JAKKS Pacific Inc (JAKK) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. This is Jack Friedman, chairman and CEO of JAKKS Pacific. Thank you for joining us to review our results for the fourth quarter and the year ending December 31st, 2002. With us today on this call is Stephen Berman, President and Chief Operating Officer, and Joel Bennett, executive Vice President and Chief Financial Officer. I'll provide an overview of our operational results for the fourth quarter and the year ending December 31, 2002 and update you on current business trends. Joel will then provide detailed comments regarding our fourth quarter and year end financial results. I will then provide guidance for 2003 and open the call for questions.

Before we begin, I'd like to point out that any comments made about future performance, events, or circumstances including estimates of sales and earnings per share information for 2003 are forward-looking statements subject to Safe Harbor protection under the federal security laws. These statements reflect our best judgment today based on current market trends and conditions and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements. For details concerning these and other risks and uncertainties, you should consult our most recent form 10Q filed with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time.

Okay. Fourth quarter and 2002 overview. We are pleased with the company's performance in 2002 despite many obstacles, including the west coast port dispute and a very challenging retail and economic environment, validated by the closing of additional Kmart stores and the bankruptcy filing of FAO Schwartz. We continue to execute our core business strategy of organic and external growth while keeping a tight reign on our operational expenses.

Sales for 2002 increased 9% to a record $310 million, our highest sales ever. In the fourth quarter, our sales increased 11.5% to $68.5 million. Our emphasis has been on controlling our operating costs and improved product sourcing allowed us to maintain our overall margins, even with the addition of overhead relating to our recent acquisitions resulting in growth, the net income to a record $36.5 million for the year.

The record year was accomplished while JAKKS Pacific began and successfully completed the integration of a key acquisition for us, Toymax International. This acquisition added to our already diverse portfolio of products, solidifying our position as a very important resource for our growing number of retail partners in virtually every retail segment in North America and in Europe. I believe our overall 2002 results are strong in light of the recent weak marketplace trends and are a direct result of our basic strategy to diversify our product lines and distribution channels.

Because of our diverse product offerings which include toy items, writing instruments, seasonal items, electronics, candy, and other leisure products, JAKKS continues to diversify its store base as well. We are now in over 25,000 store fronts in North America, and our top five accounts approximate 52% of total sales as opposed to 67% two years ago. Joel Bennett will comment a little further on our fourth quarter and year-end financial results in a few moments.

After our record year in 2002, I'd like to just take a moment to review our company's position and address how we believe we will continue this success in the future. Since our founding, we have grown from $6 million in sales in 1995 to over $310 million for 2002 plus our joint venture with WWE video games, which we don't report the revenue. We achieve this more than 75% compounded annual growth rate in our sales through a combination of internal growth and acquisitions. While acquisitions have supplied a significant source of revenue growth, we have also been able to grow our organic sales over the last three years by 19% per year. We have every reason to believe we can continue our organic growth while seeking additional acquisition opportunities and believe we are well on our way to becoming a profitable billion-dollar company.

Acquisitions; which brings me to my next point. Since our founding, we have demonstrated our teams' ability to identify, favorably negotiate, and integrate a creed of acquisitions and have successfully completed these acquisitions. Time and time again, we have consolidated these companies into JAKKS Pacific, eliminated expenses and unprofitable lines, and focused on making the acquired product lines more profitable, while delivering additional profits to our bottom line. Let me clearly state that, as we have in the past, we will continue to focus on a creed of acquisitions.

With $68 million in cash at year end, $122.8 million in working capital, no debt, and a $50 million unused line of credit, our financial position is very strong. We will continue to look for additional acquisition opportunities to leverage this financial strength, as well as accelerate rather dramatically our internal growth, although we have nothing to announce regarding acquisitions at this time.

Events in the fourth quarter and beginning of 2003. 2002 is a record sales year, and we achieved this by what we have done since 1995. Deliver value products to the consumer, many of which -- most of which retail for under $10. Or for higher profits for retailers in many of our large competitors while maintaining sound profitability for JAKKS Pacific. We believe we deliver on all three of those objectives. Through 2002, we have grown our net income at 49% four-year compound annual growth rate, and we believe 2003 will be another strong year for JAKKS.

