [ ] --------------- The number of shares outstanding of the issuer's common stock is 19,440,830 (as of August 14, 2000). ================================================================================

2 JAKKS PACIFIC, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q QUARTER ENDED JUNE 30, 2000 ITEMS IN FORM 10-Q PAGE ---- Facing page Part I FINANCIAL INFORMATION Item 1. Financial Statements. Condensed consolidated balance sheets - December 31, 1999 and June 30, 2000 (unaudited) 3 Condensed consolidated statements of operations for the three and six months ended June 30, 1999 and 2000 (unaudited) 4 Condensed consolidated statements of cash flows for the six months ended June 30, 1999 and 2000 (unaudited) 5 Notes to condensed consolidated financial statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13 Part II OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. 14 Item 5. Other Information. 14 Item 6. Exhibits and Reports on Form 8-K. 15 Signatures. 16 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements included in this report regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. When we use words like "intend," "anticipate," "believe," "estimate," "plan" or "expect," we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We 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. 2

3 JAKKS PACIFIC, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets ASSETS December 31, 1999 June 30, 2000 ----------------- -------------- (*) (unaudited) Current assets Cash and cash equivalents $ 57,546,406 $ 65,777,215 Marketable securities 39,333,944 28,045,705 Accounts receivable, net 38,024,903 45,253,165 Inventory, net 19,863,508 19,640,391 Advance royalty payments 1,137,238 2,217,927 Prepaid expenses and other current assets 1,617,692 996,093 ------------ ------------ Total current assets 157,523,691 161,930,496 ------------ ------------ Office furniture and equipment 1,233,068 1,715,564 Molds and tooling 15,283,211 18,814,872 Leasehold improvements 344,263 1,205,750 ------------ ------------ Total 16,860,542 21,736,186 Less accumulated depreciation and amortization 5,320,103 7,796,954 ------------ ------------ Property and equipment, net 11,540,439 13,939,232 ------------ ------------ Notes Receivables-Officers -- 3,250,000 Investment in joint venture 3,658,339 2,358,885 Goodwill, net 46,020,232 45,190,119 Trademarks, net 12,633,248 12,368,897 Intangibles and deposits, net 1,502,147 1,153,741 ------------ ------------ Total assets $232,878,096 $240,191,370 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 41,137,161 $ 34,605,966 Income taxes payable 3,211,926 3,669,104 Current portion of long term debt 4,967 -- ------------ ------------ Total current liabilities 44,354,054 38,275,070 ------------ ------------ Long term debt 8,713 -- Deferred income taxes 1,013,834 826,020 ------------ ------------ Total liabilities 45,376,601 39,101,090 ------------ ------------ Commitments Stockholders' equity Preferred stock, $.001 par value; 1,000,000 shares authorized, no shares issued -- -- Common stock, $.001 par value; 25,000,000 shares authorized; 19,272,692 and 19,412,830 shares issued and outstanding 19,273 19,413 Additional paid-in capital 155,172,781 155,921,232 Retained earnings 32,309,441 45,149,635 ------------ ------------ Total stockholders' equity 187,501,495 201,090,280 ------------ ------------ Total liabilities and stockholders' equity $232,878,096 $240,191,370 ============ ============ See accompanying notes to condensed consolidated financial statements. (*) Derived from audited financial statements 3

4 JAKKS PACIFIC, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the Three and Six Months Ended June 30, 1999 and 2000 (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 1999 2000 1999 2000 Net sales $35,981,209 $50,577,721 $60,941,501 $101,359,796 Cost of sales 21,332,316 28,829,894 35,528,848 59,508,310 ----------- ----------- ----------- ------------ Gross profit 14,648,893 21,747,827 25,412,653 41,851,486 Selling, general and administrative expenses 10,424,163 15,032,129 18,444,588 31,131,931 ----------- ----------- ----------- ------------ Income from operations 4,224,730 6,715,698 6,968,065 10,719,555 Other (income) and expense: Income from Joint Venture -- (1,573,792) -- (6,785,137) Other expense -- 620,572 -- 1,072,375 Interest income (398,385) (1,208,242) (530,851) (2,160,288) Interest expense 36,576 -- 169,727 -- ----------- ----------- ----------- ------------ Income before provision for income taxes 4,586,539 8,877,160 7,329,189 18,592,605 Provision for income taxes 1,231,602 2,640,399 1,969,055 5,752,411 ----------- ----------- ----------- ------------ Net income $ 3,354,937 $ 6,236,761 $ 5,360,134 $ 12,840,194 =========== =========== =========== ============ Net income per share - basic $ 0.25 $ 0.32 $ 0.44 $ 0.66 =========== =========== =========== ============ Net income per share - diluted $ 0.21 $ 0.31 $ 0.39 $ 0.63 =========== =========== =========== ============ See accompanying notes to condensed consolidated financial statements. 4

5 JAKKS PACIFIC, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1999 and 2000 (Unaudited) Six Months Ended June 30, 1999 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,360,134 $12,840,194 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,469,549 3,787,980 Change in operating assets and liabilities Accounts receivable (9,937,611) (7,228,262) Preferred return from joint venture -- 1,299,454 Inventory (4,566,216) 223,117 Advanced royalty payments (890,078) (1,080,689) Prepaid expenses and other 749,614 621,599 Accounts payable and accrued expenses 12,206,368 (6,531,195) Income taxes payable 1,198,819 457,178 Deferred income taxes (127,250) (187,814) Sale of marketable securities -- 11,288,239 ----------- ----------- Total adjustments 103,195 2,649,607 ----------- ----------- Net Cash provided by operating activities 5,463,329 15,489,801 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Cash paid in excess of fair value of toy business assets acquired (goodwill) (4,320,501) -- Purchase of Property and equipment (3,816,830) (4,875,644) Other assets 310,276 131,741 Investment in joint venture (53,852) -- ----------- ----------- Net Cash used by investing activities (7,880,907) (4,743,903) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock 51,898,066 -- Proceeds from stock options and warrants exercised 2,741,025 748,591 Dividends paid on convertible preferred stock (437,500) -- Notes Receivable - Officers -- (3,250,000) Repayment of long term debt -- (13,680) ----------- ----------- Net Cash provided (used) by financing activities 54,201,591 (2,515,089) ----------- ----------- Net increase in cash and cash equivalents 51,784,013 8,230,809 Cash and cash equivalents, beginning of period 12,452,201 57,546,406 ----------- ----------- Cash and cash equivalents, end of period $64,236,214 $65,777,215 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 897,486 $ 5,610,257 =========== =========== Interest $ 169,727 $ -- =========== =========== See note 4 for additional supplemental information to condensed consolidated financial statements. See accompanying notes to condensed consolidated financial statements. 5

6 JAKKS PACIFIC, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2000 Note 1 - Basis of presentation The accompanying 1999 and 2000 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 generally accepted accounting principles 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 the financial statements and the notes thereto included in the Company's Form 10-K, which contains financial information for the years ended December 31, 1997, 1998 and 1999. The information provided in this report reflects all adjustments (consisting solely of normal recurring accruals) that are, in the opinion of management, necessary to present fairly the results of operations for this period. The results for this period are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Basic earnings per share has been computed using the weighted average number of common shares. Diluted earnings per share has been computed using the weighted average number of common shares and common share equivalents (which consist of warrants, options and convertible securities, to the extent they are dilutive). All common shares and common share equivalents have been adjusted retroactively to give effect to a three-for-two stock split paid on November 4, 1999. 6

7 JAKKS PACIFIC, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2000 Note 2 -- Earnings per share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This statement establishes simplified standards for computing and presenting earnings per share (EPS). It requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and disclosure of the calculation of each EPS amount. THREE MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------------- 1999 2000 ------------------------------------ ------------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE -------- ---------- --------- -------- --------- --------- Net income per share - basic Net Income................... $3,354,937 $6,236,761 Preferred Dividends Declared/Paid............... (87,500) -- ---------- ---------- Net income available to common stockholders......... 3,267,437 13,244,009 $0.25 6,236,761 19,378,977 $0.32 ---------- ---------- ----- ---------- ---------- ----- Effect of dilutive securities Options and warrants......... -- 1,358,555 -- 992,389 9% convertible debentures.... 23,684 326,085 -- -- 7% convertible preferred stock..................... 87,500 802,607 -- -- -------- ---------- ---------- --------- Net income per share - diluted Income available to common stockholders plus assumed exercises and conversions... $3,378,621 15,731,256 $0.21 $6,236,761 20,371,366 $0.31 ========== ========== ===== ========== ========== ===== SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------------- 1999 2000 ------------------------------------ ------------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE -------- ---------- --------- -------- --------- --------- Net income per share - basic Net Income................... $5,360,134 $12,840,194 Preferred Stock Dividends... (437,500) -- ---------- ----------- Net income available to common stockholders......... 4,922,634 11,210,841 $0.44 12,840,194 19,334,289 $0.66 ---------- ---------- ----- ----------- ---------- ----- Effect of dilutive securities Options and warrants......... -- 1,143,060 -- 1,006,173 9% convertible debentures.... 116,867 943,478 -- -- 7% convertible preferred stock..................... 437,500 820,296 -- -- -------- ---------- ----------- --------- Net income per share - diluted Income available to common stockholders plus assumed exercises and conversions... $5,477,001 14,117,675 $0.39 $12,840,194 20,340,462 $0.63 ========== ========== ===== =========== ========== ===== 7

8 Note 3 -- Preferred stock and common stock During 1999, the Company issued and sold 6,810,955 shares of its common stock in public offerings and received $117.8 million of net proceeds. Note 4 -- Supplemental information to condensed consolidated statements of cash flows In 1999, the holders of $6.0 million principal amount of the Company's 9% convertible debentures converted all such debentures into an aggregate of 1,565,218 shares of the Company's common stock. Additionally, all 1,000 outstanding shares of 7% cumulative convertible preferred stock with a total stockholders' equity value of $4,731,152 were converted into an aggregate of 837,987 shares of the Company's common stock. Note 5 -- Acquisitions In June 1999, the Company purchased all of the outstanding shares of Berk Corporation, a producer of educational toy foam puzzle mats and activity sets, for approximately $3.3 million in cash. In connection with this acquisition, the Company assumed liabilities of approximately $3.1 million and incurred acquisition costs of approximately $113,000. In October 1999, the Company acquired all of the stock of Flying Colors Toys, Inc. for approximately $52.9 million. Consideration paid at closing was in cash. Professional fees totaling $310,667 were incurred as part of the acquisition costs. Contingent consideration includes an earn-out in an amount of up to $4.5 million in each of the three 12-month periods following the closing, if gross profits of Flying Colors Toys branded products achieve certain prescribed levels in each of such period. Note 6 -- Notes Receivable From Officers As of June 30, 2000, there were two notes receivable from officers totaling $3.0 million issued at interest rates of 6.5% each, with interest payable on each April 28 and October 28 of each year, and principal payable at a maturity date of April 28, 2003. Additionally, there is a third note receivable from an officer for $250,000 issued at an interest rate of 7.0%, with interest and principal payable at a maturity date of May 12, 2002. Note 7 -- Subsequent Event On July 28, 2000, the Company acquired all of the outstanding capital stock of Pentech International for an aggregate purchase price of approximately $20.6 million, which was paid in cash on the closing of the transaction. In addition, the Company paid on the closing $10.0 million to pay down certain indebtedness of Pentech International, assumed liabilities of approximately $23.7 million and incurred estimated legal and other acquisition costs of approximately $1.1 million. Pentech International designs, produces and markets licensed pens, markers, pencils and other writing instruments, craft and activity kits, and related stationery products. JAKKS PACIFIC, INC. AND SUBSIDIARIES 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 the Company's Condensed Consolidated Financial Statements and Notes thereto which appear elsewhere herein. OVERVIEW JAKKS was founded to design, develop, produce and market children's toys and related products. We commenced business operations when we assumed operating control over the toy business of Justin Products Limited ("Justin"), and have included the results of Justin's operations in our consolidated financial statements from July 1, 1995, the effective date of that acquisition. The Justin product lines, which consisted primarily of fashion dolls and accessories and electronic products for children, accounted for substantially all of our net sales for the period from April 1, 1995 (inception) to December 31, 1995. One of our key strategies has been to grow through the acquisition or licensing of product lines, concepts and characters. In 1996, we expanded our product lines to include products based on licensed characters and properties, such as World Wrestling Federation action figures and accessories. We acquired Road Champs in February 1997, and have included the results of operations of Road Champs from February 1, 1997, the effective date of the acquisition. We acquired the Child Guidance and Remco trademarks in October 1997, both of which contributed to operations nominally in 1997, but contributed more significantly to operations commencing in 1998. In June 1999, we acquired Berk Corporation with its lines of educational toy foam puzzle mats and activity sets. Berk began to contribute modestly beginning in the third quarter of 1999. In October 1999, we acquired Flying Colors Toys, Inc., whose product lines include licensed activity kits, play clay compound playsets and lunch boxes as well as other related products. Flying Colors product lines contributed to operations beginning in the fourth quarter of 1999. 8

