[JAKKS
Letterhead]
September
22, 2006
VIA
FAX (202-772-9202)
AND
FEDERAL EXPRESS
Securities
and Exchange Commission
100
F
Street, N.E.
Washington,
D.C. 20549
Attention:
Ms. Claire Erlanger
| Re: |
JAKKS
Pacific, Inc. and its Subsidiaries (collectively, the
"Company")
|
|
Form
10-K for the year ended December 31, 2005, Filed March 16,
2006
|
|
Form
10-Q for the quarter ended March 31, 2006, Filed May 2,
2006
|
|
Form
10-Q for the quarter ended June 30, 2006, Filed August 7,
2006
|
Dear
Ms.
Erlanger:
This
letter shall serve to respond to the questions and comments contained in the
Commission's letter to the Company dated August 30, 2006 regarding its review
of
the above-referenced Forms 10-K and 10-Q.
We
have
prepared our responses in the order contained in the Commission's
letter.
Form
10-K for the year ended December 31, 2005
Item
6. Selected Financial data, page 26
1. Please
revise future filings to either disclose or cross-reference to a discussion
thereof, any factors that materially affect the comparability of the information
provided in your Selected Financial Data. Such items may include, but not be
limited to, business acquisitions or dispositions, accounting changes or other
significant or unusual items which may be helpful to an investor’s understanding
of the selected financial data. Refer to the requirements of Item 301 of
Regulation S-K.
We
will,
in our future applicable filings, either disclose or cross-reference to a
discussion thereof, any factors that materially affect the comparability of
the
information provided in our Selected Financial Data, which may include, but
will
not be limited to, business acquisitions or dispositions, accounting changes
or
other significant or unusual items which may be helpful to an investor’s
understanding of the Selected Financial Data.
Consolidated
Financial Statements
Consolidated
Statements of Income, page 41
2. We
note that you have netted interest income and interest expense on the fact
of
your consolidated statements of income. In light of your disclosure on page
30
of your MD&A, which indicates that interest expense is material, please
revise your presentation in future filings to present interest income and
interest expense on separate line items. See Rule 5-03(b)(7-9) of Regulation
S-X.
We
will
include in our future applicable filings the presentation of interest income
and
interest expense on separate line items.
Notes
to the Financial Statements
Note
2. Summary of Significant Accounting Policies - Stock Option Plans, page
48
3. We
note your disclosure that certain options have been repriced resulting in
compensation adjustments, which have been reflected in net income. Please
provide us with the nature and details of any option repricings and resulting
compensation adjustments that occurred during the three years ended
December 31, 2005.
On
October 30, 2000, our Board of Directors resolved that (i) each of the options
to purchase 1,846,194 shares of our common stock that were outstanding as of
such date (the “Options”) be amended to reset their exercise price to $7.875;
and (ii) the number of shares to be issued upon the exercise price of the
Options be decreased pro rata; provided, that neither of the foregoing changes
would occur unless the holder of an Option consented to such changes. In total,
the holders of Options to purchase 1,717,324 shares (or 93.0% of the total
number of Options) participated in such repricing, so that the total number
of
shares underlying the Options was reduced from 1,717,324 shares to 1,384,609
shares. As a result, effective as of October 30, 2000, we began to account
for
any repriced Options using the variable method pursuant to APB 25 and FIN 44,
which resulted in charges or credit to compensation expense based on
fluctuations in the market price of our common stock for the three years in
the
period ended December 31, 2005, as follows:
| 2003 | $ |
6,292
|
|||
| 2004 | $ |
5,364,540
|
|||
| 2005 | $ |
(1,706,287
|
) |
Note
14. Common Stock, Preferred Stock and Warrants, page 61
4. (i) We
note that during 2004 and 2005 shares of restricted stock were issued to certain
executives and directors. Please tell us and disclose in future filings the
nature of the vesting provisions of the stock, and your method of recording
compensation expense and deferred compensation.
