JAKKS Pacific Inc (JAKK) 2003 Q4 法說會逐字稿

Good morning. My name is Kimberly, and I will be your conference facilitator.

At this time I would like to welcome everyone to the JAKKS Pacific 2003 fourth quarter and year-end result conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad.

I would now like to turn the conference over to Jack Friedman, Chairman and CEO of JAKKS Pacific, Stephen Berman, President and COO, and Joel Bennett, CFO, Executive Vice President. Gentlemen, you may begin.

Good morning, ladies and gentlemen, I am Jack Friedman, Chairman and CEO of JAKKS Pacific. Thank you for joining us to review our results for the fourth quarter and year-end December 31st, 2003.

On the call with me is Stephen Berman, President and COO, and Joel Bennett, Executive VP, CFO. I will provide an overview of our operational results for the fourth quarter and the year ending December 31st, 2003.

Joel will then provide detailed comments regarding the financial results of our fourth quarter and for the year and will provide guidance for 2004. I will then conclude this section of the call with comments concerning current business trends and by discuss some of our product lines in more detail. Then we will be open to 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 2004, 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.

Now I will begin. In 2003 JAKKS Pacific achieved a solid year of sales and continues to lay the groundwork for long-term growth through 2004 and beyond.

We further expanded our distribution channels, improved upon and expanded our existing licensed and non-licensed product lines and worked vigorously to secure new, substantive relationships and new areas of organic growth for JAKKS Pacific. While we continued to be affected by a challenging industry environment, including the bankruptcies of KB and FAO Schwarz we believe that we are well positioned for growth due to our diverse product offerings and categories.

As the number of stores in our primary channel base has declined we are working to place more SKUs on these shelves while at the same time leveraging our products outside of the toy category to secure shelf space at other retail channels including electronics, drug, convenience, and office supply stores. We believe that our strength in marketing and our ability to capitalize on opportunities swiftly and our ability to expand shelf space are a few of the many reasons top licensors seek out JAKKS for their partnerships.

During the fourth quarter our net sales were $84.4 million and $315.8 million for the full year of 2003. We are well positioned to leverage our financial strength to continue internal growth initiatives as well as to make additional acquisitions.

Throughout 2003, in addition to expanding our distribution channels and increasing our investment in advertising and marketing of our key product we also laid the groundwork for future growth and profitability by securing many new toy licenses including Mucha Lucha, the Dragon Ball Z franchise, Yu Yu Hakusho, Universal Plastic, Monsters, and Van Helsing. We expect these licenses combined with our core business will contribute to our top and bottom lines growth in 2004 and beyond.

In the fourth quarter we were extremely encouraged by the sales of two of our TV game units, Atari TV games and Namco TV games led by Pac-Man. These are plug-n-play video game units with five or more games built into the joysticks.

Our retail partners, ranging from Wal-Mart, Target, Toys-R-Us, to more specialty retailers such as Circuit City, Best Buy, Urban Retailers and others, all saw sell-through that exceeded ours and their expectations.

Additionally, our WWE SKUs and new items from Dragon Ball Z line did well in the action figure category. All of which JAKKS Pacific includes in our traditional toys categories which Joe will get into a little bit later.

In the activities area our Vivid Velvet and Blopen items moved quite nicely in the fourth quarter and our Nickelodeon activity toys topped by the line for our Flying Colors area did extremely well.

Before I get into more detail about our strategic initiatives and product offerings for 2004 and beyond, I would like to turn the call over to Joel for more details regarding our financial results for the fourth quarter and for the year 2003.

Thank you, Jack.

For the fourth quarter net sales increased 23.3% to $84.4 million, from $68.5 million in the comparable period last year.

Excluding a pretax charge of $2.1 million, or 7 cents per diluted share for the accounts receivable write off attributable to recent customer bankruptcies net income for the fourth quarter of 2003 was $8.9 million, or 36 cents per diluted share. This compares to $6.2 million or 25 cents per diluted share in the fourth quarter of 2002 which excludes a one-time pretax restructuring and recall benefit of $1.4 million.

Reported net income for the fourth quarter of 2003 was $7.1 million or 29 cents per diluted share, as compared to $7.3 million, or 30 cents per diluted share for the fourth quarter of last year. Net sales for the year increased to $315.8 million as compared to $310 million in 2002.