9 Our products currently include (1) action figures and accessories featuring licensed characters, principally from the World Wrestling Federation license, (2) Flying Colors molded plastic activity sets, clay compound playsets and lunch boxes, (3) Wheels division products, including Road Champs die-cast collectible and toy vehicles and Remco toy vehicles and role-play toys and accessories, (4) Child Guidance infant and pre-school electronic toys, educational toy foam puzzle mats and blocks, activity sets and outdoor products, and (5) fashion and mini dolls and related accessories. In general, we acquire products or product concepts from others or we engage unaffiliated third parties to develop our own products, thus minimizing operating costs. Royalties payable to our developers generally range from 1% to 6% of the wholesale price for each unit of a product sold by us. We expect that outside inventors will continue to be a source of new products in the future. We also generate internally new product concepts, for which we pay no royalties. In June 1998, we formed a joint venture with THQ Inc., a developer, publisher and distributor of interactive entertainment software, and the joint venture licensed the rights from World Wrestling Federation Entertainment to publish World Wrestling Federation electronic video game software on all platforms. The first games produced under this license were released in November 1999. We are entitled to receive a guaranteed preferred return based on the sales of the video games, and THQ is entitled to receive the balance of the profits generated by the joint venture. We contract the manufacture of most of our products to unaffiliated manufacturers located in China. We sell the finished products on a letter of credit basis or on open account to our customers, who take title to the goods in Hong Kong. These methods allow us to reduce certain operating costs and working capital requirements. A portion of our sales, primarily sales of our Road Champs and Flying Colors products, originate in the United States, so we hold certain inventory in warehouse and fulfillment facilities operated by unaffiliated third parties. In addition, we hold inventory of other products from time to time in support of promotions or other domestic programs with retailers. To date, substantially all of our sales have been to domestic customers. We intend to expand distribution of our products into foreign territories and, accordingly, we have (1) engaged representatives to oversee sales in certain territories, (2) engaged distributors in certain territories, and (3) established direct relationships with retailers in certain territories. We establish reserves for sales allowances, including promotional allowances and allowances for anticipated defective product returns and potential markdowns, at the time of shipment. The reserves are determined as a percentage of net sales based upon either historical experience or on estimates or programs agreed upon by our customers. Our cost of sales consists primarily of the cost of goods produced for us by unaffiliated third-party manufacturers, royalties earned by licensors on the sale of these goods and amortization of the tools, dies and molds owned by us that are used in the manufacturing process. Other costs include inbound freight and provisions for obsolescence. Significant factors affecting our cost of sales as a percentage of net sales include (1) the proportion of net sales generated by various products with disparate gross margins, (2) the proportion of net sales made domestically, which typically carry higher gross margins than sales made in Hong Kong, and (3) the effect of amortizing the fixed cost components of cost of sales, primarily amortization of tools, dies and molds, over varying levels of net sales. Selling, general and administrative expenses include costs directly associated with the selling process, such as sales commissions, advertising and travel expenses, as well as general corporate expenses, goodwill and trademark amortization and product development. We have recorded goodwill of approximately $47.6 million and trademarks of approximately $13.9 million in connection with acquisitions made to date. Goodwill is being amortized over a 30-year period, while trademark acquisition costs are being amortized over periods ranging from 10 to 30 years. 9

10 RESULTS OF OPERATIONS The following unaudited table sets forth, for the periods indicated, certain statement of operations data as a percentage of net sales. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 1999 2000 1999 2000 ------ ------ ------- ------- Net sales............................................. 100.0% 100.0% 100.0% 100.0% Cost of sales......................................... 59.3 57.0 58.3 58.7 ----- ----- ----- ----- Gross profit.......................................... 40.7 43.0 41.7 41.3 Selling, general and administrative expenses.......... 29.0 29.7 30.3 30.7 ----- ----- ----- ----- Income from operations................................ 11.7 13.3 11.4 10.6 Income from joint venture............................. -- (3.1) -- (6.7) Interest, net......................................... (1.0) (2.4) (0.6) (2.1) Other expenses........................................ 0.0 1.2 -- 1.1 ----- ----- ----- ----- Income before income taxes............................ 12.7 17.6 12.0 18.3 Provision for income taxes............................ 3.4 5.2 3.2 5.7 ----- ----- ----- ----- Net income............................................ 9.3% 12.4% 8.8% 12.6% ===== ===== ===== ===== THREE MONTHS ENDED JUNE 30, 2000 AND 1999 Net Sales. Net sales increased $14.6 million, or 40.6%, to $50.6 million in 2000 from $36.0 million in 1999. The significant growth in net sales was due primarily to the continuing sales of the World Wrestling Federation action figure product line with its expanded product offerings and frequent character releases, as well as to increasing sales in our Wheels division, consisting primarily of our Road Champs die-cast toy and collectible vehicles with its BXS die-cast bicycles and MXS die-cast motorcycles, fashion and holiday dolls and Child Guidance pre-school toys and the additions of Berk foam products, which contributed nominally to operations beginning in the third quarter of 1999 and Flying Colors products, which began contributing to operations beginning in the fourth quarter of 1999. Gross Profit. Gross profit increased $7.1 million, or 48.5%, to $21.7 million in 2000, or 43.0% of net sales, from $14.6 million, or 40.7% of net sales, in 1999. The overall increase in gross profit was attributable to the significant increase in net sales. The increase in gross profit margin of 2.3% of Net Sales is attributed to lower product costs associated with the BXS, MXS and wrestling products, which is partially offset by the increase in amortization expense of molds and tools used in the manufacture of our products and royalty expense as a percentage of net sales due to changes in the product mix and the launch of a larger number of products in 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $15.0 million in 2000 and $10.4 million in 1999, constituting 29.7% and 29.0% of net sales, respectively. The overall significant increase of $4.6 million in such costs was due to costs incurred in support of the Company's development, marketing and distribution of products under its recent acquisition of Flying Color Toys trademarks. Selling, general and administrative expenses increased as a percentage of net sales due in part to the fixed nature of certain of these expenses. The overall dollar increase was also due to the significant increase in net sales with its proportionate impact on variable selling costs such as freight and shipping related expenses, sales commissions, cooperative advertising and travel expenses, among others. We produced television commercials in support of several of our products, including World Wrestling Federation action figures, in 1999 and 2000. From time to time, we may increase our advertising efforts, including the use of more expensive advertising media, such as television, if we deem it appropriate for particular products. Income from Joint Venture. Beginning in the fourth quarter of 1999, we began to earn our preferred return on the sale of World Wrestling Federation video games by our joint venture with THQ. Interest Net. We had no interest-bearing obligations in 2000 with the conversion of our convertible debentures in 1999. In addition, we had significantly higher average cash balances during 2000 than in 1999 due to the net proceeds from the sale of our common stock in May 1999 and in December 1999. Other Expense. Other expense in 2000 consists mainly of expenses related to the lease termination of certain Flying Colors facilities and other related shut-down costs. No such expenses were incurred in 1999. 10

11 Provision for Income Taxes. Provision for income taxes included Federal, state and foreign income taxes in 1999 and 2000, at effective tax rates of 26.9% in 1999 and 29.7% in 2000, benefiting from a flat 16.5% Hong Kong Corporation Tax on our income arising in, or derived from, Hong Kong. As of June 30, 2000, we had deferred tax assets of approximately $1.7 million for which no allowance has been provided since, in the opinion of management, realization of the future benefit is probable. In making this determination, management considered all available evidence, both positive and negative, as well as the weight and importance given to such evidence. SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Net Sales. Net sales increased $40.4 million, or 66.3%, to $101.4 million in 2000 from $60.9 million in 1999. The significant growth in net sales was due primarily to the continuing sales of the World Wrestling Federation action figure product line with its expanded product offerings and frequent character releases, as well as to increasing sales in our Wheels division, consisting primarily of our Road Champs die-cast toy and collectible vehicles with the launch of the BXS die-cast bicycles, fashion and holiday dolls and Child Guidance pre-school toys and the additions of Berk products, which contributed nominally to operations beginning in the third quarter of 1999 and Flying Colors products, which began contributing to operations beginning in the fourth quarter of 1999. Gross Profit. Gross profit increased $16.4 million, or 64.7%, to $41.9 million in 2000, or 41.3% of net sales, from $25.4 million, or 41.7% of net sales, in 1999. The overall increase in gross profit was attributable to the significant increase in net sales. The decrease in the gross profit margin of 0.4% of net sales was due in part to higher in-bound freight costs incurred to more quickly launch our BXS die-cast bicycle product line and close-outs of certain Flying Colors products in preparation of the transfer of such products from the Michigan distribution facilities to our third party facilities in Washington state. Additionally, the amortization expense of molds and tools used in the manufacture of our products and royalty expense increased as a percentage of net sales due to changes in the product mix and the launch of a larger number of products in 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $31.1 million in 2000 and $18.4 million in 1999, constituting 30.7% and 30.3% of net sales, respectively. The overall significant increase of $12.7 million in such costs was due to costs incurred in support of the Company's development, marketing and distribution of products under its recent acquisition of Flying Color Toys trademarks. Selling, general and administrative expenses increased as a percentage of net sales due in part to the fixed nature of certain of these expenses. The overall dollar increase was also due to the significant increase in net sales with its proportionate impact on variable selling costs such as freight and shipping related expenses, sales commissions, cooperative advertising and travel expenses, among others. We produced television commercials in support of several of our products, including World Wrestling Federation action figures, in 1999 and 2000. From time to time, we may increase our advertising efforts, including the use of more expensive advertising media, such as television, if we deem it appropriate for particular products. Income from Joint Venture. Beginning in the fourth quarter of 1999, we began to earn our preferred return on the sale of World Wrestling Federation video games by our joint venture with THQ. Interest Net. We had no interest-bearing obligations in 2000 with the conversion of our convertible debentures in 1999. In addition, we had significantly higher average cash balances during 2000 than in 1999 due to the net proceeds from the sale of our common stock in May 1999 and in December 1999. Other Expense. Other expense in 2000 consists mainly of expenses related to the lease termination of certain Flying Colors facilities and other related shut-down costs. No such expenses were incurred in 1999. Provision for Income Taxes. Provision for income taxes included Federal, state and foreign income taxes in 1999 and 2000, at effective tax rates of 26.9% in 1999 and 30.9% in 2000, benefiting from a flat 16.5% Hong Kong Corporation Tax on our income arising in, or derived from, Hong Kong. As of June 30, 2000, we had deferred tax assets of approximately $1.7 million for which no allowance has been provided since, in the opinion of management, realization of the future benefit is probable. In making this determination, management considered all available evidence, both positive and negative, as well as the weight and importance given to such evidence. 11

12 SEASONALITY The retail toy industry is inherently seasonal. Generally, in the past, the Company's sales have been highest during the third and fourth quarters, and collections for those sales have been highest during the succeeding fiscal quarters. The Company's working capital needs have been highest during the third and fourth quarters. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, we had working capital of $123.7 million, as compared to $113.2 million as of December 31, 1999. This increase was primarily attributable to our operating activities. Operating activities provided net cash of $15.5 million in 2000, as compared to $5.5 million in 1999. Net cash was provided primarily by net income, non-cash charges, such as depreciation and amortization, and the sale of marketable securities, as well as a decrease in preferred return from joint ventures, inventory and prepaid expenses, and an increase in income taxes payable, which were offset in part by increases in accounts receivable, advanced royalty payments and decreases in accounts payable and accrued expenses and deferred income taxes. As of June 30, 2000, we had cash and cash equivalents of $65.8 million and marketable securities of $28.1 million. Our investing activities used net cash of $4.7 million in 2000, as compared to $7.9 million in 1999, consisting primarily of the purchase of molds and tooling used in the manufacture of our products in 2000 and 1999 and goodwill in 1999. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties ranging from 1% to 18% payable on net sales of such products. As of June 30, 2000, these agreements required future aggregate minimum guarantees of $13.4 million, exclusive of $2.2 million in advances already paid. Our financing activities used net cash of $2.5 million in 2000, consisting primarily of notes receivable from officers. In 1999, financing activities provided net cash of $54.2 million, consisting primarily of proceeds from sales of common stock and the exercise of options and warrants. In 1999, the holders of $6.0 million principal amount of our 9.0% convertible debentures converted all such debentures into 1,565,218 shares of our common stock. In 1999, we received $117.8 million in net proceeds from the issuance of shares of our common stock in public offerings. In June 1999, we purchased all the outstanding capital stock of Berk Corporation for approximately $3.3 million. We also agreed to pay an earn-out of up to $500,000 if sales of Berk products achieve certain prescribed levels over the 12-month period ending June 30, 2000. Berk is a leading producer of educational toy foam puzzle mats and blocks featuring popular licensed characters, including Mickey Mouse, Minnie Mouse, Winnie the Pooh, Blue's Clues, Barney, Teletubbies, Sesame Street, Looney Tunes and Toy Story II characters, and non-licensed activity sets and outdoor products. On October 5, 1999, we completed the acquisition of the Flying Colors Toys product line through the purchase of all the outstanding capital stock of Flying Colors Toys, a privately-held company based in Dexter, Michigan. At or shortly after the closing we paid approximately $34.7 million for the stock and paid off approximately $17.6 million of indebtedness. We also agreed to pay an earn-out of up to $13.5 million over the 36-month period following the closing if net sales of Flying Colors products achieve certain targeted levels during this period. Two of Flying Colors Toys' senior executives and most of its creative design and product development staff have remained with Flying Colors Toys. Flying Colors Toys' principal products include molded plastic activity kits, clay compound playsets and lunch boxes featuring licensed characters, including Barbie, Rugrats, Blue's Clues and Looney Tunes characters. The kits cover a broad range of products and activities, such as make and paint your own characters, jewelry making, art studios, posters, puzzles and other projects. On July 28, 2000, the Company acquired all of the outstanding capital stock of Pentech International for an aggregate purchase price of approximately $20.6 million, which was paid in cash on the closing of the transaction. In addition, the Company paid on the closing $10.0 million to pay down certain indebtedness of Pentech International, assumed liabilities of approximately $23.7 million and incurred estimated legal and other acquisition costs of approximately $1.1 million. Pentech International designs, produces and markets licensed pens, markers, pencils, and other writing instruments, craft and activity kits, and related stationary products. We believe that our cash flow from operations, cash and cash equivalents on hand and marketable securities will be sufficient to meet our working capital and capital expenditure requirements and provide us with adequate liquidity to meet our anticipated operating needs for at least the next 12 months. Although operating activities are expected to provide cash, to the extent we grow significantly in the future, our operating and investing activities may use cash and, consequently, this growth may require us to obtain additional sources of financing. There can be no assurance that any necessary additional financing will be available to us on commercially reasonable terms, if at all. 12

