JAKKS Pacific Inc (JAKK) 2003 Q2 法說會逐字稿

Good afternoon. My name is Charity and I will be your conference facilitator p at this time I would like to welcome everyone for the JAKKS Pacific, Inc. 2003 second quarter conference call. All lines have been placed on mute to prevent background notifies after the speakers' marks there will Abe question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone key patched if you would like to withdraw press star, hen the number 2 on your telephone key pad. Thank you and I'd now like to turn the call over the Mr. Jack Friedman.

Good afternoon, ladies and gentlemen. I am Jack Friedman, Chairman and CEO of JAKKS Pacific. Thank you for reviewing our results for the six months ending June 30th to 2003. On the call is Stephen Berman, President and COO. and Joel Bennett, CFO.

I will provide an overview of our operational results for the second quarter ending June 30, 2003. Joel will then provide detailed comments regarding financial results for the our second quarter and first six months of this year.

I will then wrap up this section of the call with comments concerning current business trends and by discussing some of our product lines in more detail. Then we will open the calls for questions.

Before we begin, I would 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 securities laws.

Such statements reflect our best judgment today based on our current market trends and conditions and are subject to certain risks and uncertainties, which can cause actual results to differ materially from those projected in forward-looking statements.

For details concerning these and other risks and uncertainties, you should consult our most recent form 10-Q filed with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time.

The second quarter was a challenging one for JAKKS Pacific as well as our peers. Sales for the second quarter from $73.3 million due the a challenging retail and economic environment, as well as unusually cool weather throughout the U.S., which adversely affected sales of our seasonal products from Go Fly A Kite to Storm(ph) and Funnoodle.

Our top line was also impacted in the second quarter, by the strict work force constraints due to mandated labor quarantines in factories throughout China as a result of SARS epidemic. It was slow during the quarter this caused a delay in our initial shipping of our NASCAR product line as well as a key Sponge Bob Square Pants item. We began shipping these items during the third quarter and have seen the labor constraints improve.

Our bottom line earnings were directly affected by lower sales in the second quarter, and by lower margins due to shifts in product mix. Additionally, we saw a lesser contribution from our World Wrestling (inaudible) with THQ, (inaudible) during the second quarter as compared to the last quarter last year, due to fewer game introductions during this time period.

We are, however, expecting to release three new WWE games through our joint venture during the second half of this year, and we believe joint venture profits for the balance of this year will be well above those during the first six months of 2003.

We continue to be excited about the future prospects for our WWE video games. During the second quarter, we completed a placement of $98 million in convertible senior notes, which enhanced our already solid financial position. We will use the proceeds to continue internal growth initiatives as well as to make additional acquisitions.

With $220.9 million of working capital, including cash of $144.4 million, we are well positioned to take advantage of acquisition or asset acquisition opportunities. We believe there are many attractive acquisition candidates, and we are in a position to move quickly when the right prospects present themselves.

I would like to add that we believe JAKKS Pacific is a company defined by innovation and adaptation. This focus drives virtually every aspect of our business from daily operations and product development to retail merchandising and integrated marketing. Our ability to adapt helps us quickly integrate new companies or asset purchases into JAKKS' operations, as well as recognize synergies in new and exist financing product lines. We will continue to focus on delivering value products to the consumers, high profits for the retailer, and results for our shareholders.

With that, I will turn the call over to Joel for more details regarding our financial results for the quarter and the first half.

As Jack mentioned, second quarter net sales were $73.3 million, compared to $79 million in the comparable period last year. Excluding one-time charges, net income for the period was $5.3 million, or 21 cents per diluted share, compared to $8.9 million, or 41 cents per diluted share for the second quarter of last year.

There were 24.7 million shares outstanding, in the second quarter of 2003, 12.4% more than the $22 million diluted shares outstanding in the second quarter of 2002. Including one-time charges, net income was $3.2 million, or 13 cents per diluted share in 2003, compared to $7.8 million, or 36 cents per diluted share for the same period last year.