We
will
disclose in all future applicable filings the nature of the vesting provisions
of our restricted stock and our method of recording compensation expense and
deferred compensation. The following would be an example of such disclosure
for
2004 and 2005:
Executive
Officers -
In
accordance with their respective Employment Agreements, Jack Friedman and
Stephen Berman were each granted the
right
to be issued an aggregate of 1,080,000 shares of restricted stock. The first
tranche of restricted stock (240,000 shares for each of Messrs. Friedman and
Berman), was granted at the time the agreements became effective in 2003, and
120,000 shares were granted to each of them on each of January 1, 2004 and
2005. No
other
executive officers were issued any shares of restricted stock in 2004 and 2005.
In
the
subsequent years of their respective employment terms, Messrs. Friedman and
Berman will each receive 120,000 shares of restricted stock.
The
vesting of each tranche of restricted stock is subject to our achieving pre-tax
income in excess of $2,000,000 in the fiscal year that the grant is made (which
we achieved in each of 2004 and 2005). Each tranche of restricted stock granted
or to be granted from January 1, 2004 through January 1, 2008 is
subject to a two-year vesting period, which may be accelerated to one year
if we
achieve certain earnings per share growth targets (which we achieved in 2004
and
2005). Each tranche of restricted stock to be granted thereafter through
January 1, 2010, is subject to a one-year vesting period.
Directors
-
In
accordance with the terms of our 2002 Incentive Equity Plan, our non-employee
directors were issued on each of January 1, 2004 and 2005, 1,000 shares of
our
restricted stock, which shares vested on the one-year anniversary of their
date
of grant (subject to the director in question still serving in such capacity
as
of such one-year anniversary).
Method
of
Recording Compensation Expense and Deferred Compensation -
Upon
granting of the restricted stock, all weighted shares of restricted stock are
included in our basic and diluted earning per share calculation. At the grant
date, restricted stock is booked as Deferred Compensation and the offset is
booked to Common Stock and Additional Paid-In Capital. Throughout the year,
the
Deferred Compensation is reduced with an offset to restricted stock expense.
Effective with the implementation of FAS123R, any balance in the Deferred
Compensation account is netted against Additional Paid-In Capital.
For
example, on January 1, 2005, Messrs. Friedman and Berman were each granted
120,000 shares of restricted stock, of which 60,000 shares vested on January
1,
2006 and 60,000 shares are scheduled to vest on January 1, 2007. The following
is the accounting that took place:
Debit
Deferred
Compensation
Credit Common
Stock
Credit Additional
Paid In Capital
The
restricted stock expense for each of Messrs. Friedman and Berman was recognized
as follows:
Debit
Restricted
Stock Expense
Credit Deferred
Compensation
(ii) Also,
for the shares of restricted stock that were issued during 2004 and 2005, please
explain to us why the total value of the shares was expensed during the same
year the shares of restricted stock were issued.
Restricted
stock issued during 2004 and 2005 was fully expensed during the same year the
shares of restricted stock were issued because of the accelerated vesting
resulting from the percentage growth of our earnings per share (as described
in
(i), above).
(iii) Also,
please tell us the number of shares of restricted stock that have been issued
but have not vested as of December 31, 2005 and explain to us how you have
considered these unvested shares in your basic and diluted earnings per share
calculation.
As
of
December 31, 2005, all shares of restricted stock that had been issued were
fully vested and included in both our basic and diluted earning per share
calculation.
5. Please
explain to us the nature of the $5.3 million increase to APIC and charge to
stock compensation expense during fiscal 2004 which is represented on the
statements of stockholders’ equity as “compensation for fully vested stock
options.” Similarly, explain the $1.7 million decrease to APIC and reduction to
stock compensation expense during fiscal 2005.
Please
refer to our response to comment #3. The fluctuation in our stock price gave
rise to the following journal entries:
Year
2004: Debit Compensation
for fully vested options
Credit Additional
Paid-In Capital
Year
2005: Debit Additional
Paid-In Capital
Credit Compensation
for fully vested options
6. We
note that during 2005 you issued 566,546 shares of common stock for
$4.9 million of cash and restricted stock. Please explain to us when the
101,002 shares of restricted stock were issued, how you determined or calculated
their value of $1.7 million, and how you accounted for the exchange of 101,002
shares for 215,982 shares.
On
September 13, 2005, each of Messrs. Friedman and Berman exercised an option
to
purchase 107,991 shares of our common stock (or 215,982 shares in the aggregate)
and, in accordance with the terms of our 1995 Employee Stock Option Plan, as
amended and restated, each paid the $850,430 exercise price therefor through
the
surrender of 50,501 of common stock (or 101,002 shares in the aggregate), based
upon the closing price of our common stock on September 13, 2005 of $16.84.