Lastly, before I turn the call over to Joel Bennett, I'd like to address the status of executive compensation which has come under discussion this past year. The company, in consultation with a well-known compensation consulting company, has developed a new bonus incentive plan for its senior executives, that beginning next year will replace the current cash bonus plan that is based on percentage of pretax income with a cash bonus plan based on growth and earnings per share. Under the new plan, senior executives will also be granted annual restricted stock grants, depended upon achieving minimum pretax income, each grant step vesting over two year periods. The final details of the plan will be submitted for approval to the compensation committee prior to the end of the first quarter. The new plan should more closely align executive compensation incentives with shareholder interest by giving senior management a greater equity stake in the company tied both to performance and length of service and tying cash bonuses to earnings per share.

Lastly, concerning the executive loans, Stephen Berman and I have each reduced our loan balances with the company to less than $600,000, and will pay off the remaining balances in full by the due date end of March 2003. With that, I will now turn the call over to Joel for more details regarding our financial results.

Thank you. For the quarter and year ended December 31st 2002, our operating results are as follows. For the fourth quarter of 2002, sales increased 11.5% to $68.5 million compared to $61.4 million for the corresponding period last year. Net income for the quarter excluding a one-time credit of $1.4 million relating to a more-than-anticipated -- more favorable than anticipated lease termination was $6.2 million or 25 cents per diluted share compared to net income of $4.4 million or 22 cents per diluted share in the fourth quarter of '01. This is on an increase of 4 million shares or 25% to 24.8 million shares in the current year. Also included in the 2002 results were reserve on the FAO Schwartz accounts receivable and minority interest in Toymax earnings aggregating 2 cents per diluted share for the quarter. Treadmasters and Dragonball did not contribute to fourth quarter sales.

Sales for the year ended 2002 were a record $310 million compared to $284.3 million for 2001, representing an increase of 9%. Net income for the year was $31.3 million or $1.37 per diluted share. Excluding one time pretax restructuring and recall charges of $6.7 million in 2002, net income increased 25% to $36.5 million, or $1.61 per diluted share, compared to $29.1 million or $1.50 per diluted share '01. Based on '01 share count, diluted earnings per share would have been $1.88 for the current year.

Our current effective tax rate was 22% compared to 25.8% in '01 and going forward we expect our effective tax rate to be approximately 25%.

Our diversified product offering allowed us to post the sales growth as Toymax sales and the strength in [inaudible] and seasonal items offset the weakness in our wheels division during '02. As we mentioned on our third quarter conference call, we've adopted a new policy of disclosing sales by category to give better insight as to how our business is growing and where we face challenges. We will comment on the broad product categories, but for competitive reasons, as we've indicated before, we ask that you please refrain from asking about detailed sales trends by specific products.

Sales of traditional toys, which include wheels, action figures, preschool and toddler toys, dolls, electronic and promotional products, had sales of $27.7 million for the quarter, and $109.4 million for the year. Wheels remained weak due to continuing softness in the category and a difficult comparison to last year because of the success last year of our extreme sports product line.

In our seasonal product category, which includes our Go Fly a Kite, Funnoodle and Junior Sports lines, sales were $3.9 million for the quarter and $27.1 million for the year.

Craft and activities and stationery and writing instruments, which is primarily our Flying Colors and Pentech division, sales were $23.3 million for the quarter, and $128.7 million for the year.

Finally, international sales were $13.6 million for the quarter and $44.8 million for the year. We expect international growth to continue as we increase our efforts in placing our expanding product lines overseas.

On our gross margins, fourth quarter gross margins increased modestly due to the change in product mix with lower royalties and lower tooling amortization offset in part by the addition of Toymax products with lower initial margins. Expanding sourcing is expected to result in modest margin improvements in '03 and beyond. Gross margins for the year were comparable to '01 with higher product costs offset by lower royalties in '02.

Our SG&A expenses for the quarter were up in dollars, but were comparable as a percentage of net sales with our year-over-year period. We expect a careful management of our operating expenses will result in current -- or continued margin improvement and profitability.

Excluding the impact of one-time charges and the charges in accounting for goodwill, operating margins were up for the quarter by 90 basis points and 70 basis points for the year compared to the prior year comparison period. Our joint venture with THQ for WWE wrestling and other games, for the quarter the JV profit decreased to $5.4 million from $5.7 million in '01. For the year the profit was $8 million compared to $6.7 in '01. We expect that the wrestling games as well as the new WWE vehicle combat games that we'll be launching in '03 will keep pace with the industry.