Excluding the one-time charge of $2 million for a product recall earlier in the year, and the $2.1 million charge for the customer bankruptcies in 2003, as well as excluding net restructuring and recall charges of $6.7 million in 2002, net income for the year was $29.2 million, or $1.18 per diluted share. This compares to $36.5 million, or $1.61 per diluted share in 2002.

Reported net income was $25.9 million, or $1.05 per diluted share in 2003, as compared to $31.3 million, or $1.37 per diluted share in 2002.

We disclose sales by category to give you better insight as to how our business is doing and where we see opportunities. We comment on four broad categories which are traditional toys, seasonal products, crafts, activities and writing instruments, and international. For competitive reasons we do not disclose detailed sales of specific products or licensed lines.

In 2003, traditional toys which is comprised of wheels, action figures, dolls, TV games and other toy products had sales of $41.2 million for the quarter and $107 million for the year. These represent 48.9% and 33.9% of overall sales for each period respectively.

Sales for the fourth quarter of 2002 were $27.7 million, and $103.4 million for the year, representing 40.6% and 33.4% of overall sales for each period respectively in 2002. Our TV games, vehicles, WWE, and Dragon Ball lines gave us a boost in this category for the fourth quarter year-over-year, however for the year our traditional toy sales were affected by the discontinuation of our higher priced karaoke machine as mentioned earlier in the year, as well as softer sales of our dolls and shipping delays earlier in the year.

In our seasonal product category we include Go Fly a Kite, Funnoodle pool toys, and Storm water toys and junior sports items. For this category in 2003 sales were $4.8 million for the fourth quarter and $40.9 million for the year. This represents 5.7% and 13% of overall sales for these periods.

Sales for the fourth quarter of 2002 were $3.9 million, and 12 month sales for 2002 were $27.1 million. These represent 5.7 and 8.7% of overall sales for each period in 2002. The quarter and year-over-year increases were led by the addition of Trend Masters products in 2003 as well as an increase in sales of our Go Fly a Kite and Funnoodle products.

In the craft, activities and writing instrument category which is made up of our Flying Colors, Pentech, Vivid Velvet and Blopens products, 2003 sales were $28.3 million for the quarter and $123.2 million for the year. This represents 33.6% and 39% of overall sales for these periods.

Sales for the fourth quarter of 2002 were $23.3 million and year-end 2002 sales were $126.2 million representing 34 and 40.7% of overall sales. The addition of the ColorWorkshop product lines in 2003 contributed to the increase in sales during the fourth quarter. While the discontinuation of Smatter Doo due to the product recall contributed to lower sales for this category this year.

And lastly, international sales were $10.1 million for the quarter and $44.7 million for the year ending December 31, 2003. This represents 11.9% and 14.2% for these periods.

Sales for the fourth quarter of 2002 were $13.5 million and year-end 2002 sales were $53.2 million representing 19.8 and 17.2% of overall sales for each period. This decrease is primarily due to a drop-off in sales from our karaoke machine.

Gross profit for the fourth quarter was $35.1 million or 41.5% of net sales compared to $27.1 million or 39.5% of net sales for this period last year. This dollar increase was due to higher sales in 2003 and a 200 basis point increase in gross margins due to proportionately more domestic sales in the period than FOB sales.

For the year gross profit was $126.6 million compared to $130.5 million in 2002 despite modestly higher sales in 2003. This was due to higher product costs as a result of mix and resulted in overall margin decrease of 200 basis points. However, we expect gross margins to continue to improve into 2004 as we achieve improvements in both pricing and costing.

Excluding one-time charges and benefits, operating profit increased during the fourth quarter of 2003 as a result of higher gross profit though offset in part by higher SG&A expenses for the quarter. SG&A increased $6.8 million to $29.9 million, or 35.4% of net sales, compared to $26.7 million or 39% of net sales in 2002.

For the year, operating profit decreased due primarily to lower gross profit and SG&A increased $3.4 million to $95.3 million or 30.2% of net sales from $91.9 million or 29.6% of net sales in 2002. These increases were due to the addition of overhead associated with our ColorWorkshop asset acquisition as well as higher non-cash stock-based option compensation in 2003 of $1.4 million.

The contribution from our video game joint venture with THQ was up for the quarter with profit of $6 million compared to $5.4 million for the fourth quarter in 2002. For the year the JV decreased modestly to $7.4 million from $8 million in the prior year.