13 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 and as of June 30, 2000, we have not used derivative instruments or engaged in hedging activities to minimize our market risk. INTEREST RATE RISK As of June 30, 2000, we do not have any bank loan or other credit facility, nor do we have any outstanding debt securities, and, 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. Sales from these operations are denominated in U.S. dollars. However, purchases of inventory and operating expenses are typically denominated in Hong Kong dollars, thereby creating exposure to changes in exchange rates. Changes in the Hong Kong dollar/U.S. dollar exchange rate may positively or negatively affect our gross margins, operating income and retained earnings. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to US$1.00 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We do not believe that near-term changes in 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. 13

14 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our most recent Annual Meeting of Stockholders on June 23, 2000. At the meeting, our stockholders considered and voted on several matters, as follows: 1. All five of our incumbent directors were nominated by management for reelection to the Board. Our stockholders voted in connection with the election of directors as follows: Nominee For Against Withheld - -------- ---------- ------- --------- Jack Friedman 13,846,886 0 2,548,214 Stephen G. Berman 14,631,652 0 1,763,448 Robert E. Glick 15,819,090 0 576,010 Michael G. Miller 15,827,905 0 567,195 Murray L. Skala 14,816,489 0 1,578,611 A plurality of the shares represented at the meeting having been voted for each of these nominees, each of them was elected as a director. 2. Our stockholders ratified the appointment of Pannell Kerr Forster, Certified Public Accountants, A Professional Corporation, as our independent auditors for our current fiscal year by a majority vote as follows: Broker For Against Abstain Non-Votes --------- -------- -------- --------- 16,343,879 46,082 5,139 0 3. Our stockholders ratified and approved the 2000 Amendment to our Third Amended and Restated 1995 Stock Option Plan by a majority vote as follows: Broker For Against Abstain Non-Votes --------- -------- -------- --------- 13,341,265 3,037,951 15,884 0 4. Our stockholders ratified and approved amendments to the employment agreements between us and Jack Friedman and Stephen G. Berman, respectively, by a majority vote as follows: Broker For Against Abstain Non-Votes --------- -------- -------- --------- 15,826,494 529,351 39,255 0 ITEM 5. OTHER INFORMATION EXECUTIVE EMPLOYMENT AGREEMENT On May 8, 2000, we entered into an employment agreement with Joel M. Bennett pursuant to which Mr. Bennett serves as our Executive Vice President and Chief Financial Officer during a four-year term from January 1, 2000 to December 31, 2003. Mr. Bennett's annual base salary in 2000 is $225,000. His annual base salary is subject to annual increases in an amount determined by our Board of Directors. He is also entitled to receive an annual bonus equal to the product of his base salary and the percentage year-over-year increase in our pre-tax income, but not less than $75,000 nor more than his base salary. If we terminate his employment other than "for cause" or if he resigns because of our material breach of the employment agreement or because we cause a material change in his employment, we are required to make a lump-sum severance payment in an amount equal to his base salary and bonus during the balance of the term of the employment agreement, based on his then applicable annual base salary and bonus. In the event of the termination of his employment under certain circumstances after a "Change of Control" (as defined in the employment agreement), we are required to make to him a one-time payment of an amount equal to 2.99 times his "base amount" determined in accordance with the applicable provisions of the Internal Revenue Code. 14

15 2000 AMENDMENT TO THIRD AMENDED AND RESTATED 1995 STOCK OPTION PLAN On June 23, 2000, the 2000 Amendment to our Third Amended and Restated 1995 Stock Option Plan became effective. As so amended, our plan provides for up to 3,275,000 shares of our common stock to be available for issuance upon the exercise of options granted under the plan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits NUMBER DESCRIPTION - ------ ----------- 2.1 Agreement of Merger dated as of May 22, 2000 among the Company, JAKKS Acquisition II, Inc. and Pentech International Inc.(1) 2.2 First Amendment dated as of July 13, 2000 to Agreement of Merger(2) 2.3 Voting and Lock-Up Agreement dated May 22, 2000 among the Company and certain stockholders of Pentech International Inc.(3) 3.1 Restated Certificate of Incorporation of the Company(4) 3.1.1 Certificate of Designation and Preferences of Series A Cumulative Convertible Preferred Stock of the Company(5) 3.1.2 Certificate of Elimination of All Shares of 4% Redeemable Convertible Preferred Stock of the Company(5) 3.1.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company(6) 3.2.1 By-Laws of the Company(4) 3.2.2 Amendment to By-Laws of the Company(7) 10.1 Term Note dated April 13, 2000 in the principal amount of $1,500,000 made by Jack Friedman payable to the order of the Company(8) 10.2 Installment Note dated April 26, 2000 in the principal amount of $1,500,000 made by Stephen Berman and Ana Berman payable to the order of the Company(8) 10.3 Deed of Trust dated April 26, 2000 made by Stephen Berman and Ana Berman in favor of First American Title Insurance Company, as Trustee(8) 10.4 Term Note dated May 12, 2000 in the principal amount of $250,000 made by Joel M. Bennett payable to the Company(8) 10.5* Employment Agreement dated as of January 1, 2000 between the Company and Joel M. Bennett(8) 10.6* 2000 Amendment to Third Amended and Restated 1995 Stock Option Plan of the Company(9) 10.7 Loan and Security Agreement dated as of January 13, 1997 among Pentech International Inc., certain subsidiaries thereof and Bank of America, N.A. (formerly BankAmerica Business Credit, Inc.)(10) 10.8 Waiver and First Amendment dated as of January 11, 1999 to Loan and Security Agreement(11) 10.9 Waiver, Consent and Second Amendment dated as of December 20, 1999 to Loan and Security Agreement(12) 10.10 Consent, Waiver and Third Amendment dated as of July 27, 2000 to Loan and Security Agreement(13) 10.11 Lease dated February 1993 between Edison Equities and Pentech International Inc.(14) 10.12 Agreement of Lease dated August 28, 1995 between 1101 CR NB, L.L.C. (successor in interest to Pensud Company Limited Partnership) and Pentech International Inc.(15) 10.15 First Amendment to Lease dated April 19, 2000 between 1101 CR NB, L.L.C. and Pentech International Inc.(8) 10.16 Second Amendment effective May 1, 2000 to Stock Purchase Agreement dated as of September 22, 1999 among the Company, Flying Colors Toys, Inc. and the former shareholders thereof(8) 27 Financial Data Schedule(8) - ------------------------- * Management contract or compensatory plan, contract or arrangement. (1) Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K, filed August 11, 2000. (2) Incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K, filed August 11, 2000. (3) Incorporated by reference to Exhibit 2.3 of the Company's Current Report on Form 8-K, filed August 11, 2000. (4) 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. (5) Filed previously as an exhibit to the Company's Current Report on Form 8-K, filed April 7, 1998, and incorporated herein by reference. (6) Filed previously as exhibit 4.1.2 of the Company's Registration Statement on Form S-3 (Reg. No. 333-74717), filed on March 9, 1999, and incorporated herein by reference. (7) 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. (8) Filed herewith. (9) Filed previously as Appendix A to the Company's definitive proxy statement, filed May 22, 2000, and incorporated herein by reference. (10) Incorporated by reference to exhibit 10.7 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1996. (11) Incorporated by reference to exhibit 10.5 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1998. (12) Incorporated by reference to exhibit 10.6 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1999. (13) Incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K, filed August 11, 2000. (14) Incorporated by reference to Exhibit 10.10 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1993. (15) Incorporated by reference to Exhibit 10.7 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1995. (b) Reports on Form 8-K No Current Report on Form 8-K was filed in the fiscal quarter ended June 30, 2000. 15

16 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. Registrant: JAKKS PACIFIC, INC. Date: August 14, 2000 By: /s/ Joel M. Bennett -------------------- Executive Vice President and Chief Financial Officer (Principal Financial Officer) 16

17 EXHIBIT INDEX NUMBER DESCRIPTION PAGE - ------ ----------- ----- 2.1 Agreement of Merger dated as of May 22, 2000 among the Company, JAKKS Acquisition II, Inc. and Pentech International Inc.(1) 2.2 First Amendment dated as of July 13, 2000 to Agreement of Merger(2) 2.3 Voting and Lock-Up Agreement dated May 22, 2000 among the Company and certain stockholders of Pentech International Inc.(3) 3.1 Restated Certificate of Incorporation of the Company(4) 3.1.1 Certificate of Designation and Preferences of Series A Cumulative Convertible Preferred Stock of the Company(5) 3.1.2 Certificate of Elimination of All Shares of 4% Redeemable Convertible Preferred Stock of the Company(5) 3.1.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company(6) 3.2.1 By-Laws of the Company(4) 3.2.2 Amendment to By-Laws of the Company(7) 10.1 Term Note dated April 13, 2000 in the principal amount of $1,500,000 made by Jack Friedman payable to the order of the Company(8) 10.2 Installment Note dated April 26, 2000 in the principal amount of $1,500,000 made by Stephen Berman and Ana Berman payable to the order of the Company(8) 10.3 Deed of Trust dated April 26, 2000 made by Stephen Berman and Ana Berman in favor of First American Title Insurance Company, as Trustee(8) 10.4 Term Note dated May 12, 2000 in the principal amount of $250,000 made by Joel M. Bennett payable to the Company(8) 10.5* Employment Agreement dated as of January 1, 2000 between the Company and Joel M. Bennett(8) 10.6* 2000 Amendment to Third Amended and Restated 1995 Stock Option Plan of the Company(9) 10.7 Loan and Security Agreement dated as of January 13, 1997 among Pentech International Inc., certain subsidiaries thereof and Bank of America, N.A. (formerly BankAmerica Business Credit, Inc.)(10) 10.8 Waiver and First Amendment dated as of January 11, 1999 to Loan and Security Agreement(11) 10.9 Waiver, Consent and Second Amendment dated as of December 20, 1999 to Loan and Security Agreement(12) 10.10 Consent, Waiver and Third Amendment dated as of July 27, 2000 to Loan and Security Agreement(13) 10.11 Lease dated February 1993 between Edison Equities and Pentech International Inc.(14) 10.12 Agreement of Lease dated August 28, 1995 between 1101 CR NB, L.L.C. (successor in interest to Pensud Company Limited Partnership) and Pentech International Inc.(15) 10.15 First Amendment to Lease dated April 19, 2000 between 1101 CR NB, L.L.C. and Pentech International Inc.(8) 10.16 Second Amendment effective May 1, 2000 to Stock Purchase Agreement dated as of September 22, 1999 among the Company, Flying Colors Toys, Inc. and the former shareholders thereof(8) 27 Financial Data Schedule(8) - ------------------------- * Management contract or compensatory plan, contract or arrangement. (1) Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K, filed August 11, 2000. (2) Incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K, filed August 11, 2000. (3) Incorporated by reference to Exhibit 2.3 of the Company's Current Report on Form 8-K, filed August 11, 2000. (4) 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. (5) Filed previously as an exhibit to the Company's Current Report on Form 8-K, filed April 7, 1998, and incorporated herein by reference. (6) Filed previously as exhibit 4.1.2 of the Company's Registration Statement on Form S-3 (Reg. No. 333-74717), filed on March 9, 1999, and incorporated herein by reference. (7) 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. (8) Filed herewith. (9) Filed previously as Appendix A to the Company's definitive proxy statement, filed May 22, 2000, and incorporated herein by reference. (10) Incorporated by reference to exhibit 10.7 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1996. (11) Incorporated by reference to exhibit 10.5 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1998. (12) Incorporated by reference to exhibit 10.6 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1999. (13) Incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K, filed August 11, 2000. (14) Incorporated by reference to Exhibit 10.10 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1993. (15) Incorporated by reference to Exhibit 10.7 of the Annual Report on Form 10-K of Pentech International Inc. for its fiscal year ended September 30, 1995.