Pretax charges relating today voluntary recalls of one of our products were $2.7 million in 2003, and $1.5 million in 2002. Net sales for the six months ended June 30, 2003, increased to $141 million compared to $138.9 million during the same period in 2002.

Excluding one-time charges, net income during the period was $11.2 million, or 45 cents per diluted share, compared to $12.9 million, or 67 cents per diluted share, for the comparable period last year.

Including the restructuring charges of $6.6 million taken in the first quarter of 2002 and the one-time second quarter charges of 2003 for the aforementioned product recalls, net income for the first six months of 2003 was $9.2 million or 37 cents per diluted share, compared to $10 million or 47 cents per diluted share for the same period in 2002.

During the third quarter of 2002, we began disclosing sales by category to give better insight as to how our business is doing and how we face challenges. Next quarter, we will as a start showing year over year competitive results by each of categories. We will comment on the four broad categories, which are traditional toys, seasonal products, crafts activities and writing instruments, and international. For competitive reasons we will not disclose details sales of specific products or licensed lines.

Sales of traditional toys, which include wheels, action figures, dolls, electronics and promotional products had sales of $17.3 million for the second quarter, and $29.6 million for the six months of 2003. These represent 24% and 21% of overall sales for each period respectively.

As JAKKS mentioned, traditional toy sales were lower than expected due to shipping delays of our NASCAR lines, which include vehicles and action figures.

In our seasonal product category we include Go Fly a Kite, Funnoodle and Storm Water toys and Junior Sports items. For this category sales were $10.7 million for the second Quarter, and $33.5 million for the first six months of 2003. This represents 15% and 24% of overall sales for these categories.

This category was adversely affected by poor weather during the second quarter. And due to the seasonality of these items, we do not expect to make up for these lost sales during the second half of the year.

In the craft activities and writing instrument category, which is primarily made up of our Flying Colors and Pentech division, sales were thrive $35.7 million for the quarter, and $60.2 million for the first six months of the year. This represents 48% from 43% of overall sales for these periods.

This category was impacted by delays in the initial shipment of the key Sponge Bob item that Jack had mentioned previously.

Finally, international sales were $9.3 million for the Quarter, and $17.5 million for the first six months of 2003. This represents 13% and 12% of these periods respectively. We are expanding on our ongoing international initiatives to increase our exposure in more countries throughout the world.

Gross profit for the second quarter and six months decreased as a result of lower sales in 2003, as well as from lower gross margins which resulted from shifts in our product mix. We expect gross margins to improve in the third and fourth Quarters, as the product mix changes and we leverage our volume to achieve lower factory costs.

SG&A expenses for the quarter, excluding costs associated with the recall decreased $2.7 million to $21.1 million or 28.8% of net sales, compared to $23.8 million or 30.1% for the same period in 2002.

For the six months, excluding restructuring and recall charges, SG&A decreased $1.1 million to $41.1 million or 29.1% of net sales, and this compares to $42.2 million or 30.4% for the same period in 2002. This improvement is a result of the cost implements in the third quarter of 2002.

Our video game joint venture provided profit of $200,000 compared to $700,000 in the prior year. And for the six months the JV profit decreased to $400,000 from from $2m in the prior year. This decrease was due to fewer game introductions in 2003; however, we expect to release three new games during the second half of this year, including Raw 2 for Xbox, Wrestlemania XIX for GameCube, and Smack Down, Here Comes the Pain for PlayStation 2. We expect that these titles will launch internationally as well in the fourth quarter.

Accordingly, we believe the joint venture profits for the balance of this year will be well above those during the first six months of this year as a result of these new titles.

Cash flow from operations for 2003 was $1.1 million for the quarter and $7.8 million for the first six months. And for 2002 operations used cash of $12.5m for the quarter, and provided cash of $600,000 for the first six months.