Cash flow from operations for the quarter for '02 was $17.3 million compared to $700,000 in '01. Cash flow from operations for the year was $39.3 million, compared to $36.9 million in 2001. And capital expenditures for the year totaled $8.5 million.

Our financial position remains very strong, with over $68 million in cash, approximately $123 million in networking capital, no debt, an untapped $50 million credit line, and cash flow from operations gives us tremendous resources to continue executing on our strategy.

Accounts receivable decreased sequentially to $56.2 million from $89.4 million with continued improvement in DSO's of [inaudible] days to 74 days. Inventory decreased in dollars sequentially to $38.9 million from $40.7 million, including $4 million added in inventory related to Treadmasters and the Dragon Ball franchise which had no sales in '02. Excluding the inventory related to Treadmasters and Dragon Ball, DSI has increased 16 days to89 days. We expect to continue reducing working capital in the business and making our return on equity increase over the forthcoming years. With this I'll return the call back to Jack Friedman.

Hello once again. I'd like to comment on some of our products, while our strategy of emphasizing lower risk evergreen products has not changed, I want to briefly discuss just a few products I'm excited about and we have received wonderful industry recognition.

Tongue Tape, through our in-house R&D development team, we developed JAKKS Pacific first candy product. We shipped our first million units and are optimistic about the potential for this line. We have accomplished this internal growth through the efforts of our talented product development team by expanding into new product categories and distribution channels and by seeking out a trend we believe has tremendous potential. We recognize that the mint-flavored tongue strips selling hundreds of millions of units to adults, there was certainly an opportunity to expand on this new business category by creating a product marketed to kids. And, so far, it looks like it has huge potential.

Seasonality; through the acquisition of Toymax and Treadmaster's assets, we've gained a strong arsenal of seasonal products that have not only diversified our product lines but also added and will additional revenue for JAKKS in the first and second quarters. Spring and summer lines from Funnoodle, Go Fly a Kite, storm water guns from our Treadmaster asset acquisitions and sports products we gained from our Treadmaster acquisition along with an array of Easter, Christmas and Halloween items are strong drivers for our seasonal business for '03. From our WWE joint venture with THQ we look to at least five new games slated for release later in '03. Strong licensing deals such as American Idol and a new Master Toy license for Nickelodeon's hit animated TV showed The Fairly Odd Parents will add to the line up from our Flying Colors division. Action figures will be added by our new Dragonball Z franchise, along with several top licenses for our [inaudible] vehicles divisions will strengthen our boys action division. New Nickelodeon soft lunch boxes, portfolios, notebooks, writing instruments, are slated for fall '03 and incorporate the top innovation available for the writing instrument industry. Our Disney line has come together in '03. We're introducing a number of new SKUs for the Disney [inaudible], as well as junior sports line based on Goofy. Our Atari ten in one TV games, which launched just before Christmas is looking promising for '03, and we expect to launch other versions of this plug and play game unit, including a Namco version with Pacman, and a Nickelodeon TV game featuring Sponge Bob square pants.

A new animated version of our video karaoke machine is debuting at the toy fair this year along with many of the new product introductions from all of JAKKS Pacific's divisions. WWE remains the number two action figure brand for boys 9 to 11 and is ranked fourth highest selling licensed action figure line.

Our guidance for 2003, based on current initiatives and a continuing difficult economic conditions, the company is targeting to achieve sales and earnings growth of at least 10% in '03, excluding none recurring charges.

In closing, we believe JAKKS Pacific is well situated to continue on its path to becoming a billion-dollar company. Let me review a few factors I believe will help us get there. We have a wonderfully strong management team. Our emphasis on evergreen products reduces our alliance on hit-driven products and mitigates some of the risk inherent in the toy industry. We have proven our ability to deliver organic growth. We have demonstrated our ability to execute and integrate a creed of acquisitions, and we have an extremely strong balance sheet to continue doing so. From where we sit, we are very excited about the opportunities available to us, and we expect to continue delivering both sales and earnings growth for JAKKS Pacific. With that, we will now open the call to your questions.

Thank you. We are ready to begin the formal question and answer portion of the call. Should you wish to ask a question or have a comment please press star 1. You will need to lift the handset prior to pressing star 1. To cancel the question or comment, simply press star 2. Once again that's star 1 to ask a question and star 2 to cancel. One moment please, as our questions register. Our first question comes from Shawn McGowen (ph) of Gerald, Klauer, Mattison.