1 EXHIBIT 10.1 TERM NOTE $1,500,000 Malibu, California April 13, 2000 FOR VALUE RECEIVED, Jack Friedman ("Borrower") hereby promises to pay to the order of JAKKS Pacific, Inc., a Delaware corporation, or assigns ("Holder"), the principal amount of $1,500,000, together with interest accrued thereon, as hereinafter provided. 1. The entire principal amount of this Note shall be due and payable on April 28, 2003. 2. Interest shall accrue on the principal amount of this Note from time to time outstanding after the date hereof at the rate of 6.5% per annum, and shall be payable semi-annually on April 28 and October 28 of each year (unless such day is not a business day, in which case, payment shall be made on the next succeeding business day), commencing in October 2000 until this Note is paid in full. This Note may be prepaid, in whole or in part, at any time or times, without premium or penalty, but any such prepayment shall include interest accrued to the date of such prepayment on the principal amount so prepaid. 3. Payment of this Note shall be made in lawful money of the United States of America at Holder's office at 22761 Pacific Coast Highway, Malibu, California 90265, Attn: Chief Financial Officer, or at such other place as Holder may from time to time direct by written notice to Borrower. 4. If any one or more of the following events (each, an "Event of Default") shall occur, the entire outstanding principal amount hereof and all interest then accrued thereon shall immediately become due and payable upon written notice to that effect given to Borrower by Holder, in the case of an Event of Default described in subparagraph 4(b) or 4(e), and without any notice or other act, in the case of an Event of Default described in subparagraph 4(a) or 4(d): (a) Borrower's failure to pay any installment of this Note within 15 days after the due date thereof; (b) (i) Borrower's failure to pay when due any indebtedness, other than this Note, evidenced or secured by any note, bond, debenture, loan agreement, indenture, guaranty, trust agreement, mortgage or other instrument or agreement in connection with the borrowing of money or the obtaining of advances or credit to which Borrower is a party or by which he is bound, or to which any of his properties or assets may be subject (a "Debt Instrument"), or Borrower's failure to perform or comply with any condition or covenant thereof, so that, as a result of any such failure, indebtedness evidenced or secured thereby in an amount in excess of $500,000 may be declared due and payable prior to the date on which such indebtedness would

2 otherwise become due and payable; or (ii) any event or condition referred to in any Debt Instrument shall occur or fail to occur, so that, as a result thereof, indebtedness evidenced or secured thereby in an amount in excess of $500,000 may be declared due and payable prior to the date on which such indebtedness would otherwise become due and payable; (c) Borrower shall file a petition in bankruptcy, make an assignment for the benefit of creditors, petition or apply for the appointment of a receiver, conservator, trustee or other fiduciary agent for him or a substantial part of his assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, composition, dissolution or liquidation law, or if there shall have been filed by any other person any such petition or application or any such proceeding shall have been commenced by any other person against him, which petition, application or proceeding is not vacated or dismissed for a period of 90 days or more; or Borrower shall consent to, approve of, or acquiesce in, any such petition, application or proceeding or the appointment of a receiver or conservator of, or trustee or other fiduciary agent for, him or any substantial part of his assets, or shall suffer any such appointment to continue undischarged for a period of 90 days or more; or an order for relief shall have been entered against Borrower under the United States Bankruptcy Code; or (d) any judgment against Borrower or any attachment of, levy upon, or execution against, any of his properties for any amount in excess of $500,000 shall not be paid, stayed on appeal, bonded, discharged, vacated or dismissed within a period of 90 days. 5. Upon the occurrence of an Event of Default, Holder may accelerate this Note and demand the prompt payment of all amounts due hereunder, and may take any lawful action to compel the same, including through an appropriate suit, action or other proceeding. Borrower shall be liable for and promptly pay to Holder its costs of collection, including without limitation reasonable attorney's fees and court costs. 6. Any other provision hereof to the contrary notwithstanding, if any law, or any rule or regulation thereunder, shall limit the maximum rate of interest which may be charged on this Note to a rate less than that provided for herein (but for the provisions of this paragraph), then the rate of interest charged on this Note shall be reduced to such maximum lawful rate for so long as such interest rate shall be so limited by law and shall thereafter return to the rate otherwise provided herein. 7. Borrower hereby waives presentment, demand for payment, protest, notice of protest or dishonor and any other notice or demand (except as provided in paragraph 4 hereof) in connection with the payment and performance of this Note. 8. Any notice or demand required or permitted to be given or made hereunder shall be deemed to have been duly given or made for all purposes if (i) in writing and (A) sent by messenger or courier service against receipt, or (B) sent by certified or registered mail, postage paid, return receipt requested, or (ii) sent by telegram, telecopy, telex or similar

3 electronic means, provided that a written copy thereof is sent on the same day by postage-paid first-class mail, to such party at the following address: To Borrower at: 24572 Malibu Road Malibu, California 90265 (310) 456-1026 To Holder at: 22761 Pacific Coast Highway Malibu, California 90265 Attn: Chief Financial Officer (310) 317-8527 or such other address as either party hereto may at any time, or from time to time, direct by notice given to the other party in accordance with this paragraph. The date of giving or making of any such notice or demand shall be, in the case of clause (i)(A), the date of the receipt, in the case of clause (i)(B), five business days after such notice or demand is sent, and, in the case of clause (ii), the business day next following the day that notice or demand is sent. 9. This Note shall be governed by, and interpreted in accordance with the laws of the State of California, without regard to principles of choice or conflict of laws. IN WITNESS WHEREOF, Borrower has duly executed this Note as of the date first written above. /s/ JACK FRIEDMAN ---------------------------------------- Jack Friedman

1 EXHIBIT 10.2 ESCROW NO.: 13917 NOTE SECURED BY DEED OF TRUST INSTALLMENT NOTE - INTEREST ONLY $1,500,000.00 MALIBU, CALIFORNIA APRIL 26, 2000 ON OR BEFORE April 28, 2003 in installments and at the time hereinafter stated, for value received, I/We, promise to pay to JAKKS PACIFIC, INC., A DELAWARE CORPORATION or order, at place designated by the holder(s) hereof, the principal sum of ONE MILLION FIVE HUNDRED THOUSAND AND 00/100 ($1,500,000.00) with interest from April 28, 2000, at the rate of 6.5% per cent per annum, payable INTEREST ONLY semi-annually, beginning on the 28th day of October, 2000 and continuing semi-annually thereafter until the maturity date hereof. This note is subject to section 2966 of the Civil Code, which provides that the holder of this note shall give written notice to the trustor, or his successor in interest, of prescribed information at least 90 and not more than 150 days before any balloon payment is due. The privilege is reserved of paying the whole or any portion of this Note at any time prior to maturity without penalty. This Note is given and accepted as a portion of the purchase price. Each payment shall be credited first on interest then due and the remainder on the principal sum; and interest shall thereupon cease upon the amount so credited on the said principal. Should default be made in the payment of any installment when due the whole sum of principal and interest shall become immediately due at the option of the holder this note. Principal and interest payable in lawful money of the United States of America. Should suit be commenced to collect this note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorney's fees. This note is secured by a Deed of Trust to FIRST AMERICAN TITLE INSURANCE COMPANY, a California Corporation as Trustee, affecting the property located at: VACANT LAND - 27465 WINDING WAY, MALIBU, CA 90265 /s/ Stephen Berman /s/ Ana Berman - -------------------------------- ----------------------------------- Stephen Berman Ana Berman DO NOT DESTROY THIS NOTE: When paid, said original Note, together with the Deed of Trust securing same, must be surrendered to Trustee for cancellation and retention before reconveyance will be made

1 EXHIBIT 10.3 RECORDING REQUESTED BY: AND WHEN RECORDED MAIL TO: JAKKS Pacific, Inc. 22761 Pacific Coast Highway #226 Malibu, CA 90265 A.P.N.: 4460-005-023 Title Order No. LA0020541 Escrow No. 13917 SHORT FORM DEED OF TRUST AND ASSIGNMENT OF RENTS THIS DEED OF TRUST, made this Twenty-Sixth day of April, 2000, between TRUSTOR: STEPHEN BERMAN AND ANA BERMAN, HUSBAND AND WIFE AS TENANTS IN COMMON whose address is 22761 Pacific Coast Highway #226, Malibu, CA 90265, and TRUSTEE: First American Title Insurance Company, a California Corporation, and BENEFICIARY: JAKKS PACIFIC, INC. a Delaware Corporation WITNESSETH: That Trustor IRREVOCABLY GRANTS, TRANSFERS AND ASSIGNS to TRUSTEE IN TRUST, WITH POWER OF SALE, that property in the City of Malibu, Los Angeles, California, described as: As per legal description attached hereto and made a part hereof: This Note is given and accepted as a portion of the purchase price. TOGETHER WITH the rents, issues, and profits thereof, SUBJECT, HOWERVER, to the right, power and authority given to and conferred upon Beneficiary by paragraph 10 of the provisions incorporated by reference to collect and apply such rents, issues and profits. FOR THE PURPOSE OF SECURING: 1. Performance of each agreement of Trustor incorporated by reference or contained herein. 2. Payment of the indebtedness evidenced by one promissory note of even date herewith, and any extension of renewal thereof, in the principal sum of $1,500,000.00 executed by Trustor in favor of Beneficiary or order. 3. Payment of such further sums as the then record owner of said property hereafter may borrow from Beneficiary, when evidenced by another note (or notes) reciting it is so secured. TO PROTECT THE SECURITY OF THIS DEED OF TRUST. TRUSTOR AGREES: By the execution and delivery of this Deed of Trust and the note secured hereby, that provisions (1) to (14), inclusive of the fictitious deed of trust recorded in Santa Barbara County of Sonoma County on October 18, 1961, and in all other counties on October 23, 1961, in the book and at the page of Official Records in the office of the county recorder of the county where said property is located, noted below and opposite the name of such county, viz: County Book Page County Book Page County Book Page County Book Page County Book Page - ------ ---- ---- ------ ---- ---- ------ ---- ---- ------ ---- ---- -------- ---- ----- Alameda 435 684 Imperial 1091 501 Merced 1547 538 San Benito 271 383 Siskiyou 468 181 Alpine 1 250 Inyo 147 598 Modec 184 851 San Bermardino 5567 61 Solano 1105 182 Amador 104 348 Kern 3427 60 Mono 52 429 San Francisco A332 905 Sonoma 1851 689 Bute 1145 1 Kings 792 833 Monterey 2194 538 San Joaquin 2470 311 Stanisluas 1715 456 Calavera 145 152 Lake 362 39 Napa 639 86 San Luis Obispo 1151 12 Sutter 572 97 Colusa 296 617 Lassen 171 471 Nevada 305 320 San Mateo 4078 420 Tehama 401 289 Contra Los Costa 3978 47 Angeles T2055 899 Orange 5889 611 Santa Barbara 1878 860 Trinity 93 366 Del Norte 78 414 Madera 810 170 Placer 895 301 Santa Clara 5336 01 Tulare 2294 275 El Dorado 568 456 Marin 1508 339 Plumas 151 5 Santa Cruz 1431 494 Tuolumne 135 47 Fresno 4626 572 Mariposa 77 292 Riverside 3005 523 Shasta 684 528 Ventura 2062 386 Glenn 422 184 Mendocino 579 530 Sacramento 4331 62 Sierra 29 335 Yolo 653 245 Humbolt 657 527 San Diege Series 2 Book 1961, Page 183887 Yuba 334 486 (which provisions, identical in all counties, are printed on page 3 of this document) hereby are adopted and incorporated herein and made a part hereof as fully as though set forth herein at length; that he will observe and perform said provisions: and that the references to property, obligations, and parties in said provisions shall be construed to refer to the property, obligations, and parties set forth in this Deed of Trust. In accordance with Section 2924b, Civil Code, request is hereby made that a copy of any Notice of Default and a copy of any Notice of Sale be mailed to Trustor at Trustor's address hereinbefore set forth, or if none shown, to Trustor at the property address. NOTICE: A COPY OF ANY NOTICE OF DEFAULT AND OF NAY NOTICE OF SALE WILL BE SENT ONLY TO THE ADDRESS CONTAINED IN THIS RECORD REQUEST. IF YOUR ADDRESS CHANGES, A NEW REQUEST MUST BE RECORDED. 1

2 A.P.N.: 4460-005-023 Signature of Trustor(s) /s/ Stephen Berman /s/ Ana Berman - ------------------------ ---------------------------------- Stephen Berman Ana Berman Document Date: April 26, 2000 -------------- STATE OF CALIFORNIA )SS COUNTY OF Los Angeles ) On April 26, 2000 before me, Patricia Ryan personally appeared Stephen Berman and Ana Berman personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their signatures on the instrument the persons or the entity upon behalf of which of the persons acted, executed the instrument. WITNESS my hand and official seal. Signature /s/ Patricia Ryan ----------------------------- (SEAL) This area for official notarial seal. 2