Capital expenditures in 2003 were $1.3 million for the second quarter, and $2.5 million for the six months. There were no additional shares repurchased in the second quarter as part of the previously announced share buy back and total repurchases to date total 412,000 shares at an average price of $10.24.

The continued strong cash flow and the successful completion of the $98 million convertible senior notes offering equates to a very solid balance sheet. We have $144.4 million in cash, approximately $221 million in networking capital. The $98 million in convertible notes carry a coupon interest rate of 4.625 per annum. But with the original issue discount, the notes are cash flow neutral before interest income or return on other investment of these funds.

Accounts receivable decreased year over year to $72.8 million from $78.1 million, with comparable DSOs of 89.4 days. Excluding accounts receivable acquired from P&M, Color Workshop, and asset acquisition, DSOs decreased 1.7 days to 87.3 days.

Inventory decreased year over year to $38 million, from $50 million last year with the corresponding decrease in DSIs of 31 days to 87.3 case. This is due to ongoing efforts to improve working capital. Excluding inventory acquired from P&M Color Workshop, DSIs would have decreased to a further 8.6 days to 78.7 case. Now I will turn the call over to Jack.

As I mentioned in my opening remarks, the second quarter was a challenging one for JAKKS Pacific. Having said that, we are still conservatively optimistic about the remainder of the year. We are confident that we created innovative products across multiple categories. Our products are sold in a broad range of retail outlets including Wal-Mart, Kmart, Best Buy, and Staples to name a few. JAKKS Pacific has aligned with top entertainment properties for today, including Disney, Nickelodeon, NASCAR, Hello Kitty, World Wrestling Entertainment.

We believe that our more than 4,000 SKUs across multiple Categories feature top innovation and are compelling to children and adults through the world. We are optimistic about several key drivers for the 2003 holiday season, which are Flying Colors, (inaudible) Toymax and JAKKS Pacific.

We are excited about these new licenses and have been integrated into our boys action toys over the last 12 months. And we believe we are laying the groundwork for future growth.

Earlier this year we signed a new license with NASCAR, the No. 1 fan attended sport in the United States. A line of action vehicles and figures, based on top drivers, Tony Stewart, Bobby Labante (ph),

Jimmy Johnson and Jeff Gordon have excellent placement at all our stop retailers as we are again to shift this quarter.

Our vehicles and figures will be featured as part of a NASCAR boutique, in more than 681 Toys 'R' Us stores nationwide beginning in September, and will also be sold in Wal-Mart stores, amongst others, nation wide. Additionally a key item in the NASCAR line was already recognized with an Oppenheim Toy Of The Year award for 2003.

Our Finding Nemo activity toys turned out to be a nice surprise at retail. We have Finding Nemo SKUs from our Flying Colors Division at Walgreen stores, and expect to introduce a line for the ten-year anniversary of the Lion King DVD release in the fourth quarter. Our TV game line of plug N play games, which we obtained from the Toymax acquisition,

launched us before the end of 2002 and has full distribution for holiday 2003.

Some of the retailers carrying the line are Wal-Mart, Target, Best Buy, Urban Outfitters and Toys 'R' Us. The Atari TV have been a hit in the media and among gamers and we look forward to similar success with our new unit, Namco TV Games which feature Pac-Man, Dig Dung, and Galaxias (phs) . That unit will be introduced late in 2003 with full distribution slated for early 2004 at a diverse group retailers appealing to different groups of consumers. Earlier this year we announced that JAKKS is Master Toy licensed for Fairly Odd Parents, one of Nickelodeon's top new shows. We have developed a full line of plush figures and other items which will begin shipping in late third quarter. We announced earlier this year two new Master Toy licenses for top Japanese Animi (ph) properties, Dragon Ball Z, and U, U, Hockishu, (phs). For both properties, we have new assortments of figures hitting (inaudible) third quarter. Both shows are enjoying strong ratings among the key target markets and we believe we have a solid fall program at our leading retailers.

A rolling craft and activity case is also a lead item from our Flying Colors division. We have adapted this play pattern across our top licenses for holiday 2003.