Couple questions; I've got two for Joel and two for Jack. Joel, what gives rise to the deferred tax asset on the balance sheet; and second, there's a line on the balance sheet that we got on the press release that's missing, like, the heading, and -- either that or it's two numbers for deferred income tax. A number for deferred income tax and there's a number under that that isn't labeled. And then the two for Jack would be what general, directional trends do you see in the wrestling sales and product that retail and can you comment on what impact the West Coast port situation had on you?

The first part of the question with regards to the deferred tax assets, those were acquired in the Toymax acquisition, and we expect to take advantage of that based on the Toymax operations going forward. And I'm looking at my copy of the table, and I don't see -- we have long-term deferred tax credits. So I'm not sure what, exactly, you are referring to there, Shawn. But the bigger the number, the $13.7 million, is a deferred tax assets that we acquired with Toymax.

The questions that you asked me, Shawn, regarding WWE, we definitely see a trending upwards. We kind of rejuvenated our line with very unique wrestling products. In addition, wrestling ratings are up about 10% to 15% in the last month with some new exciting wrestlers, the return of Steve Austin. And most recently, which we don’t have product yet for, the return of Sergeant Slaughter. I think the WWE has gone through a little bit of a funk in terms of programming and it seems to be on a trend coming back right now. The second part of your question was regarding the West Coast dock strike. I think more than it had a direct impact on JAKKS, it had an overall impact on retail and salable products at retail, and caused somewhat of a discouragement by the retailers, and there was less inventory replenishment available and probably missed a little bit of turn. Not dramatic, but a little bit of turn.

Can you guys hear me?

Yes.

The question I had on the deferred income tax thing was there's a line on the printout -- not that we [inaudible] -- it says $6 million in deferred income tax for '02 compared to $2.256. And then there's a line below that says $6 million compared to $2.3.

That's a subtotal for long-term liabilities.

Okay.

There's no caption.

Okay. I got it. Thank you.

Thanks, Shawn.

Our next question comes from Bret Jordan of Advest.

A couple of quick questions. One on the organic growth; I guess was there -- and trying to back out the contribution from the Toymax, was there organic growth in the fourth quarter? And then looking at the acquisition that you made that didn't contribute to Treadmaster and Dragonball Z, getting to a 10% targeted revenue growth for '03 would seem that almost just the contribution of those two acquisitions would get you 10%. Are you forecasting organic growth in '03 as well?

I'd like to answer the second part of your question first Bret. I think in rough times we're sailing through including potential war in Iraq and other places, et cetera, we think that our initial forecast for the year is a conservative one. We're actually very excited about the acquisition of the Treadmaster and Dragonball Z product line, we're extremely excited about it. But we believe it is most wise to take a low-profile and conservative growth for the year. In terms of organic against acquisition, we think we will grow organically, and we will grow through the acquisition of the Dragonball Z license. I'm not sure whether one would put Dragonball Z as acquisition or organic. It is a license, wasn’t an acquisition of a company.

Okay. And as far as the fourth quarter?

As far as the fourth quarter this year, what happened in the quarter?

No, just as far as organic versus acquired. You picked up $3.9 million on the seasonal toys, which was acquired Toymax business, but the balance of the sales growth, was that in existing lines or were those other lines that were picked up?

I think with the continuing weakness that we had in our vehicle business, I'd say the growth came mostly through the Toymax acquisition for Q4.

A couple of quick questions for Joel; you were talking about a 25% tax rate in '03, is that until we exhaust the deferred tax benefit and return to 27? I guess if we are looking out further.

No it's basically the restructuring or reorganizing of our international operations and also the shift in revenue. In 2002, we saw a shift in Wal-Mart, in particular, to almost virtually all domestic, and we've -- in developing our transfer pricing and all of our management agreements amongst the companies, the go for it rate has been 25. So it takes into account all things. Based on the rate that we're able to recoup on the deferred tax assets, it does not have a major impact on the provision going forward.

Where do you see cap ex in '03?

Between $10 and $12 million.

Okay. And then last question, and I'll pass it along. The increase in goodwill of $40 million sequentially, is that about the price paid for the Treadmaster and any asset or license fees associated with Dragonball Z.

Primarily Treadmasters, yes. The Dragonball is not --

Did you get tooling with that or--

Yeah, we did pay some license -- some license acquisition costs, but most of that is Treadmasters, but the -- well, it wasn't nearly that high. I'll have to get the details for you on that.