3 A.P.N. 4460-005-023 DO NOT RECORD The following is a copy of provisions (1) to (14) inclusive, of the fictitious deed of trust, recorded in each county in California, as stated in the foregoing Deed of Trust and incorporated by reference in said Deed of Trust as being a part thereof as if set forth at length therein. TO PROTECT THE SECURITY OF THIS DEED OF TRUST, TRUSTOR AGREES: (1) To keep property in good condition and repair; not to remove or demolish any building thereon; to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged or destroyed thereon and to pay when due all claims for labor performed and materials furnished therefore; to comply with all laws affecting said property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereof; not to commit, suffer or permit any act upon said property in violation of law; to cultivate, irrigate, fertilize, prune and do all other acts which from the character or use of said property may be reasonably necessary, the specific enumerations herein not excluding the general. (2) To provide, maintain and deliver to Beneficiary fire insurance satisfactory to and with loss payable to Beneficiary. The amount collected under any fire or other insurance policy may be applied by Beneficiary upon indebtedness secured hereby and in such order as Beneficiary may determine, or at option of Beneficiary the entire amount so collected or any part thereof may be released to Trustor. Such application or release shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (3) To appear in and defend any action or proceeding purporting to affect the security hereof or affect the security hereof or the rights or powers of the Beneficiary or Trustee: and to pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any such action or proceeding in which Beneficiary or Trustee may appear, and in any suit brought by Beneficiary to foreclose this Deed. (4) To pay: at least ten days before any delinquency all taxes and assessments affecting said property, including assessments on appurtenant water stock; when due, all encumbrances, charges and liens, with interest, on said property or any part thereof, which appear to be prior or superior hereto; all costs, fees and expenses of this Trust. Should Trustor fail to make any payment or to do any act herein provided, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may: make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon said property for such purposes; appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; pay, purchase, contest or compromise any encumbrance, charge or lien which in the judgement of either appears to be prior or superior hereto; and, in exercising any such powers, pay necessary expenses, employ counsel and pay his reasonable fees. (5) To pay immediately and without demand all sums so expended by Beneficiary or Trustee, with interest from date of expenditure at the rate called for in the note secured hereby, or at the amount allowed by law at date of expenditure, whichever is greater, and to pay for any statement provided for by law in effect at the date hereof regarding the obligation secured hereby any amount demanded by the Beneficiary not to exceed the maximum allowed by law at the time when said statement is demanded. (6) That any award of damages in connection with any condemnation for public use of or injury to said property or any part thereof is hereby assigned and shall be paid to Beneficiary who may apply or release such moneys received by him in this same manner and with the same effect as above provided for disposition of proceeds of fire or other insurance. (7) That by accepting payment of any sum secured hereby after its due date, Beneficiary does not waive his right to require prompt payment when due of all other sums so secured or to declare default for failure so to pay. (8) That at any time or from time to time, without liability therefore and without notice, upon written request of Beneficiary and presentation of this Deed and said note for endorsement, and without affecting the personal liability of any person for payment of the indebtedness secured hereby, 3

4 Trustee may: reconvey any part of said property; consent to the making of any map or plat thereof; join in granting any easement thereon; or join in any extension agreement or any agreement subordinating the lien or charge hereof. (9) That upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed and said note to Trustee for cancellation and retention and upon payment of its fees. Trustee shall reconvey, without warranty, the property then held hereunder.. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The grantee is such reconveyance may be described as "the person or persons legally entitled thereto." Five years after issuance of such full conveyance, Trustee may destroy said note and this Deed (unless directed in such request to retain them.) (10) That as additional security, Trustor hereby gives to and confers upon Beneficiary the right, power and authority, during the continuance of these Trusts, to collect the rents, issues and profits of said property, reserving unto Trustor the right, prior to any default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, to collect and retain such rents, issues and profits as they become due and payable. Upon any such default, Beneficiary may at any time without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of said property or any part thereof, in his own name sue for or otherwise collect such rents, issues and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. The entering upon and taking possession of said property, the collection of such rents, issues and profits and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act pursuant to such notice. (11) That upon default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, Beneficiary may declare all sums secured hereby immediately due and payable by delivery to Trustee of written declaration of default and demand for sale and of written notice of default and of election to cause to be sold said property, which notice Trustee shall cause to be filed for record. Beneficiary also shall deposit with Trustee the Deed, said note and all documents evidencing expenditures secured hereby. After lapse of such time as may then be required by law following the recordation of said notice of default, and notice of sale having been given as then required by law, Trustee, without demand on Trustor, shall sell said property at the time and place fixed by it in said notice of sale, either as a whole or in separate parcels, and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Trustee may postpone sale of all or any portion of said property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceeding postponement. Trustee shall deliver to such purchaser its deed conveying the property so sold, but without any conveyant or warranty, express or implied. Te recitals in such deed of matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee, or Beneficiary as hereinafter defined, may purchase at such sale. After deducting all costs, fees and expenses of Trustee and of the Trust, including cost of evidence of title in connection with sale, trustee shall apply the proceeds of sale to payment of: all sums expended under terms hereof, not then repaid, with accrued interest at the amount allowed by law in effect at the date hereof; all other sums then secured hereby; and the remainder, if any, to the person or persons legally entitled thereto. (12) Beneficiary, or any successor in ownership of any indebtedness secured hereby, may from time to time, by instrument in writing, substitute a successor or successors to any Trustee named herein or acting hereunder, which instrument, executed by the Beneficiary and duly acknowledged and recorded in the office of the recorder of the county or counties where said property is situated, shall be conclusive proof of proper substitution of such Trustee or Trustees, who shall, without conveyance from the Trustee predecessor, succeed to all its title, estate, rights, powers and duties, must contain the name of the original Trustor, Trustee and Beneficiary hereunder, the book and page where this deed is recorded and the name and address of the new Trustee. (13) That this Deed applies to, insures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors and assigns. The term Beneficiary shall 4

5 mean the owner and holder, including pledges, of the note secured hereby, whether or not named as Beneficiary herein. In this Deed, whenever the context so required, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. (14) That Trustee accepts the Trust when this Deed, duly executed and acknowledged, is made a public record as provided by law. Trustee is not obligated to notify any party hereto of pending sale under any other Deed of Trust or any action or Proceeding in which Trustor, Beneficiary or Trustee shall be party unless brought by Trustee. 5

1 EXHIBIT 10.4 TERM NOTE $250,000 Malibu, California May 12, 2000 FOR VALUE RECEIVED, Joel M. Bennett ("Borrower") hereby promises to pay to JAKKS Pacific, Inc., a Delaware corporation, or assigns ("Holder"), the principal amount of $250,000, together with interest accrued thereon from the date hereof at the rate of 7% per annum, on May 12, 2002 (the "Maturity Date"), subject, however, to the provisions of paragraph 1 hereof. This Note may be prepaid, in whole or in part, at any time or times, without premium or penalty, but any such prepayment shall include interest accrued to the date of such prepayment on the principal amount so prepaid. Payment of this Note shall be made in lawful money of the United States of America at Holder's office at 22761 Pacific Coast Highway, Malibu, California 90265, Attn: Chief Financial Officer, or at such other place as Holder may from time to time direct by written notice to Borrower. 1. All of Borrower's obligations hereunder shall be deemed fully paid, satisfied and discharged, and this Note shall be cancelled: (1) on the Maturity Date, if Borrower shall continue to be employed in any capacity by Holder or a subsidiary thereof (excluding any leave of absence or other interruption of service approved or permitted by Holder) on such date; or (2) on the Termination Date (as defined in the Employment Agreement dated as of January 1, 2000 between Holder and Borrower (the "Employment Agreement")), if Borrower's employment by Holder (or a subsidiary thereof) is terminated prior to the Maturity Date for any reason other than Borrower's voluntary resignation (excluding termination of employment by Borrower "for good reason" as provided in Section 14 of the Employment Agreement) or "for cause" as provided in Section 13 of the Employment Agreement. 2. If any one or more of the following events (each, an "Event of Default") shall occur, the entire outstanding principal amount hereof and all interest then accrued thereon shall immediately become due and payable upon written notice to that effect given to Borrower by Holder, in the case of an Event of Default described in subparagraph 2(b) or 2(e), and without any notice or other act, in the case of an Event of Default described in subparagraph 2(a) or 2(d): (1) Borrower's failure to pay any installment of this Note within 15 days after the due date thereof; (2) (i) Borrower's failure to pay when due any indebtedness, other than this Note, evidenced or secured by any note, bond, debenture, loan agreement,

2 indenture, guaranty, trust agreement, mortgage or other instrument or agreement in connection with the borrowing of money or the obtaining of advances or credit to which Borrower is a party or by which he is bound, or to which any of his properties or assets may be subject (a "Debt Instrument"), or Borrower's failure to perform or comply with any condition or covenant thereof, so that, as a result of any such failure, indebtedness evidenced or secured thereby in an amount in excess of $500,000 may be declared due and payable prior to the date on which such indebtedness would otherwise become due and payable; or (ii) any event or condition referred to in any Debt Instrument shall occur or fail to occur, so that, as a result thereof, indebtedness evidenced or secured thereby in an amount in excess of $500,000 may be declared due and payable prior to the date on which such indebtedness would otherwise become due and payable. (3) Borrower shall file a petition in bankruptcy, make an assignment for the benefit of creditors, petition or apply for the appointment of a receiver, conservator, trustee or other fiduciary agent for him or a substantial part of his assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, composition, dissolution or liquidation law, or if there shall have been filed by any other person any such petition or application or any such proceeding shall have been commenced by any other person against him, which petition, application or proceeding is not vacated or dismissed for a period of 90 days or more; or Borrower shall consent to, approve of, or acquiesce in, any such petition, application or proceeding or the appointment of a receiver or conservator of, or trustee or other fiduciary agent for, him or any substantial part of his assets, or shall suffer any such appointment to continue undischarged for a period of 90 days or more; or an order for relief shall have been entered against Borrower under the United States Bankruptcy Code; or (4) any judgment against Borrower or any attachment of, levy upon, or execution against, any of his properties for any amount in excess of $500,000 shall not be paid, stayed on appeal, bonded, discharged, vacated or dismissed within a period of 90 days. 3. Upon the occurrence of an Event of Default, Holder may accelerate this Note and demand the prompt payment of all amounts due hereunder, and may take any lawful action to compel the same, including, through an appropriate suit, action or other proceeding. Borrower shall be liable for and promptly pay to Holder its costs of collection, including without limitation reasonable attorney's fees and court costs. 4. Any other provision hereof to the contrary notwithstanding, if any law, or any rule or regulation thereunder, shall limit the maximum rate of interest which may be charged on this Note to a rate less than that provided for herein (but for the provisions of this paragraph), then the rate of interest charged on this Note shall be reduced to

3 such maximum lawful rate for so long as such interest rate shall be so limited by law and shall thereafter return to the rate otherwise provided herein. 5. Borrower hereby waives presentment, demand for payment, protest, notice of protest or dishonor and any other notice or demand (except as provided in paragraph 4 hereof) in connection with the payment and performance of this Note. 6. Any notice or demand required or permitted to be given or made hereunder shall be deemed to have been duly given or made for all purposes if (i) in writing and (A) sent by messenger or courier service against receipt, or (B) sent by certified or registered mail, postage paid, return receipt requested, or (ii) sent by telegram, telecopy, telex or similar electronic means, provided that a written copy thereof is sent on the same day by postage-paid first-class mail, to such party at the following address: To Borrower at: 1145 Rosecreek Drive Moorpark, California 93201 (310) 532-1092 To Holder at: 22761 Pacific Coast Highway Malibu, California 90265 Attn: Chief Financial Officer (310) 317-8527 or such other address as either party hereto may at any time, or from time to time, direct by notice given to the other party in accordance with this paragraph. The date of giving or making of any such notice or demand shall be, in the case of clause (i)(A), the date of the receipt, in the case of clause (i)(B), five business days after such notice or demand is sent, and, in the case of clause (ii), the business day next following the day that notice or demand is sent. 7. This Note shall be governed by, and interpreted in accordance with the laws of the State of California, without regard to principles of choice or conflict of laws. IN WITNESS WHEREOF, Borrower has duly executed this Note as of the date first written above. /s/ JOEL M. BENNETT ------------------------------------ Joel M. Bennett

1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of January 1, 2000 by and between JAKKS Pacific, Inc., a Delaware corporation (the "Company"), and Joel M. Bennett ("Executive") W I T N E S S E T H : WHEREAS, the Company desires to employ Executive on the terms and subject to the conditions hereinafter set forth, and Executive desires so to be employed; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the Company and Executive agree as follows: 1. Offices and Duties. (a) The Company hereby employs Executive during the Term (as hereinafter defined) to serve as the Company's Executive Vice President and Chief Financial Officer. As such, Executive shall have principal responsibility and authority (subject to the provisions of Section 1(c)) to administer all financial and accounting functions for the Company and its subsidiaries, including without limitation with respect to: (i) financial recordkeeping and reporting; (ii) interfacing with the Company's independent auditors; (iii) preparation and interpretation of budgets, projections and other financial analyses; (iv) tax reporting and compliance; (v) cash management; and (vi) reporting to and advising the Company's Board of Directors and executive management on financial, accounting, tax and compensation matters. Within the scope of such functions and duties, Executive shall perform such administrative and supervisory services on behalf of the Company as the Company's Board of Directors or a Superior Officer (as hereinafter defined) may from time to time reasonably direct. The Company's Board of Directors or a Superior Officer may appoint or designate Executive to serve in such other corporate offices of the Company or a Subsidiary (as hereinafter defined) as they may from time to time deem necessary, proper or advisable; provided that, without his consent (which shall not be unreasonably withheld), Executive shall not be required to occupy or serve in any office which (i) is