Dora the Explorer, Adventure activity rolling case, Hello Kitty rolling activity case, as well as Sponge Bob Square Pants and Disney Princess cases all have activities designed specifically for their respective characters.

Additionally, other Sponge Bob Square Pants items from our Flying Colors division are well-placed at retail, including the Switch Em Up and Swap and Bop, (inaudible) Sponge Bob, a singing and dancing activity toy, which plays different songs, which we and our retailers have high hopes for during the who will die season.

The slumber bags are the No. 2 and 3 sellers at retail and have an excellent placement Target, Toys 'R' Us and Kay Bee Toys. And we look forward to introducing a Sponge Bob Square Pants and NASCAR versions for the holidays.

Our Blues Clues (ph) notebook is still a strong performer for JAKKS including the Bedtime Notebook and Handy and Dandy (inaudible) notebook have added innovation and refresh playback patterns for the Evergreen item.

From our recent asset acquisition of Color Workshop we gained a wonderful sales business with Blow Pen, an innovative patented writing instrument. Other profitable lines that we intend to exploit are felt poster pens, as well as other specialty oriented SKUs.

The line has we'll Wal-Mart, Target, A C. Moore as well as wonderful international placement. Our Tongue Tape candy line of Tongue Tape strips continued to perform for JAKKS. As with all our product lines with Tongue Tape we set out to present a dandy line not just one product. We believe this is key to truly maximizing the potential for success. We have begun shipping the second round of new flavors for the core you can pr lines including watermelon, apple, blue berry and punch.

New candy reps have helped place Tongue Tape into distribution channels expanding beyond our typical retail outlets, for example, gas stations, convenience stores, and other alternative outlets including 7 eleven stores, BP Gas stations and Auto Zone stores.

We have also begun shipping our now licensed varieties based on Strawberry Short Cake and Hello Kitty to retailers such as (inaudible) where we will reach tweens, and NASCAR Tongue Tape which also will be including in the Toys R Us retail boutiques.

We expect to announce multiple new licenses over the coming months. Tongue Tape flavors are being introduced with the initial launch being sold in displays at Sams Clubs locations nationwide. Additionally, we announced in second quarter, that we have developed multiple new lines expenses for Tongue Tape, including vitamin C, multivitamin, and electrolyte infused versions, which may potentially provide JAKKS with a new group of retail customers in multiple new channels.

We are exploring the potential of these new areas and will report our progress late there year.

We believe 2003 will be another profitable year for JAKKS Pacific. We have adjusted our expectations due to the continued challenging economic environment.

We now expect full year sales for 2003 to be at least $310 million, and earnings for diluted share, excluding one-time charges will be in the range of $1.30 to $1.35.

In closing, we believe we remain focused on incorporating innovation and adapting technologies to make our diverse products more compelling for our children and adults, and more profitable for JAKKS and other retail partners.

We have the vision necessary to further build and expand our business and drive shareholder value. With our recent convertible senior note deal, combined with our solid operating cash flow, we are well positioned for internal growth initiatives as well as acquisitions.

Although we continue to operate in a difficult environment, we believe our strengths will help us in these challenging times and that we will be well-positioned to excel when the environment improves.

Overall we are quite excited about the opportunities available to us, and we expect to continue to deliver both sales and earnings growth over the long-term.

With that, we will now open the call to your questions.

At this time I would like to well mine everyone if you would like to ask a question, please press star, then the number 1 on your telephone keypad now.

Your first question comes from Derek Winger from Jefferies and Company.

Derek Winger Yes, hi. I believe you had said that the CAPEX the second quarter, and then the outlook for both this year and next (inaudible) on capital spending, acquisitions.

Yeah, we're running around $2.5 million for the first six months. It usually accelerates in the back half for the following year launches. And we expect to run in the $7 to $8 million range through '04, on an annual basis.

Derek Winger Okay. And $2.5 million dollars for the first six months this year. What about this year?