During the fourth quarter we released Smack Down! Here Comes the Pain! for Play Station 2 which was awarded Best Fighting Games at Spike TVs first annual Video Game Awards and which was among the top ten best selling Play Station 2 games of the holiday season. Sales were up year-over-year even with fierce competition for this title. We expect that the WWE games under the joint venture with THQ will keep pace with the industry in 2004.

Operations used cash of $8.2 million for the fourth quarter and provided cash of $7.4 million for the full year. For the fourth quarter of 2002 operations provided $7.1 million in cash and $29.1 million for the year. Capital expenditures in 2003 were $1.7 million for the quarter and $4.7 million for the year.

We purchased and retired an additional 142,000 shares in the fourth quarter as part of our ongoing share buy back program bringing the total repurchases for the year to 554,500 shares at an average price of $10.98.

We have working capital of $234 million including $137.5 million in cash and marketable securities.

Accounts receivable decreased slightly to $86.1 million from $86.6 million as of September 30th and DSOs increased to 92 days this period, last year from 86 days. This is due in part to the increase in domestic sales which carry longer payment terms than FOB sales which were $54 million for fourth quarter of 2003 compared to $34 million for the same period in 2002.

Inventory increased nominally to $44.4 million from $43.5 million at the end of third quarter with a corresponding increase in DSIs of three days to 94 days. The increase in inventory is necessary to accommodate increasing domestic sales which is anticipated as we head into the back-to-school and seasonal product shipping seasons and to allow for earlier timing of Chinese New Year during which factories shut down.

Moving to guidance.

Due to the current challenging environment we are taking a cautiously optimistic approach to 2004 and anticipate net sales excluding acquisitions to be in the range of 330 to $340 million and diluted earnings per share of $1.20 to $1.30 excluding non-cash stock-based compensation expense of $9.3 million of which $8.3 million is related to restricted stock grants. We expect cash flow from operations to be in excess of $40 million for 2004.

In 2004 we will continue to increase our marketing endeavors to launch new categories throughout the year while maximizing the earnings potential on existing brands. We expect to see an increase in advertising and marketing spending year-over-year beginning in the first quarter of 2004 and expect to see results from these efforts beginning in the second quarter and moving forward with higher sales and profits.

In addition, we will continue to actively pursue complimentary and accretive acquisitions that provide both near and long-term growth potential and market share expansion opportunities.

With that I'm going to return the call back to Jack.

Thank you, Joel.

Throughout 2003 we continued to be affected by a challenging industry environment including the bankruptcies of KB Toys, FAO Schwarz, and others. However, for 2004 and beyond we believe that we are well positioned for growth due to our diverse product offerings and categories.

We will continue to leverage our strong operating cash flow and balance sheet to support and expand our core business and take advantage of the opportunities we expect during 2004. Our products are sold in a broad range of retail outlets everywhere from Wal-Mart, Target, Toys-R-Us, Walgreens, Best Buy, Urban Outfitters and Staples to name a few.

But further expanding our distribution channels and increasing our investment in design, advertising, and marketing throughout the company we are confident that we will continue to create innovative products across multiple categories. We believe that our thousands of SKUs feature top innovation and are compelling to children and adults throughout the world.

We are extremely optimistic about several key drivers for 2004 branded under multiple divisions including Flying Colors, Road Champs, TV games, and JAKKS. Our licensed line feature top entertainment properties of today including Disney, Nickelodeon, NASCAR, Hello Kitty, Dragonball Z, Mucha Lucha, WWE, Ms. Pac-Man, Pac-Man, and Spider-Man and a line of EA electronics for our plug and play games.

As we look at multiple opportunities for growth in 2004 we will continue to focus on the internal development of new non-licensed concept as well as innovative extensions to product lines based on our top licenses.

We are particularly excited about our several new TV game versions we expect in 2004 including Spider-Man TV games, Ms. Pac-Man TV games, both of which we announced last week as well as our Activision and our first SpongeBob TV games which hit retail shelves early in first quarter and are doing quite well. These titles along with several others are slated for the first half of this year.

The distribution of our TV games is wide and reaching and a product is available at many diverse retail channels. We also additionally announced a licensing tie-up with Midway Games for our TV games additionally.

Our Van Helsing product line for Universal Pictures action horror film is sold into a major retail partners and is well positioned on shelves as we speak. Our other boys' action figure lines including Dragon Ball Z, Mucha Lucha and WWE are extensive and have been well received at the International Toy Fair.