2 not reasonably related to his functions and duties as Chief Financial Officer and (ii) involves other substantial duties or liabilities. (b) Executive shall devote substantially all of his business time and attention to the business and affairs of the Company. (c) Executive shall at all times be subject to the direction and control of the Company's Board of Directors and the Superior Officers and observe and comply with such rules, regulations, policies and practices as the Company's Board of Directors or the Superior Officers may from time to time establish. (d) Executive hereby accepts such employment and agrees that throughout the Term he shall faithfully, diligently and to the best of his ability, in furtherance of the business of the Company, perform the duties assigned to him or incidental to the offices assumed by him pursuant to this Section. 2. Term. The employment of Executive hereunder shall commence on the date hereof and continue for a term ending on December 31, 2003, subject to earlier termination upon the terms and conditions provided elsewhere herein (the "Term"). As used herein, "Termination Date" means the last day of the Term. 3. Compensation. (a) As compensation for his services hereunder, the Company shall pay to Executive during the Term: (i) a base salary for 2000 at the rate of $225,000 per annum and for each subsequent year during the Term at a rate to be determined by the Company's Board of Directors (or Compensation Committee) that is not less than the rate for the immediately preceding year (the "Base Salary"), such Base Salary to be paid in substantially equal installments no less often than twice monthly; (ii) a bonus (the "Bonus") in respect of each Bonus Period (as hereinafter defined), payable within 90 days after the end of such Bonus Period, in an amount equal to the greater of (A) $75,000 and (B) the product of (I) the lesser of (1) the Bonus Factor (as hereinafter defined) for such Bonus Period) and (2) 1 and (II) the Base Salary for such Bonus Period; and (iii) such additional incentive or bonus compensation as the Company's Board of Directors may from time to time determine. (b) For the purposes of Section 3(a)(ii):

3 (i) A "Bonus Period" is a fiscal year of the Company ending during the Term or, if the Term ends on a day other than the last day of a fiscal year of the Company, the portion of such fiscal year ending on the last day of the last full month ending during the Term. (ii) The "Bonus Factor" for any Bonus Period is (A) if the Pre-Tax Income (as hereinafter defined) for such Bonus Period exceeds the Pre-Tax Income for the immediately preceding Bonus Period, the quotient obtained by dividing the (I) amount of such excess by (II) the Pre-Tax Income for the immediately preceding Bonus Period, or (B) if the Pre-Tax Income for such Bonus Period is equal to or less than the Pre-Tax Income for the immediately preceding Bonus Period, 0. (iii) The "Pre-Tax Income" for any Bonus Period is the Company's consolidated income before any deduction or reserve for income taxes and without adjustment for any extraordinary item accrued in such Bonus Period, multiplied, if the duration of such Bonus Period is not 12 calendar months, by a fraction the numerator of which is 365 and the denominator of which is the number of days included in such Bonus Period. The determination of the Pre-Tax Income, the Bonus Factor and the Bonus for any Bonus Period, including all estimates, allocations or prorations required to be made in connection therewith, shall be made by the Company's regularly-engaged independent certified public accountants in accordance with generally accepted accounting principles applied on a basis consistent with past periods, which determination, absent manifest error, shall be conclusive and binding upon the Company and Executive. If any adjustment that affects the determination of the Bonus for any Bonus Period is made after the payment of the Bonus for such Bonus Period, the Company shall promptly give written notice to Executive of any change proposed to be made to such Bonus, setting forth in reasonable detail therein the amount of and basis for such change. If such change involves an increase to such Bonus, the Company shall pay such increase to Executive concurrently with the delivery of such notice, and if such change involves a decrease to such Bonus, Executive shall repay the amount of such decrease to the Company promptly, and in any event, within 60 days after receipt of such notice. (c) If the Company's stockholders approve the 2000 amendment to the Company's Amended and Restated 1995 Stock Option Plan, as amended (the "Plan"), at the 2000 annual meeting of the Company's stockholders (the "Annual Meeting"), so that such amendment shall thereupon become effective and the number of shares of the Company's common stock, par value $.001 per share (the "Common Stock"),

4 subject to the Plan shall be increased in accordance with such amendment, the Company shall grant to Employee on the date of the Annual Meeting an option under the Plan to purchase 96,000 shares of Common Stock, which option shall incorporate the terms and conditions and be substantially in the form of Exhibit A hereto. If the 2000 Amendment to the Plan does not become effective on or before June 30, 2000, because the Company's stockholders fail to approve such amendment at the Annual Meeting or otherwise, the Company shall grant to Executive on June 30, 2000 an option having the same rights and subject to the same terms and conditions as would appertain to an option granted under the Plan described in the preceding sentence (other than any rights, terms or conditions which could not apply to such option under applicable law). (d) In addition to his Base Salary and other compensation provided herein, Executive shall be entitled to participate, to the extent he is eligible under the terms and conditions thereof, in any stock, stock option or other equity participation plan and any profit-sharing, pension, retirement, insurance, medical service or other employee benefit plan generally available to the executive officers of the Company, and to receive any other benefits or perquisites generally available to the executive officers of the Company pursuant to any employment policy or practice, which may be in effect from time to time during the Term. Except as otherwise expressly provided herein, the Company shall be under no obligation hereunder to institute or to continue any such employee benefit plan or employment policy or practice. (e) During the Term, Executive shall not be entitled to additional compensation for serving as a director or officer of the Company or any Subsidiary (other than Executive Vice President or Chief Financial Officer of the Company), if such service is reasonably related to his duties and functions as the Company's Chief Financial Officer and does not involve any other substantial duties or liabilities, except that throughout any period or periods during which he shall serve as a director of the Company or such Subsidiary, Executive shall be entitled to directors' fees in accordance with the policies and practices of the Company or such Subsidiary then in effect. 4. Expense Allowance. (a) The Company shall pay directly, or advance funds to Executive or reimburse Executive for, all expenses reasonably incurred by him in connection with the performance of his duties hereunder and the business of the Company, upon the submission to the Company of itemized expense reports, receipts or vouchers in accordance with its then customary policies and practices. (b) The Company shall provide to Executive a suitable automobile or other vehicle for his exclusive use and shall pay the entire cost thereof (including without limitation purchase price or lease payments, insurance premiums, repair charges, and maintenance and operating expenses), other than fuel charges, or shall pay to executive a monthly automobile allowance in the amount of $600.

5 5. Location. Except for routine travel and temporary accommodation reasonably required to perform his services hereunder, Executive shall not be required to perform his services hereunder at any location other than the Company's principal executive office. 6. Office. The Company shall provide Executive with suitable office space, furnishings and equipment, secretarial and clerical services and such other facilities and office support as are reasonably necessary for the performance of his services hereunder. 7. Vacation. Executive shall be entitled to four weeks paid vacation during each year of his employment hereunder, such vacation to be taken at such time or times as shall be agreed upon by Executive and the Company. Vacation time shall be cumulative from year to year, except that Executive shall not be entitled to take more than six weeks vacation during any consecutive 12-month period during the Term. 8. Key-Man Insurance. The Company shall have the right from time to time to purchase, increase, modify or terminate insurance policies on the life of Executive for the benefit of the Company in such amounts as the Company may determine in its sole discretion. In connection therewith, Executive shall, at such time or times and at such place or places as the Company may reasonably direct, submit himself to such physical examinations and execute and deliver such documents as the Company may deem necessary or appropriate. 9. Trade Secrets. Executive shall hold all Confidential Information (as hereinafter defined) in a fiduciary capacity for the benefit of the Company, and he shall not, at any time hereafter, without the prior written consent of the Company, use or disclose to any Person, other than the Company or its designees, any such Confidential Information, except: (a) to the extent reasonably required for Executive to perform his functions and duties hereunder; (b) to the extent disclosure is required by an order, subpoena, demand or other legal process; provided that Executive promptly gives notice thereof to the Company so that the Company may oppose such disclosure or seek a protective order or other confidential treatment of such Confidential Information; (c) to the extent any Confidential Information becomes generally available in the public domain (other than through the disclosure of such Confidential Information by Executive in violation of the provisions of this Section or any other confidentiality obligation of Executive in favor of the Company or a Subsidiary); and (d) that any Confidential Information that was known to Executive prior to his initial employment by the Company may be used by or disclosed by Executive after the Termination Date.

6 On the Termination Date or upon request by the Company at any time prior thereto, Executive shall deliver to the Company any manuals, records, files, lists and other documentation (regardless of form) embodying or containing Confidential Information, without retaining any copy thereof, except to the extent such Confidential Information may be retained for use or disclosure by Executive pursuant to clauses (a) through (d) of the preceding sentence. 10. Intellectual Property. Subject to Sections 2870 and 2871 of the California Labor Code: (a) Any Invention conceived, developed, created or made by Executive, alone or with others, during the Term and applicable to the business of the Company, whether or not patentable or registrable, shall become the sole and exclusive property of the Company. (b) Executive shall disclose the same promptly and completely to the Company and shall, during the Term or thereafter, (i) execute all documents requested by the Company for vesting in the Company the entire right, title and interest in and to the same, (ii) execute all documents requested by the Company for filing applications for and procuring such patents, trademarks, service marks or copyrights as the Company, in its sole discretion, may desire to prosecute, and (iii) give the Company all assistance it may reasonably require, including the giving of testimony in any Proceeding (as hereinafter defined), in other to obtain, maintain and protect the Company's right therein and thereto; provided that the Company shall bear the entire cost and expense of such assistance, including without limitation paying Executive reasonable compensation for any such assistance after the Termination Date. 11. No Competition. (a) During the Term, and unless his employment terminates pursuant to Section 14 or by action of the Company other than pursuant to Section 13, for a further period of two years thereafter, Executive shall not, directly or indirectly: (i) own, control, manage, operate, be employed by, serve as a consultant or advisor to, or otherwise render any service to or for, participate or invest in, or otherwise be connected with, in any manner, any Person that is engaged in the Restricted Business (as hereinafter defined); provided, however, that Executive may invest his funds in securities of a Person engaged in the Restricted Business if the securities of such Person are listed for trading on a registered securities exchange or actively traded in an over-the-counter market and Executive's holdings therein represent less than 1% of the total number of shares or principal amount of the securities of such Person outstanding; or

7 (ii) for himself or on behalf of any other Person, employ or engage any Person who at the time shall have been within the preceding 12-month period an employee of the Company or any Subsidiary or contact any supplier, customer or employee of the Company or such Subsidiary or take any other action for the purpose of soliciting or diverting any supplier, customer or employee from the Company or such Subsidiary. (b) Executive acknowledges that the provisions of this Section, and the period of time, geographic area and scope and type of restrictions on his activities set forth herein, are reasonable and necessary for the protection of the Company. 12. Termination Upon Death or Disability. Executive's employment hereunder shall terminate immediately upon his death. In the event that Executive is unable to perform his duties hereunder by reason of any disability or incapacity (due to any physical or mental injury, illness or defect) for an aggregate of 90 days in any consecutive 12-month period, the Company shall have the right to terminate Executive's employment hereunder within 60 days after the 90th day of his disability or incapacity by giving Executive notice to such effect at least 30 days prior to the date of termination set forth in such notice, and on such date such employment shall terminate. 13. Termination for Cause. (a) In addition to any other rights or remedies provided by law or in this Agreement, the Company may terminate Executive's employment under this Agreement if: (i) Executive is convicted of, or enters a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense and either Executive fails to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if Executive does perfect such an appeal, his conviction of a felony offense is sustained on appeal; or (ii) the Company's Board of Directors determines, after due inquiry, that Executive has: (A) committed fraud against, or embezzled or misappropriated funds or other assets of, the Company or any Subsidiary; (B) violated, or caused the Company or any Subsidiary, or any officer, employee or other agent thereof, or

8 any other Person to violate, any material law, regulation or ordinance, which violation has or would reasonably be expected to have a significant detrimental effect on the Company, or any material rule, regulation, policy or practice established by the Board of Directors of the Company or any Subsidiary; (C) on a persistent or recurring basis, (1) failed properly to perform his duties hereunder or (2) acted in a manner detrimental to, or adverse to the interests of, the Company; or (D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by Executive hereunder. (b) The Company may effect such termination for cause by giving Executive notice to such effect, setting forth therein the Termination Date (which may be the date such notice is given, in case such termination is based on paragraph (i) or clause A of paragraph (ii) of Section 13(a), but which shall otherwise be at least 20 days after the date such notice is given) and, in reasonable detail, the factual basis for such termination, and, in such event, such termination shall be effective on the Termination Date set forth in such notice, unless Executive avoids such termination by curing or explaining to the reasonable satisfaction of the Company's Board of Directors the factual basis for termination set forth therein. (c) In making any determination pursuant to this Section 13(a) as to the occurrence of any act or event described in clauses (A) to (D) of paragraph (ii) thereof (each, a "For Cause Event"), each of the following shall constitute convincing evidence of such occurrence: (i) if Executive is made a party to, or target of, any Proceeding arising under or relating to any For Cause Event, Executive's failure to defend against such Proceeding or to answer any complaint filed against him therein, or to deny any claim, charge, averment, or allegation thereof asserting or based upon the occurrence of a For Cause Event; (ii) any judgment, award, order, decree or other adjudication or ruling in any such Proceeding finding or based upon the occurrence of a For Cause Event (that is not reversed or vacated on appeal); or (iii) any settlement or compromise of, or consent decree issued in, any such Proceeding in which Executive expressly admits the occurrence of a For Cause Event;