The
101,002 surrendered shares were charged to Treasury Stock. The 101,002 shares
of
restricted stock were initially issued as of January 1, 2004. Simultaneously,
the 215,982 shares issued pursuant to the option exercise were accounted for
as
increases to Common Stock and APIC. Upon the retirement of the surrendered
101,002 shares, Common Stock and APIC were likewise reduced along with the
Treasury Stock.
7. We
note that during 2003, you awarded 2,760,000 shares of restricted stock to
certain executives, of which 396,000 were earned during 2004. Please explain
to
us how you have accounted for the 396,000 shares in 2004 including how you
valued the shares and how they have been accounted for in the statement of
stockholders’ equity.
The
396,000 shares of restricted stock earned in 2004 were charged to compensation
expense during 2003 and 2004, the service period of such grants, with an offset
to Deferred Compensation From Restricted Stock Grants, which as of December
31,
2004 was nil due to the full vesting of such shares during 2004. As of December
31, 2003, $789,000 of stock-based compensation relating to 60,000 restricted
shares that vested on January 1, 2005 was deferred in the stockholders’ equity.
The value of the shares was determined using the closing stock price on the
last
trading day of each of the fiscal years.
Note
20- Litigation, page 64
8. Please
revise to disclose, in plain English, the nature of the WWE’s claims against
you.
Pursuant
to your discussion with our counsel, Saul Kaszovitz, on September 13, 2006,
the
Commission has revised its request so that we are required to only disclose
the
requested information in future filings, rather than amend the Form 10-K.
We
will
disclose in all future applicable filings the nature of the WWE’s claims against
us in plain English.
Item
15. Exhibits, page 82
9. Your
exhibit index does not include reference to material contracts such as
acquisition, financing, licensing, or joint venture agreements. Please revise
to
reference to all material contracts as required by Item 15(b) of Form 10-K
and
Item 601(b)(10) of Regulation S-K.
Pursuant
to your discussion with our counsel, Saul Kaszovitz, on September 13, 2006,
the
Commission has revised its request so that we are required to only disclose
the
requested information in future filings, rather than amend the Form
10-K.
We
will
include in the exhibit index of all future applicable filings references to
material contracts required by Item 15(b) of Form 10-K and Item 601(b)(10)
of
Regulation S-K.
Form
10-Q for the quarter ended March 31, 2006
Balance
Sheets
10. We
note that your investment in the THQ video game joint venture has decreased
from
$10.4 million as of December 31, 2005 to $3.2 million as of March 31, 2006.
Please explain to us the nature of this decrease.
Our
investment in the THQ video game joint venture is comprised of two
components: (1) our actual investment in the joint venture, with a net book
value of $2.0 million as of December 31, 2005, that is being amortized over
the
life of the underlying license agreement for which the joint venture was
organized; and (2) an accrual for the preferred return earned by us each
quarter, which is settled in the following quarter. Accordingly, the reduction
in the balance in the investment account is primarily due to our receipt of
the
payment in the amount of $8.4 million in the quarter ended March 31, 2006 for
the preferred return earned by us in the fourth quarter ended December 31,
2005.
The fourth quarter is typically the highest volume quarter due to the number
of
video game titles typically released in the fourth quarter. This resulted
in the net reduction for the quarter ended March 31, 2006.
Management’s
Discussion and Analysis - Results of Operations
11. Please
revise to discuss and analyze results of operations by the operating segments
disclosed in note 3 to the financial statements. For example, please discus
and analyze net sales and cost of sales (rather than margins) separately for
each segment. Because margins are impacted by both net sales and cost of sales,
we believe a separate discussion of cost of sales results is
appropriate.
Pursuant
to your discussion with our counsel, Saul Kaszovitz, on September 13, 2006,
the
Commission has revised its request so that we are required to only disclose
the
requested information in future filings, rather than amend the Form
10-Q.