Okay, great. Thanks.

Thanks, Brett.

Our next question comes from Tony Geikus (ph) of U.S. Bancorp.

Good afternoon, guys. Couple questions for you. In your opening comments you had talked about the percentage of sales was broadening among your major retailers. I missed those percentages, but if you could repeat that for me, I'd appreciate it. Secondly -- and you might have said this -- but what were the an annualized sales for Toymax at year end '02? And the third question, the new executive compensation plan, when does that start? When does that take effect? Has it been implemented for calendar '03?

This is Jack, on your third question regarding executive compensation, it begins January 1, 2004. It's being presented to the compensation committee. We've had meetings regarding it. So it, effectively, begins January 1, 2004.

The top five accounts accounted for about 52% of the business this year compared to 67% two years ago. Was that the number you were referring to?

Right.

Okay.

What's driving that? Just out of curiosity, that is kind of going contrary to the direction of the broader industry is.

One of the things is the expansion into the drug and grocery channel with Kmart -- actually, Kmart has been, you know, relatively strong this year, compared to where we would have thought, based on their filing. But it's really the expansion of our distribution, you know, based on the product, and that will further expand with the Tongue Tape as we get into, you know, 7-11's and those types of store fronts.

And what was the sales run rate for Toymax in '02?

It's contained within the categories that we gave. The expectation was in the, you know, $40 to $50 million range for the year. That's the only guidance we had given.

It's very difficult, Tony, to give an accurate answer on that question regarding Toymax. Creepy crawlers, for example, was completely taken over by JAKKS, revamped as if it was new. It was almost like taking a license for creepy crawlers, which was deteriorating and totally revamping it. It is very difficult to break that out. I’m not trying to [inaudible] at all but it would be very difficult to break out. The key to the Toymax acquisition particularly is the seasonal product line. We are a conservative company, and we're delighted with our diverse seasonal line, to make us not dependent on Q4. Although in recognition of being so conservative regarding Q4, we intend to get a bit more aggressive regarding Q4 with additional new products for '03 and forward.

Okay. One quick follow-up, then. Related to the recent acquisitions in licensing arrangements you guys have done, what will the contribution from those deals done in the fourth quarter be to the next calendar year in terms of revenue? I mean, what percent of sales?

To Q4 2002 Tony?

No, the recently announced licensing deals that you guys have announced, you know, recent deals done in the quarter. What will their contribution be during calendar '03?

Really, I think the best way we could answer that is everything is mixed together in our forecasting, and we're truly trying to be ultra conservative in this kind of crazy environment that we're living in right now, Tony.

Any estimate of organic growth for this year, '03?

I don't know how to answer that, Tony. Again, is Dragonball Z, organic, it's a newly acquired license the same as the new property from Nickelodeon. The Treadmaster assets, of course, that is acquired and not organic. It will certainly make a contribution. Overall, I'd say that we are actually extremely excited about 2003. We think we have a great line. Our reception from the retailer, so far, has been excellent. But again in these difficult economic environments we're dealing in, we're trying to be very conservative and make sure that we at least hit the 10% that we're comfortable with.

And on the call, we don't want to back into effectively a higher forecast by carving out organic. We've given the 10% which is all in. And to say which is which, obviously, as a conservative forecast, you know, we're working to achieve more than that. But at this juncture, the 10% is what we're, you know, providing to you in terms of the combined growth.

We also hope to, but we can't put in a forecast at this point to do additional acquisitions. We're poised for it management-wise. We have the team in place. We're certainly set to add on $100, $200-plus million of revenue with the approximate team that we have in place, and we have the capital and borrowing power to do it. We have to find one, of course, and execute it before it happens. We think we're in terrific shape as a company. We're really extremely proud of where we've gotten, to where we've come from. We think we've done, really, a great job for our shareholders. We have a wonderful line. We have a wonderful position within our industry. We're certainly recognized as a force within the toy industry. We give good profits to the retailers. We're really in great shape as a company, and it certainly saddens us when we look at the PE of our stock at this juncture, but that's what we have to live with at the moment, I guess.

OK, thanks guys.

The next question comes from Russell Cleveland (ph) of REN capital.(ph)

Hello fellas; good report. My question, of course, all the people on this call have been following you the longest, and you built a very fine company here, continue to show good results in bad economic times. You know, our share count went up about 5 million shares on that secondary. There's certainly very few companies you could buy that would be anymore attractive than JAKKS Pacific itself; and, you know, I'm, of course, disappointed in the price of the stock myself. But coming down to my question, why wouldn't we want to buy shares in at this kind of multiple and take back some of this 5 million shares that we put out at much, much higher prices? Give me your thoughts here.