It's in that same range.

Derek Winger Seven to Eight for the next two years? I mean for this year and for next year as well?

Joel Bennett Yes.

Your next question comes from Arvind Bhatia with Southwest Securities.

Just, I guess, a couple of questions I got on the call a little bit late.

Did you talk about the third quarter guidance at all and what's going to be driving that guidance?

Are you giving guidance that's in line with first calls numbers out there? Or are you changing that in light of your revised annual numbers? And then second question is what were the cash flow from operations this quarter?

Actually, we gave that. One moment, Arvin. Cash flow for the quarter, $1.1 million, and for the six months it was $7.8 million. And that's compared to having used $12.5 million in the second quarter last year, and providing $600,000 for the six months last year.

Do you expect cash flows to be positive in the third quarter?

Yes.

Okay. And then I guess my first question about guidance, the third quarter.

We're giving annual guidance, basically with the order pattern changing dramatically over the last 18, 24 months, and it's still continuing. We're not providing on a quarterly base , I but ...

Would it be fair to assume you could do at least flat numbers versus last year?

Yes.

Okay. So, I mean, with everything that's happened so far in the year, Jack, what gives you confidence? I know you talked a little bit about it, but, why should anybody believe that the second half is going to be any better? Or even $1.30 to $1.35. What gives you confidence in that?

Well, number one, we do, as our competitors do, more of our revenue in the back half of the year. Number 2, our sales at retail are doing quite well. We don't have any specific drivers. We have a host of Evergreen products that we have placed. We're in all of our planograms that our major retailers are set. And we are quite comfortable. We believe that it's correct for us to take a conservative approach to earnings and revenue in difficult retail environment that we're dealing in.

But our products are selling well, We have excellent placement at the retailers. We're highly confident in knowing how to manage our business, manage our inventories, ship to retailers properly, to make sure our products stay on the shelf.

I'd say we're very confident about the back half of the year.

Arvind Bhatia But, I mean, the swing in your guidance is about 30, 40 cents. What has so dramatically changed since your last call? I mean, that's a big swing.

We were projecting obviously about 10% growth, or you guys were projecting about 10% growth. Now you're project than down versus last year, I think 5% or 10%. Can you sort of break it down or simplify it so we can understand where this is coming from? How much of this is you being conservative, and how much of this is just something that is so dramatically changed at retail in the last, I don't know, two months.

I would say number one, Arvin, that one of the things that makes us a little insecure to the back half is Disney stores, which has been a significant customer of ours.

We just don't know, we still don't know the status of how many stores are closing and what they will be purchasing for those stores, so we're countering that into our more conservative approach.

And also the only other significant reason is the way retailers are ordering less quantities say date. Retailers are missing a certain amount of sales by not having enough inventory in their stores. And we are reacting to that, and managing our business and have demonstrated in this call that we're watching our inventories very carefully as well as receivables, and our overhead, to make sure that we run a profitable business even with flat or slightly down sales.

Is it your sense that this approach that retailers have Dean of taken of being very conservative which, as you said, started 18 to 24 months ago, is it your sense that they have actually accelerated that approach or they've become even more conservative in the last couple of months?

I think that they have somewhat accelerated, and I think that's made us react to taking a very conservative approach. We are, as you probably know and some others on this call, we are a very conservative company. We don't take any big inventory shots waiting for it to happen.

We manage our business in a very conservative way. We wish we were in a position to say that we think that sales will grow dramatically this year, but with the present environment and no specific driver, we're well-satisfied with our business under the present circumstances, Arvin.

Lastly, Arvin, the convertible notes, the interest expense on that is about 8 cents for the year. It was about a penny in Q2. It will be 3-1/2 or so in each of Q3 and Q4.

I was under the impression that was going to be earnings neutral.

It's cash flow neutral, but because of the original issue discount, rather than a benefit to the provision, we actually have -- I mean, the technical is we have to book a liability in case the notes are ultimately paid off in cash as opposed to converted.