For WWE Pay-Per-View is up, attendance at house shows are up, ratings are up, the marketing initiatives have been increased by WWE as they gear up for Wrestle Mania 20 and as a result our wrestling toy sales are seeing a pickup as well.

On the activity front, our Blopens and velvet art products from the ColorWorkshop acquisition are now branded under Flying Colors and feature our licenses including Nickelodeon and Hello Kitty at retailers ranging from Wal-Mart to Michael's. Our Nick Junior product line will reflect new program initiatives for Dora the Explorer and Blue's Clues, for example, our Talking Trace and Doodle Box will be the only talking Blue's Clues product on the market for this spring.

We internally developed a new scrapbooking line for tweens called My OverStuffed Life. Scrapbooking is a large category and we believe we can capitalize on a growing trend with our innovative line of purse-shaped activity kits specifically geared toward young girls. This product is just hitting retail shelves and the initial sales are encouraging.

On the international front we are continuing to expand our efforts and have assembled a new team who will work to increase our exposure in more countries throughout the world. This team will work to maximize JAKKS products international potential on all fronts including sales, operations, marketing, and product development.

We expect to capitalize on opportunities available to us and to leverage key licenses with product lines that are compelling and appropriate for international customers. We also expect to sell our TV games line into retailers worldwide and announced last week a new agreement with Namco, makers of Pac-Man, to bring our award-winning Namco Pac-Man TV games to Europe, Australia, and New Zealand.

Since the Hong Kong and London toy fairs in January the sell-in for our TV games line internationally has been extremely solid.

Our results during 2003 reflected some of the challenges that JAKKS Pacific faced throughout the year due to the retail environment but it was also highlighted by several key strengths we continue to build upon.

We are investing in our sales and began to increase our advertising and marketing focus during the fourth quarter to achieve results from these efforts. We continue to expand our distribution channels and we laid the groundwork for continued growth in revenue and earnings in 2004 and beyond.

Our fourth quarter results before one-time charges are better than last year's results and we continue to expand our product offering in both our toy segments and arts and activities segments.

In closing, we remain focused on creating innovative products which we use to increase shelf space with our existing retailers as well as expand our distribution channels. We will continue to reinvest in JAKKS by increasing advertising and marketing initiatives prudently, of course as well as design and marketing personnel to make JAKKS Pacific more profitable across the board.

We have the vision necessary to further build and expand our business and drive shareholder value. With continued solid operating cash flow we are well positioned for internal growth initiatives, new licenses as well as additional acquisitions. Overall we are quite excited about the opportunities available to us and we expect to continue to deliver both sales and earning growth over the long term.

With that we will now open the call to your questions. Thank you all.

At this time I would like to remind everyone if you would like to ask a question please press star then the number one on your telephone keypad. Your first question comes from Tony Gikas of Piper Jaffray.

Hi, guys. Couple questions this morning. Could you maybe just comment on the acquisition pipeline and the likelihood of, you know, some acquisitions here in 2004, what you might be looking at? Secondly, how did pricing hold up over the holidays and what are your assumptions looking at 2004? And has your shelf space, you know, increased materially, or changed materially at Wal-Mart, Target, and Toys-R-Us?

The first part of your question, I might need to ask you to repeat part of your question, Tony.

Sure.

The first part of it, in terms of the acquisition pipeline we have been extremely active in our pursuit of acquisition or acquisitions. We have none to announce at this time, and there's never a deal until there is a deal, but we have been quite active in the area and it is looking quite interesting. Again, though, nothing is a deal until there is a deal.

In terms of our shelf space at the mass retailers, I think it's ever-increasing. I would say particularly at Wal-Mart our shelf space is increasing quite rapidly and as long as our relationship Toys-R-Us, our shelf space is excellent, and I would say at most of the retailers our shelf space is expanding as our presence and importance as a very profitable vendor to the major retailers continues.

How is pricing holding up, and what are your expectations for 2004?

I'm not sure what you mean by pricing.

Are you seeing any deterioration in terms of just your average price points? Are you being pressured by Wal-Mart, Target to, you know, bring pricing down at all?

You mean our selling prices?

Correct.

No, not at all. I think there's a general reluctance to garnish price increases from the major retailers but there isn't any downward pressure for price decreases.

Okay. Then your ad spend during the December quarter was up quite a bit from our expectations. Did the increase in ad spending there pay off to the levels you were expecting?