Following
is an example of the revised disclosure under Management’s Discussion and
Analysis- Results of Operations:
|
Three
Months Ended (in thousands)
|
|||||||
|
March
31, 2005
|
March
31, 2006
|
||||||
|
Net
Sales
|
|||||||
|
North
America Toys
|
$
|
120,783
|
$
|
92,925
|
|||
|
Pet
Products
|
—
|
2,370
|
|||||
|
International
|
13,893
|
11,949
|
|||||
|
134,676
|
107,244
|
||||||
|
Cost
of Sales
|
|||||||
|
North
America Toys
|
70,029
|
52,418
|
|||||
|
Pet
Products
|
—
|
2,111
|
|||||
|
International
|
10,435
|
8,552
|
|||||
|
80,464
|
63,081
|
||||||
|
Gross
Margin
|
|||||||
|
North
America Toys
|
50,754
|
40,507
|
|||||
|
Pet
Products
|
—
|
259
|
|||||
|
International
|
3,458
|
3,397
|
|||||
|
$
|
54,212
|
$
|
44,163
|
||||
Net
Sales
North
America Toys.
Net
sales of our North America Toys segment were $92.9 million in 2006 compared
to
$120.8 million in 2005, representing a decrease of $27.9 million or 23.1%.
The
decrease in net sales was primarily due to a decrease in sales of our (i)
Traditional Toy products of $28.0 million, with decreases in TV Games, wheels
products, Care Bears and Cabbage Patch Kids, offset in part by increases in
WWE
actions figures and accessories, Doodle Bear, Sky Dancers and Dragonflyz, and
(ii) a decrease in sales of our Seasonal products of $1.2 million, partially
offset by increases in sales of our Crafts and Activities and Writing
instruments of $1.4 million. Additionally, our North America Toys net sales
included approximately $8.1 million of Creative Designs line of products, which
we acquired in February 2006.
Pet
Products.
Net
Sales of our Pet Pal line of products, which we acquired in June 2005,
contributed $2.4 million in 2006. There were no sales for this line of products
in 2005.
International.
Net
sales of our International segment were $12.0 million in 2006 compared to $13.9
million in 2005, representing a decrease of $1.9 million or 14.0%. The decrease
in net sales is primarily due to decreases in sales of our Traditional Toy
products of $1.6 million and Seasonal products of $0.7 million, offset in part
by increases in sales of our Crafts and Activities and Writing instruments
of
$0.4 million. Additionally, our International net sales included
approximately $1.7 million of Creative Designs line of products, which we
acquired in February 2006.
Cost
of Sales
North
America Toys.
Cost of
sales of our North America Toys segment was $52.4 million in 2006 compared
to
$70.0 million, representing a decrease of $17.6 million or 25.1%. The decrease
primarily consisted of decreases in product costs of $12.1 million and royalty
expense of $5.6 million, which were in line with the lower volume of sales.
Furthermore, royalty expense for the North America Toys segment decreased as
a
percentage of net sales due to changes in the product mix to more products
with
lower royalty rates or proprietary products with no royalty rates, from products
with higher royalty rates. Product costs as a percentage of sales increased
due
to the mix of the product sold and sell-through of closeout product. Our
depreciation of molds and tools increased by $0.1 million, which was comparable
year-over-year.
Pet
Products.
Cost of
sales of our Pet Pal line of products, which we acquired in June 2005, was
$2.1
million in 2006 and there were no cost of sales in 2005. The cost of sales
for
this new Pet Pal line of products consisted of product costs of $1.8 million,
royalty expense of $0.2 million and depreciation of molds and tools of $0.1
million.
International.
Cost of
sales of our International segment was $8.6 million in 2006 compared to $10.4
million in 2005, representing a decrease of $1.8 million or 18.0%. The decrease
primarily consisted of decreases in product costs of $1.4 million and royalty
expense of $0.5 million, which were in line with the lower volume of sales.