So at the time for the foreseeable future until we know if they'll be converted or paid off, there is no benefit to the provision.

Okay. So dealing flat versus last year for the third quarter, I mean, what are the top couple of reasons that could impact that negatively; in other words, what are you most worried about in the third quarter?

I think that we're trying to present a most conservative picture now and not have to come back and forecast down later in the year. Hopefully we can do better than these estimates, but this is where we feel comfortable and we want to make sure that we meet our forecasts and our goals for the rest of this year and forward from this year.

Do you regain any of the sales that you might have lost towards the end of the second quarter? Do you get any of that back in the third quarter?

I would say two fold. The seasonable business is gone. We can't pick that up. And we are seeing, because of the conservative purchasing by retailers, certain stores out of our products at certain times, and we miss a little bit here and a little bit there. Remember, we're not talking about dramatic numbers here; we're talking about small numbers that do impact the bottom line, of course, because every dollar, once you meet your initial goals, every dollar of sales drops dramatically to the bottom line. Which impacted Q2. We missed or own forecast by about 8 or $9 million, and that

had a dramatic drop to the bottom.

And then you talked about Disney. Disney stores. What is that as a percentage of your sales right now or was it?

Well, we're not supposed to disclose that, but it's -- it has a, not a serious am packet to us but certainly some impact.

Also, the level of maybe a Kay Bee?

What did you say, Arvin?

Could it have as much of an impact as it would have if you didn't have Kay Bee stores?

No. Kay Bee stores would have a much more dramatic impact on us. Disney stores is strictly specialized items that we make for them, not our product line.

Okay. Thanks.

Thank you.

Your next question comes from Brett Jordan with Advest.

Advest.

Good morning. Quite a train wreck there. A couple of questions. And really, Joel, trying to get a feeling for what the contribution from acquired business is or trying to get some feeling for the magnitude of the climate in what was the core business.

In the prior you did $79 million and you've bought some businesses sense then. I realize your not going to break the out by category but are you can you give us some color as opposed to what was layered on year over year?

The only layer was Trend Masters, and they were affected by the weather, certainly, at least in terms of where we than expected them to be, and that in part resulted in lower margin for the quarter.

It did have a shift within the category, say, from our Gak (ph) Splat to the Trend Masters products which, again, is part of the reason for the decline in the gross margin.

Do you want to get a rough run rate for the Trendmaster in the year? You clearly called out the unprofitable business about the a feeling for the contribution?

No. I mean, within the parameters that we've stated, that's the extent of the information that we're providing on the call.

Then I guess on SARS, a couple your large peers who sourced more product out of China didn't mention SARS as a negative impact in the first half.

Is there something different relative to your sourcing versus as Hasbro or Mattel add you more exposed to SARS rather than less?

It was 1 factor in, and the result was not shutdowns but shared labor, unfamiliarity with machines and such, and fewer workers in general.

So there was a line that was particularly high volume for you that didn't get shipped or ...

Yeah, the NASCAR and the Sponge Bob were probably the two key.

Were there any bright spots as we look at the second quarter and expect that to be a reasonably solid quarter on the back-to-school category, given that that isn’t impacted much by weather, w s it up or down year over year?

Brett, this is Jack speaking. I think the best answer we can give is our individual lines in our categories are doing well in a sluggish environment without any specific drivers. We think that's pretty good. But we're placed at all the retailers with the items that we know we have and we can reasonably project the revenue stream that those will create for us, and we do have a pretty good backlog of orders on hand.

Okay. So you've got a reasonably solid comfort level with your guide an on the balance of the year.

Yes.

and as far as the visibility, I mean, clearly this was –

We're trying to give a number that we can't miss and hope to do better, Brett.

All right. As far as the visibility on the quarter ended goes, and clearly there was a secondary on the second week of June, is it something -- did the visibility and the deterioration sort of come up after that fact? I'm trying to get a feeling. Because, you know, given the possibility of free releases and things like that, it clearly was, you know ...