Well, I think we did previously announce that we were going to be more aggressive with our marketing and advertising plans, and I think we're beginning to definitely see the results of it. Fourth quarter was quite a successful quarter to us and the first half of this year is looking particularly good to us.

And I must comment we're very bullish, actually, about 2004 and want to be cautiously optimistic with our forecast. The last thing we want to do, which has happened to JAKKS in the past, is disappoint the street in earnings forecast, but we are quite excited that our initiatives are working very successfully for us.

Okay. Thanks, guys.

You're welcome.

Your next question comes from Arvind Bhatia of Southwest Securities.

Good morning, guys.

Good morning, Arvind, how are you?

Good. How are you? Just a few questions here. One, Jack, I want to understand what your sense is of the TV games market. What do you think is the total size? You're obviously a major player there. What sort of market share do you have now and do you think you can have going forward? And also, if you could give a sense of what percentage of your business are you trying to replace in 2004? Specifically as you look at KB Toys, FAO Schwarz, and maybe some of the other smaller retailers, looking at their situation and, you know, what you lost there in terms of business, or will lose, you know, how much is that that you'll to have replace? And then I have a couple of follow-up questions.

The first part of your question regarding the TV games business, the size is unknown. No one knows the up side. Whatever we've shipped today has sold through so quickly we can't even judge what the up side is.

In terms of our position in it, we are clearly the leader. If I had to guess a percentage, I would say probably we expect to be 80 to 90% market share. We have the best licenses, the best innovative product, the best pricing, the best distribution.

We have a spectacular lineup for the year with EA Sports, Namco, Marvel, Atari, Nickelodeon, Disney, Activision, Midway, and many more to come which we cannot announce yet. So we feel we are clear leaders in the category.

We have future ideas which we're not ready to announce at this point to the street or to the trade for follow-up and additional to it. Once again, we are the first people in the business.

We think we've done a great job and are clearly the market leader and frankly we are having a little bit of difficulty now catching up with the demand. We will catch up as we get into second quarter and are able to get the components, the additional components necessary which take six to eight weeks lead time to catch up with the demand.

Jack, who's the customer for this product? Is it an older customer? Is it a younger customer?

I would say it's 6 to 50 years old. It's all ages, which is wonderful. It gives us a very expansive marketplace for it. Not dissimilar to the video game business.

As example, our SpongeBob, which we thought would be to younger children, which we recently introduced was an immediate sell-out, as well as our Pac-Man continues to sell at staggering rates of sales when it's on shelves.

And the channel that's --.

The channel of distribution is the normal mass merchants plus people like Circuit City, Electronics Boutique, Saks, Best Buy, Kohls, QVC ran a promotion on it. It's very, very widespread, and day after day, Arvind, we're getting requests from other retailers that we don't normally do business with but we are first trying to supply our current retailers that support us with product before we sell some of these other people coming at us.

The other part of your question was regarding how do we make up for the demise of some of the bankrupt retailers. It's continuing to go after alternative business. Some of these I just mentioned like Saks Fifth Avenue, Michaels stores in our craft activity has become an important customer to us. Linens 'n Things, Blockbuster, we're doing more business with the dollar-type stores.

We're very aggressively seeking alternative distribution but, of course, we continue to grow with the giant like Wal-Mart, Target, and Toys-R-Us.

Is there anything in the accounts receivable at this point that you would consider at risk?

Joel should answer that, but -- Joel, you answer that.

Not other than what has already been provided for. Both the FOB business is on letter of credit and most of the increase in the domestic sales is, you know, from Wal-Mart and at this point, you know, they're very low credit risk at this point.

Then just looking at your DSOs having gone up, and you explained why they've gone up, but has there been any material change in the terms you're getting with the retailers, given their own situation, especially in the toy side, you know, should we expect DSOs to stay in the high 80s, low 90s going forward? Or you think this quarter is more of an anomaly?

I think the quarter is an anomaly. As I indicated, the domestic shipments were up $20 million from $34 million Q4 '02, and, you know, I think it normalizes, and you'll also see the corresponding increase in cash flow next year but it's more a function of how we ship, not that we're giving any more generous terms than we do in the past.

I would say just to that we have zero given additional terms to induce our retailers to buy more product. Our terms are the same or tighter than ever before. It's just the mix that fell into particularly Q4 with domestic and letter of credit.