Well, first, within a period of 48 hours from announcing earnings and forecast, we're not permitted to comment on that.

But give me your philosophy, Jack. That's what I'm trying to get at. I mean, we’re down here at $12.00.

We've done it before in our past, and we consider all things that would enhance shareholder value. So that certainly wouldn't be out of our consideration, especially in today's rules, Russell, I wouldn't go further on that.

Okay. That's all. Thanks.

Our next question comes from Joe Yurman (ph) of Bear, Stearns.

Hi, guys. I'm going to try approach the organic question from a slightly different vantage, and rather than talking about what might happen in '03, let's talk about the year in the fourth quarter. Joel, you broke out the segments, and I was wondering if you could talk about the dollar amounts versus the previous years. And I realize for seasonal it's not going to have a comp considering Toymax this year, but clearly for the crafts business as well as traditional, we should be able to get some sense of what the organic growth was there. So that's kind of the first question or the first request. And the second is just a question -- the cash flow from operation number that you gave us, I'm assuming that you're backing out.

Marketable securities.

You're backing out the marketable securities line.

Yeah, basically excess cash balances invested and --

Let me make a comment. We try to look at, on a daily basis, actually, a retailer inventory on our products and what's going on overall at retail, not just with JAKKS products. When you over ship products in today's world retailers come back at you for markdowns and other kind of coop allowances to get rid of that inventory. One of the things we wanted to concentrate on was making sure that we certainly had a good year, and we think under conditions we had a very good year to what's going on out there. Our inventories are very clean out there. Our current inventory on hand is clean inventory. At full value, our receivables are clean with fully reserve. JAKKS is very poised to grow our business. We are very conservative in what we ship. Looking at the retailers, we didn't push our salespeople to go beyond what we thought our retailers could sell for the fourth quarter.

Could you provide us with a gross sales number maybe so we could back into the adjustment?

We began releasing this new category information, we did it from the -- this year going forward.

All right.

And for those same reasons, you know the numbers that we gave, certainly for '03 going forward, we'll provide the prior year comp. But in terms of, you know, getting the information on a by-skew basis now that everything is assimilated, it's a lot more difficult to go back, especially when we indicated that the numbers that we gave were the numbers we were expecting to give. We do have, you know, '02 and will be giving those comps in each quarter going forward.

Well, one more comment as it relates to that. One more comment on that, as I kind of alluded to a little bit before, I think JAKKS has to get a little more aggressive with some more Christmas, seasonal selling products and some higher-priced products in Q4. When you do advertise, when we have to expense our advertising, so we do need to do a greater percentage of our revenue in Q4 than we have in the past to continue to grow our company properly, and we are focusing on that and I believe we will accomplish that.

Two more housekeeping questions. D&A for the year or the quarter whichever you want to give me.

The quarter was $2 million, the year was $9.2.

$9.2? Okay. And what was the allowance for doubtful accounts on the receivables, Joel, at year end?

$6.8 million.

Okay. All right. Thanks, guys.

Thank you.

Our next question comes from Bret Jordan of Advest.

Joel, just a quick follow-up here on the operating SG&A line. Feeling for, as a percentage of sales going forward, I think combined you did about 39% in the quarter. Do you have a target for, a full year number for '03?

We did initiate some cost reductions in '02 which we will anniversary in this year. We'll have a full benefit, rather. We were at about $31.8 excluding the acquisition we're about $34. So we think that we'll be able to leverage that since we're not anticipating any, you know, headcount additions or anything that would expand the SG&A base.

I think you picked up about 20 basis points full year-over-year. Do you see yourself leveraging that in '03 over '02?

Yeah, because we didn't do a lot of the headcount reductions until the latter part of the year. And the beginning of the year had a lot of the Toymax. So we had the initial Toymax call in the second quarter, then beginning in the third quarter, we had our own headcount adjustment on the JAKKS side.

Okay. Thanks.

Our next question comes from Arvind Bhatia of Southwest Securities.

Good afternoon, guys.

Hi, how are you?