Well, I think it was impacted, I think it was impactive. It clearly came down to the last few weeks of the quarter, being that we didn't ship the NASCAR and Sponge Bob items, and the weather, Wal-Mart as an example, cut off all seasonals from everyone on June 15.

And, Joel, on the share count I guess as you're looking at your guide an on the year you did 310 last year and you earned $1.59 on the fully diluted shares, about 23. What are you using in your expectations for this year? Were there a couple million shares of restricted stock granted?

Is that going into the fully delighted or is there a margin change as you see similar top line yet a lower EPS? Do you use year over year flat share count, you'd still come up with something ahead of $1.30 to $1.35.

Year-over-year we are looking, with the second quarter blended, we're looking at right around 40% on the gross margin line.

Share counts were about $25 million for the year against $22 million, although the comps for the third quarter and fourth quarter, I believe (inaudible) since the offering last year was done in June, the share count between third and fourth quarter this year and last year will be a lot closer.

Right. Do the restrict stock grants come into the share count this year?

No, that will be in '04.

Okay. Thank you.

Thanks, Brett.

Your next question comes from Sean McGowan with Ferris, Nesbitt, Gerard.

I think train wreck is putting it mildly. I have a couple of questions. Can you give us some idea of what's happening with wrestling, just a direction, whether that product is up or down?

Second, could you get more specific on the mix shift? What products are doing better than others that caused the gross margin to go down?

And then third, and in my opinion the most important, I don't understand how you raise money when a collusion from this offering is killing the earnings.

Can you please talk about what you intend to do with that money? Thank you.

On the last question, the dilution for the quarter was about a (inaudible) and for the balance –

Joel, on a full year bases it's about 20 cents . I would have thought with if you raised $98 million on top of having $80 million there would be something that you would do with the money. It's just sitting there. It's diluting the shareholders.

As we sit here today, we we're looking (inaudible)had we had something at the time we did the offering, we would have had to disclose it. We're very active in reviewing opportunities that will put that money to very good use.

Well, let me just point out something that you might to have deal with in the coming weeks.

This makes two weeks in a row effectively, two years, where equity gets sold and then two years late there earning get bagged so that's what I'm concerning earned about. It's is shareholder lawsuit that says where did why did you raise the money?

Effectively you've sold it at much higher price. That's what I'm concerned about.

We're not going to address that on the call, but if you can restate the first part, we can ...

I would like to know whether the wrestling figures are up or down and what specifically on the mix shift gives rise to a shift in the margin like that?

Within the seasonal category, the water guns, which weren't in the mix cast year, have a lower margin than others items that were in the mix last year, like Splat, which is our (inaudible) supplying Flying Colors.

I don't understand. A big reason for the sales shortfall is that nobody bought water guns. How does the mix shift? How is it attributable to water guns?

Within the category we're still selling a lot and we also had higher expectations for the category as a whole, so within what was sold, the higher proportion came from lower margin items.

Okay. And I didn't hear the answer on wrestling.

I can't give you an answer. This is Jack speaking. (inaudible) I can't give you an answer specifically on what percentage of our business wrestling was. Wrestling figures are alive and well. There are some superstars that are doing well, our new assortment are selling quite well at retail.

My question was is it up or down versus last year?

I don't have that answer sitting here. I'll be glad, weigh be glad to get back to you with a specific answer on that.

Thank you.

Again, if you would like to ask a question, please press star 1 on your telephone keypad now.

Your next question comes from Joe Yurman with Bear Sterns.

Hey, guys. Sean kind of touched on something that I think is really the crux of what some people are having an issue with. And I guess it comes from two parts. One, where do the-- in what are the internal policies such that when you look when you look at first call and you see where the street is and you know that there's a pretty good chance, or I would hope that you know there's a pretty good chance you're going to miss the street by a pretty measurable amount, that you would announce that.