9 provided that none of the foregoing shall be dispositive or create an irrebuttable presumption of the occurrence of such For Cause Event; and provided further that the Company's Board of Directors may rely on any other factor or event as convincing evidence of the occurrence of a For Cause Event. 14. Termination by Executive. In addition to any other rights or remedies provided by law or in this Agreement, Executive may terminate his employment hereunder if: (a) (i) the Company violates, or fails to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by it hereunder or, (ii) as a result of any action or failure to act by the Company, there is a material change in the nature or scope of the duties, obligations, rights or powers of Executive's employment, by giving the Company notice to such effect, setting forth in reasonable detail the factual basis for such termination, at least 20 days prior to the date of termination set forth therein; provided however that the Company may avoid such termination if it, prior to the date of termination set forth in such notice, cures or explains to the reasonable satisfaction of Executive the factual basis for termination set forth therein; or (b) a Change of Control (as hereinafter defined) occurs during the Term, at any time within the two-year period thereafter, by giving the Company notice to such effect, setting forth the event or circumstance constituting such Change of Control, such termination to be effective upon the date of termination, not more than 30 days after the date of such notice, set forth therein or, if no such date is set forth therein, immediately upon delivery of such notice to the Company. The termination by Executive of his employment pursuant to this Section 14 shall not constitute or be deemed to constitute for any purpose a "voluntary resignation" of his employment. 15. Compensation upon Termination. (a) Upon termination of Executive's employment hereunder, he shall be entitled to receive, in any case, any compensation or other amount due to him pursuant to Section 3 or 4 in respect of his employment prior to the Termination Date. (b) If Executive is discharged "for cause" pursuant to Section 13, except for the payment of any amount required to be made by Section 15(a), from and after the Termination Date, the Company shall have no further obligation to Executive hereunder, including without limitation any obligation pursuant to Section 17. (c) If his employment is terminated by Executive pursuant to Section 14(a) or by the Company other than "for cause" pursuant to Section 13, he shall be entitled to receive an amount equal to the product of (i) the sum of (A) his Base Salary for the year in which such termination occurs and (B) his Bonus for the last Bonus

10 Period ending before the Termination Date (annualized if such Bonus Period is other than a 12-month fiscal year of the Company), and (ii) a fraction, the numerator of which is the number of full months remaining in the balance of the Term after the Termination Date and the denominator of which is 36. (d) If his employment terminates pursuant to Section 14(b) and, if at the time Executive gives the Company the notice of termination referred to therein, the Company has not given to Executive a notice of termination upon his disability pursuant to Section 12 or "for cause" pursuant to Section 13, he shall be entitled to receive, upon the terms and subject to the conditions set forth in Section 16, the Parachute Amount (as hereinafter defined). (e) If Executive's employment hereunder terminates pursuant to Section 12, he or his guardian, custodian or other legal representative or successor shall be entitled to continue to receive the Base Salary payable pursuant to Section 3(a)(i) in the amounts and at the times provided therein for a period of six months following the date of termination. (f) Except as otherwise provided in Section 15(e), any amount payable to Executive upon termination of his employment hereunder shall be paid promptly, and in any event within 30 days, after the Termination Date. 16. Change of Control. (a) For the purposes of this Section 16: (i) The "Act" is the Securities Exchange Act of 1934, as amended. (ii) A "person" includes a "group" within the meaning of Section 13(d)(3) of the Act. (iii) "Control" is used herein as defined in Rule 12b-2 under the Act. (iv) "Beneficially owns" and "acquisition" are used herein as defined in Rules 13d-3 and 13d-5, respectively, under the Act. (v) "Non-Affiliated Person" means any person, other than Executive, an employee stock ownership trust of the Company (or any trustee thereof for the benefit of such trust), or any person controlled by Executive, the Company or such a trust. (vi) "Voting Securities" includes Common Stock and any other

11 securities of the Company that ordinarily entitle the holders thereof to vote, together with the holders of Common Stock or as a separate class, with respect to matters submitted to a vote of the holders of Common Stock, but securities of the Company as to which the consent of the holders thereof is required by applicable law or the terms of such securities only with respect to certain specified transactions or other matters, or the holders of which are entitled to vote only upon the occurrence of certain specified events (such as default in the payment of a mandatory dividend on preferred stock or a scheduled installment of principal or interest of any debt security), shall not be Voting Securities. (vii) "Right" means any option, warrant or other right to acquire any Voting Security (other than such a right of conversion or exchange included in a Voting Security). (viii) The "Code" is the Internal Revenue Code of 1986, as amended. (ix) "Base amount," "present value" and "parachute payment" are used herein as defined in Section 280G of the Code. (b) A "Change of Control" occurs when: (i) a Non-Affiliated Person acquires control of the Company; (ii) upon an acquisition of Voting Securities or Rights by a Non-Affiliated Person or any change in the number or voting power of outstanding Voting Securities, such Non-Affiliated Person beneficially owns Voting Securities or Rights entitling such person to cast a number of votes (determined in accordance with Section 16(g)) equal to or greater than 25% of the sum of (A) the number of votes that may be cast by all other holders of outstanding Voting Securities and (B) the number of votes that may be cast by such Non-Affiliated Person (determined in accordance with Section 16(g)); or (iii) upon any change in the membership of the Company's Board of Directors, a majority of the directors are persons who are not nominated or appointed by the Company's Board of Directors as constituted prior to such change. (c) The "Parachute Amount" to which Executive shall be entitled pursuant to Section 15(d) shall equal 2.99 times Executive's base amount.

12 (d) It is intended that the present value of any payments or benefits to Executive, whether hereunder or otherwise, that are includable in the computation of parachute payments shall not exceed 2.99 times the base amount. Accordingly, if Executive receives any payment or benefit from the Company prior to payment of the Parachute Amount which, when added to the Parachute Amount, would subject any of the payments or benefits to Executive to the excise tax imposed by Section 4999 of the Code, the Parachute Amount shall be reduced by the least amount necessary to avoid such tax. The Company shall have no obligation hereunder to make any payment or provide any benefit to Executive after the payment of the Parachute Amount which would subject any of such payments or benefits to the excise tax imposed by Section 4999 of the Code. (e) Any other provision hereof notwithstanding, Executive may, prior to his receipt of the Parachute Amount pursuant to Section 15(d), waive the payment thereof, or, after his receipt of the Parachute Amount thereunder, treat some or all of such amount as a loan from the Company which Executive shall repay to the Company within 180 days after the receipt thereof, together with interest thereon at the rate provided in Section 7872 of the Code, in either case, by giving the Company notice to such effect. (f) Any determination of the base amount, the Parachute Amount, any liability for excise tax under Section 4999 of the Code or other matter required to be made pursuant to this Section 18, shall be made by the Company's regularly-engaged independent certified public accountants, whose determination shall be conclusive and binding upon the Company and Executive; provided that such accountants shall give to Executive, on or before the date on which payment of the Parachute Amount or any later payment or benefit would be made, a notice setting forth in reasonable detail such determination and the basis therefor, and stating expressly that Executive is entitled to rely thereon. (g) The number of votes that may be cast by holders of Voting Securities or Rights upon the issuance or grant thereof shall be deemed to be the largest number of votes that may be cast by the holders of such securities or the holders of any other Voting Securities into which such Voting Securities or Rights are convertible or for which they are exchangeable or exercisable, determined as though such Voting Securities or Rights were immediately convertible, exchangeable or exercisable and without regard to any anti-dilution or other adjustments provided for therein. 17. Other Termination Provisions. (a) Upon request by Executive, on the Termination Date or as soon as practicable thereafter, the Company shall assign to Executive, and Executive shall assume, the purchase agreement or lease relating to any automobile or other vehicle

13 that the Company provides for his use on the Termination Date pursuant to Section 4(b) (other than an automobile or other vehicle owned or leased by Executive), if and to the extent assignable under the terms and conditions thereof, and thereafter Executive shall be liable for, and the Company shall be relieved of all liability for, any amount or other obligation required to be paid or performed thereunder in respect of any period commencing after the date of assignment. (b) Throughout the 10-year period following the Termination Date, the Company shall indemnify Executive, and hold him harmless from, any loss, damages, liability, obligation or expense that he may suffer or incur in connection with any claim made or Proceeding commenced during such period relating to his service as a director, officer, employee or agent of the Company (or any subsidiary thereof) to the same extent and in same manner as the Company shall be obligated so to indemnify Executive immediately prior to the Termination Date; provided that, if during such 10-year period the Company adopts or assumes any indemnification policy or practice with respect to its directors, officers, employees or agents that is more favorable than that in effect on the Termination Date, Executive shall be entitled to such more favorable indemnification. (c) Throughout the 10-year period following the Termination Date, the Company shall maintain for the benefit of Executive directors' and officers' liability insurance (on a "claims made" basis) providing coverage at least as favorable to Executive (including with respect to limits of liability, exclusions, and deductible and retention amounts) as that in effect on the Termination Date. 18. Limitation of Authority. Except as expressly provided herein, no provision hereof shall be deemed to authorize or empower either party hereto to act on behalf of, obligate or bind the other party hereto. 19. Notices. Any notice or demand required or permitted to be given or made hereunder to or upon either party hereto shall be deemed to have been duly given or made for all purposes if (a) in writing and sent by (i) messenger or an overnight courier service against receipt, or (ii) certified or registered mail, postage paid, return receipt requested, or (b) sent by telegram, telecopy, telex or similar electronic means, provided that a written copy thereof is sent on the same day by postage-paid first-class mail, to such party at the following address: to the Company at: 22761 Pacific Coast Highway Malibu, California 90265 Attn: President Fax: (310) 317-8527 with a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP 750 Lexington Avenue New York, New York 10022 Attn: Murray L. Skala, Esq. Fax: (212) 888-7776

14 to Executive at: 11349 Rosecreek Drive Moorpark, California 93021 Fax: (805) 532-1092 or such other address as either party hereto may at any time, or from time to time, direct by notice given to the other party in accordance with this Section. The date of giving or making of any such notice or demand shall be, in the case of clause (a) (i), the date of the receipt; in the case of clause (a) (ii), five business days after such notice or demand is sent; and, in the case of clause (b), the business day next following the date such notice or demand is sent. 20. Amendment. Except as otherwise provided herein, no amendment of this Agreement shall be valid or effective, unless in writing and signed by or on behalf of the parties hereto. 21. Waiver. No course of dealing or omission or delay on the part of either party hereto in asserting or exercising any right hereunder shall constitute or operate as a waiver of any such right. No waiver of any provision hereof shall be effective, unless in writing and signed by or on behalf of the party to be charged therewith. No waiver shall be deemed a continuing waiver or waiver in respect of any other or subsequent breach or default, unless expressly so stated in writing. 22. Governing Law. This Agreement shall be governed by, and interpreted and enforced in accordance with, the laws of the State of New York without regard to principles of choice of law or conflict of laws. 23. Jurisdiction. Each of the parties hereto hereby irrevocably consents and submits to the jurisdiction of the courts of the State of New York and the United States District Court for the Southern District of New York in connection with any Proceeding arising out of or relating to this Agreement, waives any objection to venue in the County of New York, State of New York, or such District, and agrees that service of any summons, complaint, notice or other process relating to such Proceeding may be effected in the manner provided by clause (a)(ii) of Section 19. 24. Remedies. In the event of any actual or prospective breach or default under this Agreement by either party hereto, the other party shall be entitled to equitable relief, including remedies in the nature of rescission, injunction and specific performance. All remedies hereunder are cumulative and not exclusive, and nothing herein shall be deemed to prohibit or limit either party from pursuing any other remedy or relief available at law or in equity for such actual or prospective breach or default, including the recovery of damages; provided that, except as provided in Section 15 and except with respect to a breach by Executive of his obligations pursuant to Sections 9, 10 and 11, no party hereto shall be liable under this Agreement for lost profits or consequential damages.