Just a couple of quick questions. The October guidance in the year, $1.65 to $1.70, I wanted to find out what the tax rate you guys were dealing with at that point. Then I did my own back of the envelope calculation for quarter growth, and looked at Toymax for '01, December quarter. And then, you know, if I use only half the rate of sales that we’re doing at that point for this quarter, I come up with about 5% or 7% decrease in core growth for the quarter. You know, can you address that? And, second, and finally, you know, you're talking about 10% growth in your top line for 2003. I guess what I want to find out is, for 2002, overall, did you have at least 10% core growth for the four quarters combined?

With the softness on the wheels, it actually brought it down to a modest decline, as we indicated before. Individual categories went up, but the wheels category was quite pronounced, and that was probably the major category that precipitated the reduction in the forecast mid year.

I guess that's my question. I mean, 2002 was a difficult year. What is the 10% predicated on? You know, I mean, that's just all your core growth? You're not doing any acquisitions there.

There's no acquisitions -- Jack speaking now -- there's no acquisitions at all built into our forecast of 10% increase top and bottom line minimum for 2003.

Unfortunately, the holiday season didn't signal any specific turnaround in retail, so we're not anticipating that in our forecast. The expectation was that, you know, one good year follows a bad toy year. We're in uncharted territory as an industry, so rather than, you know, footnote, everything, say, we can give you 20% growth, but then say, you know, if retail turns around, if there's no war, blah, blah, blah. So we basically cut to the chase, came out with a conservative forecast and, you know, we're certainly going to strive to exceed that, but --

What gives you confidence for 10% when we had a decline in '02 ? [inaudible]

We have some excellent products. The new Dragonball Z license we're excited about. Some of the Treadmaster assets will certainly enhance our revenue. WWE is looking stronger, the new Tongue Tape category which is a brand new category, and significant other distributions, all of those things plus some additional Nickelodeon licenses and our overall position within our industry keeps increasing.

Okay. And then the tax rate question, what tax rate did you use in your previous guidance of the year.

We were at 27%.

Okay. So what are the apples-to-apples numbers? If you were to go back and use the same tax rate you were using in your guidance of $1.65 to $1.70, what's the apples-to-apples number for that?

For the fourth quarter, it meant about $2 million in net income. That's the easiest computation they have for you.

What's the EPS number for '02 if you were to, again, use the tax rate that you were using back in October when you gave the guidance?

$2 million.

EPS?

Pardon?

What about EPS? What are the EPS compared to your guidance before and your reported numbers now, viewing the same tax rate?

That -- well, the $2 million equates to 8 cents earnings per share.

Okay. Got it. Okay. Thanks.

You're welcome.

Our next question comes from John Taylor of Arcadia investments. .

Hi, I've got a couple of questions, too. What did Irwin do with Dragonball Z in the course of '02? Is there any [inaudible] number or anything like that or any volume number that they shipped or sold through or any -- can you give us a rough guess on that?

I'm sorry, with the licensing agreement that we did with funny mason, the license source, we have a confidentiality regarding that.

You can't tell us what the [inaudible],which is available publicly would have been.

I’d have to tell you to try to look at that yourself. We have a confidentiality agreement and we're not going to go anywhere near breaching it.

Okay. With the wheels erosion that took place in '02, does it feel like that category, that segment can stabilize in '03, or do you expect continued erosion?

We think the erosion is over, and it's settled down, and we've diversified from extreme sports to more basic vehicles that we've been doing in the past .

Evidently pricing is firmed up a little bit on vehicles in the last couple of months? Are you going to benefit from that?

I'm not sure I understand the question.

It seems that retail pricing is kin of come of the bottom for things like hot wheels and those kind of basic vehicles.

I think the effect on JAKKS was the dramatic drop in our extreme sports vehicles which other than that our motorcycle segment of that we have now exited and are attempting and think we have replaced some of that with a very nice line of basic vehicles.

Okay. Do those compete against basic hot wheels, that sort of thing .

No. They're more novelty and, in most cases, larger scale.

Okay. Then other than wheels, is there any segment that you are looking at, that you consider core or kind of evergreen that looks like it could be in for a rougher '03?

Not at all.

No, Okay. So you're feeling good about the base.

We're feeling very good about the base, we're feeling very good about the year.

Yeah. In terms of royalty expenses, do you pay any royalty on the Tongue Tape?

On what we presently ship, there's a small inventor royalty regarding the patent we've been able to acquire. Continuing the line, we are planning on doing numerous amounts of licenses, Nickelodeon, Disney, NASCAR and others, that a license royalty would be attached to.