And I think probably more concerning is talking about SARS and the timing of the pricing (inaudible) of the intention to issue a convertible on June 2nd. You announced the terms on the fourth, and you priced it on the 9th.

Clearly, in the beginning of June you guys were aware about SARS and that it was impacting or could be impacting factory workers in China. And I'm just wondering why none of this concern was Articulated basically ten days into the last month or the last period of the quarter.

It doesn't give an appearance that makes people want to get behind you guys. I guess that's maybe just an opinion.

So if you could -- did you not see that the workers needed to be retrained during either the intention to do the deal, the announcing of the term of the pricing?

Well, this is Jack speaking, Joe. Number one, we did not know or we would have said so. Firstly, we're a very ethical company. We wouldn't bag shareholders, nor would we commit certainly anything fraudulent. The SARS specifically in itself was not an issue. It caused delays, and we did think we would get those two products out during the balance of the quarter, maybe a week or ten days later than anticipated but did anticipate getting those goods out.

Once again, we weren't -- we're not a desperate company. We're an ethical company. If we had known at the time, we would have guided lower regarding the offering.

All indications, we checked with our far East office, our salespeople, and all indications were that we would meet our forecast for the quarter.

Otherwise, we would have announced that or not done (ph) the offering.

What does that tell you about some of your internal controls, then?

I think we have pretty good end terrible controls, and I think we're pretty sophisticated company, and I think stuff happens from time to time and overall we're trying to give guidance on an annualized basis rather than a quarterly basis in a difficult retail environment where the rules are changing. We think it's a much better approach to take an annualized look.

But certainly regarding Q2, if we thought it was tanking, we wouldn't have proceeded with the offering, we wouldn't have started the offering or would have told your company which did the offering, this is what it looks like, and if people wanted to buy it they would buy it or if the price went to a low level, maybe we wouldn't have done the deal.

Okay. And getting back to just maybe some of the internal policies Getting back to your internal policies, when you have, y hen basically your earnings come in at a third of street consensus --

That was more than the a third of street consensus. It was about 60% of street consensus.

What's 13% of 39?

For the recall it was – (inaudible)

Oh. I'll take that out. But -- As a practical matter, we do discuss it internally at high levels. And we also discuss this with our outside securities counsel. As a matter of precedence, we haven't preannounced to date, as we certainly do consider it, when situations come up. And in this case it was decided that we would not.

I guess I'm just saying in closing, I think what's happened is unfortunate because you had a set of fresh eyes doing a convertible versus an equity offering, who could maybe take a look at your company with an unbiased view, and I don't know that that's necessarily the case today. Thank you.

And you have a follow-up question from Arvin Bhatia with Southwest Securities.

Hi. This is a question on the joint venture. The next couple of quarters, I'm wondering if you could talk about what you're mod for modeling versus last year. I know there are two games coming out in the September quarter, one on Xbox, one on GameCube, and you've got Play Station 2 in the fourth quarter.

With the bad visibility and with what you know from your discussions ever discussions with THQ, can you tell us of your modeling numbers for the year flat versus last year or are up or down?

The question is?

Your income from joint venture for the year, particularly for the last two quarters of the year, how does that compare to last year?

We're expecting it to be at or above last year's levels. I personally am not sure what was discuss ever does closed in terms of release dates, so I can't break out between third and fourth quarter, but with those three titles, we certainly expect the aggregate of the two quarters to be at least what they were last year.

Okay. Thanks.

Oh, I would suggest to watch the releases on the title launch.

the PS 2, the SmackDown product, I thought you guys should have joined press releases a couple days ago. So that is a big product for the year. And I'm just, I guess, wondering, I guess you did answer the question, that you are dealing back to up versus last year.

Yes.

Thanks.

At this time there are no further questions.

This is Jack speaking. Thank you all very much for your attention, and I hope JAKKS Pacific continues to grow our business and report profitable quarters, and hopefully increase our profits as the year goes on. Thank you very much.

Thank you for your participation in today today's conference. In concludes today's call, and you may now disconnect.