15 25. Severability. The provisions hereof are severable and in the event that any provision of this Agreement shall be determined to be invalid or unenforceable in any respect by a court of competent jurisdiction, the remaining provisions hereof shall not be affected, but shall, subject to the discretion of such court, remain in full force and effect, and any invalid or unenforceable provision shall be deemed, without further action on the part of the parties hereto, amended and limited to the extent necessary to render the same valid and enforceable. 26. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and which together shall constitute one and the same agreement. 27. Assignment. This Agreement, and each right, interest and obligation hereunder, may not be assigned by either party hereto without the prior written consent of the other party hereto, and any purported assignment without such consent shall be void and without effect, except that this Agreement shall be assigned to, and assumed by, any Person with or into which the Company merges or consolidates, or which acquires all or substantially all of its assets, or which otherwise succeeds to and continues the Company's business substantially as an entirety. Except as otherwise expressly provided herein or required by law, Executive shall not have any power of anticipation, assignment or alienation of any payments required to be made to him hereunder, and no other Person may acquire any right or interest in any thereof by reason of any purported sale, assignment or other disposition thereof, whether voluntary or involuntary, any claim in a bankruptcy or other insolvency proceeding against Executive, or any other ruling, judgment, order, writ or decree. 28. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement is not intended, and shall not be deemed, to create or confer any right or interest for the benefit of any Person not a party hereto. 29. Titles and Captions. The titles and captions of the Articles and Sections of this Agreement are for convenience of reference only and do not in any way define or interpret the intent of the parties or modify or otherwise affect any of the provisions hereof. 30. Grammatical Conventions. Whenever the context so requires, each pronoun or verb used herein shall be construed in the singular or the plural sense and each capitalized term defined herein and each pronoun used herein shall be construed in the masculine, feminine or neuter sense. 31. References. The terms "herein," "hereto," "hereof," "hereby," and "hereunder," and other terms of similar import, refer to this Agreement as a whole, and not to any Article, Section or other part hereof. 32. No Presumptions. Each party hereto acknowledges that it has had an

16 opportunity to consult with counsel and has participated in the preparation of this Agreement. No party hereto is entitled to any presumption with respect to the interpretation of any provision hereof or the resolution of any alleged ambiguity herein based on any claim that the other party hereto drafted or controlled the drafting of this Agreement. 33. Certain Definitions. As used herein: (a) "Confidential Information" means all confidential or proprietary information of the Company or a Subsidiary, including without limitation information relating to Inventions (including Confidential Information required to be disclosed to the Company pursuant to Section 10), Trade Rights, plant and equipment, products, customers, suppliers, marketing and sales, personnel, and financing and tax matters. (b) "Invention" means any invention, design, process, system, improvement, development or discovery or any technical specifications, know-how or information or other intellectual property relating thereto. (c) "Person" includes without limitation a natural person, corporation, joint stock company, limited liability company, partnership, joint venture, association, trust, government or governmental authority, agency or instrumentality, or any group of the foregoing acting in concert. (d) A "Proceeding " is any suit, action, arbitration, audit, investigation or other proceeding before or by any court, magistrate, arbitration panel or other tribunal, or any governmental agency, authority or instrumentality of competent jurisdiction. (e) "Restricted Business" means (i) designing, developing, manufacturing or otherwise producing, marketing, distributing, selling or otherwise trading or dealing in or with any Restricted Product in the Restricted Territory or (ii) acquiring (by purchase, license or otherwise), using or otherwise exploiting any Restricted Trade Right in the Restricted Territory. (f) "Restricted Product" means any toy, doll, game, electronic game, activity set, collectible model vehicle or other product that, on the Termination Date or at any time during the 12-month period preceding the Termination Date, (i) is or was designed, developed, manufactured or otherwise produced, marketed, distributed, sold or otherwise traded or dealt in or with by or for the Company or any Subsidiary or (ii) is or was subject to a Restricted Trade Right. (g) "Restricted Territory" means the United States of America. (h) "Restricted Trade Right" means a Trade Right that, on the Termination Date or at any time during the 12-month period preceding the Termination Date, is or was (i) owned by or licensed to the Company or (ii) owned by or licensed to

17 a Subsidiary and used in connection with any Restricted Product. (i) "Subsidiary" means any Person in which the Company, directly or indirectly, owns any equity interest (including without limitation as a general partner of a partnership or a member of a limited liability company). (j) "Superior Officer" means any of the Company's Chairman, Chief Executive Officer, President or Chief Operating Officer. (k) "Trade Right" means any claim of copyright, trademark, service mark, trade name, brand name, trade dress, logo, symbol, design or other trade right. 34. Entire Agreement. This Agreement embodies the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any prior agreement, commitment or arrangement relating thereto. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the day and year first above written. JAKKS PACIFIC, INC. By: /s/ STEPHEN G. BERMAN ---------------------------------------- Name: Stephen G. Berman Title: President EXECUTIVE: /s/ JOEL M. BENNETT -------------------------------------------- Joel M. Bennett

18 EXHIBIT A JAKKS PACIFIC, INC. CERTIFICATE OF STOCK OPTION AGREEMENT To purchase 96,000 shares of Common Stock June __, 2000 JAKKS Pacific, Inc., a Delaware corporation (the "Company"), hereby certifies that Joel M. Bennett has been granted an Option to purchase 96,000 shares of Common Stock, pursuant to and subject to the terms and conditions of the Company's Third Amended and Restated 1995 Stock Option Plan, as amended (the "Plan"), exercisable as follows: 1. Date of Grant: June __, 2000 2. Exercise Price: [closing sale price of Common Stock on the date of grant as reported by the Nasdaq National Market] 3. Vesting: This Option is exercisable to the extent of the following number of shares commencing on the following dates: Date on or after which shares can be purchase Number of Shares ---------------------- ---------------- June __, 2001 14,400 June __, 2002 additional 14,400 June __, 2003 additional 14,000 June __, 2004 additional 24,000 June __, 2005 additional 28,800 4. Termination: This Option shall not be exercisable after 5:00 p.m. Pacific Time on June __, 2006. 5. Restrictive Covenants: The Optionee, by his acceptance of this Option, makes all of the acknowledgments, stipulations, covenants and agreements to be made by the Optionee pursuant to Section 11(h) of the Plan, all of which are incorporated herein by this reference.

19 6. Method of Exercise of Option: The Optionee shall notify the Company by written notice, substantially in the form of the Option Exercise Form annexed hereto, sent by registered or certified mail, return receipt requested, addressed to its principal office, or by hand delivery to such office, attention Secretary, properly receipted, as to the number of shares of Common Stock which the Optionee desires to purchase under this Option, which written notice shall be accompanied by the Optionee's check payable to the order of the Company for the full option price of such shares of Common Stock, unless payment of the option price is to be made in accordance with, and subject to the condition of, the proviso to Section 12(b) of the Plan. As soon as practicable after the receipt of such written notice, the Company shall, at its principal office, deliver to the Optionee a certificate or certificates issued in the Optionee's name evidencing the shares of Common Stock so purchased by the Optionee hereunder. This Option is intended to be an "Incentive Stock Option" subject to Section 7 of the Plan and the applicable provisions of the Code. This Option is subject to substantial restrictions on transfer and will expire, under certain conditions, upon the termination of employment of the Optionee. PLEASE REFER TO THE COMPLETE PLAN, A COPY OF WHICH IS ATTACHED HERETO, TO SEE THE TERMS AND CONDITIONS THEREOF APPLICABLE TO THIS OPTION. JAKKS PACIFIC, INC. By: -------------------------------- Name: Stephen G. Berman Title: President OPTIONEE: -------------------------------- Name: Joel M. Bennett

20 OPTION EXERCISE FORM JAKKS PACIFIC, INC. 22761 Pacific Coast Highway Malibu, California 90265 The undersigned hereby exercises the right to purchase ________________ shares of Common Stock pursuant to and in accordance with the terms and conditions of the Option granted June __, 2000, and herewith makes payment of $ therefor, and requests that a certificate for such shares be issued in the name of the undersigned and be delivered to the undersigned at the address stated below, and, if such number of shares shall not be all of the shares subject to such Option, that a new Certificate of Stock Option Agreement of like tenor for the balance of the shares purchasable thereunder be delivered to the undersigned at the address stated below. Dated: --------------------------- Address: --------------------------- --------------------------- ----------------------------- Name: Joel M. Bennett

1 EXHIBIT 10.15 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE, made as of the 19th day of April, 2000 by and between 1101 CR NB, L.L.C., a New Jersey limited liability company and successor in interest to Pensud Company Limited Partnership, having an address c/o Sudler Management Company, 300 Interpace Parkway, Parsippany, New Jersey 07054-1100 ("Landlord"), and PENTECH INTERNATIONAL, INC., having an address at 1101 Corporate Road, North Brunswick, New Jersey ("Tenant"). WHEREAS, Landlord and Tenant entered into a lease, dated August 28, 1995 (the "Lease") for Premises known as 1101 Corporate Road, North Brunswick, New Jersey (the "Premises"); and WHEREAS, Landlord and Tenant desire to amend the Lease in accordance with the terms hereof; NOW, THEREFORE, for and in consideration of the above premises, the mutual agreements herein contained and other good and valuable consideration, the parties hereto agree as follows: 1. Except as modified herein, the Lease shall continue in full force and effect and is incorporated herein by reference. 2. The term of the Lease shall be extended for a period of five (5) Lease years, expiring and terminating on October 31, 2005. The period November 1, 2000 through October 31, 2005 shall be referred to as the "First Extension Term." 3. The second sentence of Section 11(d) of the Lease shall be amended to provide that the costs of any replacement of the roof shall be amortized on a straight line basis over twenty (20) years and Tenant shall, upon demand, pay Landlord that portion of such costs applicable to the remaining portion of the Term and any extension(s) thereof. 4. In the event that the fire sprinkler booster pump requires replacement, the cost of such replacement shall be shared equally between Landlord and Tenant. 5. The First Extension Term shall be on all of the same terms and conditions set forth in the Lease and applicable to the Initial Term, except as set forth hereinabove and except that the annual Base Rent during the First Extension Term shall be as follows: Period PSF Monthly Installment Annual Amount ------ --- ------------------- ------------- November 1, 2000 through October 31, 2005 $4.00 $43,425.00 $521,100.00

2 6. Landlord and Tenant represent that the only brokers involved in the negotiation of this Amendment were DiLeo Realty and Samson Realty Corp. Tenant acknowledges that Tenant was represented in the negotiation of this Amendment exclusively by DiLeo Realty Associates, Inc. with offices at 1315 Stelton Road, Piscataway, NJ 08854 (John C. Zsilavetz, salesperson) ("Broker") and that Broker was the procuring cause of this Amendment and that no other broker represented Tenant in connection herewith. Tenant shall indemnify and hold Landlord and Sudler Management Company, L.L.C. harmless from and against any claim for commission by any other broker, including but not limited to, Continental Realty Advisors, Inc., in connection with this Amendment. Landlord shall indemnify Tenant for any claim made by any broker, other than Continental Realty Advisors, Inc., alleging that such broker dealt with Landlord in connection with this Amendment. IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment to Lease as of the date first set forth above. WITNESS: 1101 CR NB, L.L.C. /s/ D.B. By: /s/ Peter D. Sudler - ---------------------------------- ------------------------------------ PETER D. SUDLER, MANAGEMENT ATTEST: PENTECH INTERNATIONAL, INC. /s/ F.V. By: /s/ David Melnick - ---------------------------------- ------------------------------------ DAVID MELNICK, PRESIDENT

1 EXHIBIT 10.16 SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT THIS SECOND AMENDMENT effective as of May 1, 2000 to the Stock Purchase Agreement dated as of September 22, 1999 among JAKKS Pacific, Inc., Flying Colors, Inc. (formerly Colorbok Paper Products, Inc.) and the former shareholders thereof named therein (the "Agreement"). W I T N E S S E T H: - - - - - - - - - - - WHEREAS, the Agreement provided for JAKKS and Joshua H. Pokempner ("Pokempner") to enter into an Employment Agreement and contemplated that Pokempner would remain employed by JAKKS throughout the term provided therein; and WHEREAS, JAKKS and Pokempner entered into the Employment Agreement as of October 1, 1999 but have, by their mutual consent, terminated Pokempner's employment by JAKKS effective as of the close of business on April 30, 2000; and WHEREAS, the parties to the Agreement desire to amend the Agreement to permit the termination of Pokempner's employment without affecting the Earn-Out (as defined in the Agreement) and other provisions of the Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. The provisions of Sections 2.5(e) and (f) of the Agreement shall not apply to the termination of Pokempner's employment, which shall not affect the determination or payment of the Earn-Out as otherwise provided in such Section 2.5. 2. From and after May 1, 2000, the provisions of Section 2.5(g) of the Agreement shall not apply to Pokempner. 3. In all other respects, the Agreement shall continue in full force and effect.

2 IN WITNESS WHEREOF, the undersigned have duly executed this Second Amendment as of this 26th day of June, 2000. JAKKS PACIFIC, INC. By: /s/ JOEL M. BENNETT ------------------------------------------- Name: Joel M. Bennett Title: Executive Vice President FLYING COLORS, INC. By: /s/ JOEL M. BENNETT -------------------------------------------- Name: Joel M. Bennett Title: Chief Financial Officer /s/ JOSHUA H. POKEMPNER --------------------------------------------------- Joshua H. Pokempner, as Agent as of the Shareholders 2

5 3-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 65,777,215 28,045,705 47,439,017 2,185,852 19,640,391 161,930,496 21,736,186 7,796,954 240,191,370 38,275,070 0 0 0 19,413 201,090,280 240,191,370 101,359,796 101,359,796 59,508,310 31,131,931 1,072,375 0 (2,160,288) 18,592,605 5,752,411 0 0 0 0 12,840,194 0.66 0.63