Okay. So as you -- when you go up to 10,000 feet and look down, you've got the Dragonball license kicking in, if you do the entertainment licenses on Tongue Tape, that kicks in. Overall, would you expect your royalty expense as a percent of revenue to be flat, increase or go down '03 versus '02.

We expect it to be about the same. We have had some decreases over the last couple of years, with writing instruments which many don't carry any royalty, plus with the Nickelodeon, when we use just the Nick brand as opposed to a particular show, that carries a little bit lower royalty. So we think that the balance, based on the forecast, will keep us in the range that we are in for 2002.

I think that's from an [inaudible] as I think that the way we're guiding and pricing our line is that if we reach our numbers the bottom line profit as a percentage of revenue will stay at least steady. If there is any increases in more royalty products, it will take a higher margin to us to accommodate additional licensing fees.

Okay. And I don't know if you said this earlier, but what are you using as your fully diluted share count for '03?

25 million.

25 even? Okay. Thank you.

Thank you.

Our next question comes from Shawn McGowen of Gerard, Klauer Mattison.

Hi, guys, me again. Joel, could you talk about what the mechanics were of the recall charge and then credit during the year? And then two questions for Jack; Jack, how, logistically, do you plan to sell to these new channels, like drugstores, supermarkets? Do you have a direct sales force, reps?

We have a direct sales force that we've been building up once we got involved with Pentech and even Flying Colors. We don't use reps for most of the drug chains. It's mostly direct selling, and we've developed what we think are some excellent relationships. And we have put on, particularly, with our Tongue Tape, some confectionary distributors .

And another question for Jack and then we can go back to the recall thing. Jack, in '03, what, specifically, are the performance metrics that would allow you guys to max out or at least, you know, get the high end of executive comp? Can you get a little more specific of how that would change if this proposal were passed?

I don't think if executives would make more money than in the past if we hit our numbers. I don't know how to answer, you know, more than that.

No, just the specific metrics. This year is focused on pretax income and next year growth?

The focus is on earnings per share growth.

But what will it be in '03?

Again, we're focusing our new compensation when it gets done on earnings per share.

Which is effective January 1, '04.

Well, the best way I could answer it without getting too specific is if we didn't grow earnings per share, our bonuses would be dramatically less than they have been in the future when it was based around pretax income. It would be a dramatic difference.

Okay. Thank you. And Joel, that recall issue?

Oh, it was related to restructuring charges we took in the first quarter. We had taken reserve based on a discounted lease payment of our showroom because, typically, it's very difficult to get out of these. As it turns out, we were able to get out of the lease with a much lower payment than originally anticipated. So we got a credit in the current quarter.

And that's called a recall?

No, no. The line that it's on, it's restructuring and recall costs. So it's really a line item.

Okay.

The credit is related to the restructuring part of that line item. It doesn't have anything to do with the recall.

Okay. Thank you.

Welcome. One more question, please.

Our next question comes from Grange Johnson (ph) of LeGrange capital.

Quick question on share buybacks. I missed part of it. Have you bought back any shares in the previous quarter?

No, we haven't bought any shares in almost two years.

Is there any availability under your authorization right now?

Our authorization has expired. It would require a new authorization from our board.

Okay. And just sort of getting back to philosophy, what's holding you back? You have seemingly excess capital on your book. I think there's only $10 million of cap ex going forward. And I think on the last few calls and this call, you talked about how cheap your stock is. So I'm trying to get a little bit of the philosophy behind why there's not even an authorization for buyback.

Well, again, within the SEC rules, as we make this conference call for the next 48 hours, we're not permitted to make comments on that. But we consider all things for enhancing shareholder value now and in the future.

I guess I'm a little confused. I didn't know that whatever the recent rules precluded companies from talking about buybacks. I'm not sure I understand the rules. Can someone else on the call explain it to me? Other companies I cover talk about buybacks. So I'm just curious what specifically with JAKKS.

I'm not an attorney. We have spoken with our attorney and he told us within a period of 48 hours of announcing any earnings statements that we're not permitted to talk about any sort of buyback.

Okay. Thank you very much.

I can't give you further guidance on it. Once again, from where we sit, we're very excited about the potential opportunities out there, and we think we'll continue to deliver sales and earnings growth, which is no hint that we're not interested or interested in a share buyback. Thank you very much. Thank you all for your time.

This concludes today's conference call. Have a good day.