Furthermore, royalty expense for the International segment decreased as a
percentage of net sales due to changes in the product mix to more products
with
lower royalty rates or proprietary products with no royalty rates, from products
with higher royalty rates. Product costs as a percentage of sales also decreased
due to the mix of the product sold. Our depreciation of molds and tools
increased by $0.1 million, which was comparable year-over-year.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $41.9 million in 2006 and $40.5 million
in 2005, constituting 39.1% and 30.1% of net sales, respectively. The overall
increase of $1.4 million in such costs was primarily due to the addition of
overhead related to the operations of Creative Designs ($0.8 million), increases
in product development ($0.8 million), amortization expense related to
intangible assets other than goodwill ($2.0 million) and stock-based
compensation ($1.9 million), offset in part by a decrease in other selling
expenses ($4.9 million). Increased grants of restricted stock awards to our
non-employee directors and the increase in the price of our common stock in
2006
compared to 2005 resulted in stock-based compensation expense of $2.3 million
in
2006 compared to $0.4 million in 2005. The decrease in direct selling expenses
is primarily due to lower sales volume during the quarter and a decrease in
advertising and promotional expenses of $5.3 million in 2006 in support of
several of our product lines. From time to time, we may increase or decrease
our
advertising efforts, if we deem it appropriate for particular
products.
Interest
Income
Interest
income in 2006 was $1.4 million, as compared to $0.9 million in 2005. The
increase is due to higher average cash balances and higher interest rates during
2006 compared to 2005.
Interest
Expense
Interest
expense was $1.1 million for both 2006 and 2005 and relates to our convertible
senior notes payable.
12. Please
consider the use of tables when quantifying changes, with narrative discussions
following the tables to explain the underlying business reasons for the
changes.
Please
refer to our response to comment #11.
13. For
revenues, please quantify factors such as price, mix, and volume
changes.
Please
refer to our response to comment #11.
14. Please
expand your discussion of cost of sales and selling, general and administrative
expenses to quantify and discuss the significant cost components within these
broad categories, such as licensing fees, product costs, product development
costs, marketing costs, depreciation and amortization, and any other significant
components that would enable readers to understand your business better. For
example, you state that gross profit was affected by lower product costs and
tool and mold amortization, offset in part by an increase in royalty expense,
but you do not quantify these changes or provide the actual cost figures
necessary to put these changes in proper context.
Please
refer to our response for comment #11. We have separately addressed the
components of cost of sales, which include product costs, royalty expense and
depreciation of molds and tools.
Form
10-Q for the quarter ended June 30, 2006
Note
8. Common Stock and Preferred Stock, page 10
15. We
note that in January 2006 you issued 268,660 shares of restricted common stock
which vest in January 2007 and 2008 and are valued at approximately
$5.6 million. Please tell us how you have accounted for these shares as of
March 31, 2006 and June 30, 2006. Include in your response the nature
of the $5.3 million deferred compensation recorded as part of stockholders
equity during the three months ended March 31, 2006 and explain why this
amount is no longer recorded as of June 30, 2006.
Please
refer to our response for comment #4 which addresses the accounting for
compensation related to restricted stock grants. As of March 31, 2006, the
deferred portion of the compensation expense for the unvested restricted stock
grants was presented on the balance sheet as a separate line item in the
stockholders’ equity section. Such treatment was revised in the quarter ended
June 30, 2006 to be consistent with the provisions of FAS 123R, and ,
accordingly, the deferred portion of the stock grant was netted against APIC
as
of June 30, 2006.
Note
9. Business Compensations, page 10
16. We
note that the amounts allocated to intangible assets and goodwill in the
Creative Designs acquisition have changed from that reported in the Form 10-Q
for the quarter ended March 31, 2006. In future filings, to the extent the
allocation amounts change significantly, please disclose the amount of the
adjustments. See paragraph 51 of SFAS No. 141.
We
will
include in our future applicable filings the disclosure of the amount of
adjustments to purchase price allocations to the extent such changes are
significant.
Management’s
Discussion and Analysis - General
17. We
note that in connection with the joint venture with THQ, no agreement has been
reached for the preferred return for the period July 1, 2006 to
December 31, 2009. Please revise MD&A in future filings to discuss the
existence of this uncertainty and explain how it may effect your financial
position and statements of operations in the future.
We
will
include in our future applicable filings a discussion of any uncertainty (and
its possible impact on our financial position and statements of operations)
related to the pending renegotiation of our joint venture agreement with
THQ.
We
hope
that the foregoing has been helpful in answering the questions contained in
your
letter. Of course, if you have any further comments or require any further
information, please do not hesitate to call.
|
Very
truly
yours,
|
||
| |
|
|
| /s/ Joel M. Bennett | ||
| Joel M. Bennett | ||
| Chief Financial Officer | ||