Okay. And the tax rate, Joel, I think if I'm looking at it correctly, was 16% this quarter. What sort of tax rate should we be using going forward? One, why was it low this quarter, and then second, guidance for tax rate going forward.

The original expectation was that the tax rate would be in the 23, 24%, but as the change from FOB to domestic, there are a number of different factors that go into it. Transfer pricing amongst the entities and so forth that we wound up at a 22% effective tax rate for the year but do expect that it will be back in the 23% range and are forecasting such in 2004.

I'm sorry, 22%?

No, no, it's 22% effective tax rate for 2003, but the expectation is that it will be in the 23% range as we forecasted for 2004.

Got it. And final question on cash flow from operations, could you quickly give those numbers again for this quarter and for the year and then I don't know if you talked about guidance for next year. Should we be expecting positive cash flow from operations going forward?

Absolutely. We think that we'll be able to squeeze the working capital because it grew so much in the back half of the year.

As far as 2003, Q4 used approximately $7 million -- actually, I'm flipping through. Hold on one second. We used about $7 million in the quarter and operations provided about $8 million for the year.

Okay. Thank you very much.

Thank you, Arvind.

Your next question comes from Bret Jordan of Advest.

Hi, good morning. Couple quick questions, Joel, and I'm in an airport so if I can get them through. The '04 Cap EX expectation and the depreciation and amortization, you know, sort of following up on the cash flow question?

$6 million in Cap EX and 6.5 for depreciation on the tools and molds.

And you think networking capital is going to shrink year-over-year?

Yes.

What's the share count you're using? I mean you've got the restricted stock in there now for the '04 number.

25.4 million.

How about the '04 expectation given the grants of restrict stock?

That's '04, I'm sorry. The '03 was in the table at 24.7.

Okay. But your expectation on '04 fully diluted is --.

Yeah, it should go up about $800,000 from the annualizing both the buy back and also the restrict ed grants.

Okay. And then the hurdle rate on the EPS for the new management compensation program. Is that going to be based off the 118 reported and your target of 120 to 130 ex the 9.3 in compensation expense or are you going to penalize yourself the 9.3 compensation expense and still expect to grow the earnings for the management comp program?

Right now the board, they have actually until the end of the first quarter to set those hurdles and they have not yet been determined

Hasn't the hurdle already been set for '04?

I think that the hurdles have been, but as far as the adjusted EPS has not. So in your question, rather than changing the percentage growth hurdles it will be what goes in or what comes out of EPS.

Okay. Great. Thank you.

You're welcome.

Your next question comes from Bill Dezellem of Davidson Investment Advisors.

Thank you. I had two questions relative to TV games. First of all, from a competitive perspective, what is the replicability or the ability of the competitors to come in with similar or like products or their inability? Walk us through the dynamics there. And then secondarily, given the low price points of these product verse the Nintendo and these type of games to what degree do you see opportunity in South America and developing countries to really introduce those kids and people to video games?

The second, I'll answer this. This is Jack Friedman. The second part of your question I'll answer first. We are doing a material effort particularly during the international toy fair periods to get distribution in all markets around the world where applicable and we do expect to sell the products into Latin America, particularly Mexico through Wal-Mart Mexico.

Most of the western European countries have placed orders or have made initial offerings to us. We expect to start shipping those very shortly.

The first and more important part of your question, at least the way I view it, is in terms of what is our market position, in terms of competition and we have various patents on our products. It is possible to knock off the concept, if you will, the key to it from our point of view is we have what we consider to be just about every major license possible in the category, and there's a host of additional licenses that we haven't announced because we haven't dotted the I's or crossed the T's on various licenses.

We like to think that we virtually, I hate to use the word but I'll use it, we virtually think we own the category, or control the category. That might be a bit of an overstatement because there always is competition but I would truly guess as we're sitting here now that we will command an 80 to 90% market share of the category.

We do expect to catch up in second quarter on being able to meet the demands that are currently out there. Whatever we have shipped so far in first quarter is virtually selling through in a matter of days or weeks.

In terms of how that relates to our forecast for the year, we are a nervous company in terms of overforecasting to the marketplace from some past misses and we are continuing to take a cautious forecast with the street for the year and hopefully we can get more optimistic as the quarters roll out during the year.

Jack, just a point of clarification, so relative to the licenses, it sounds like it would be correct for us to infer that any and all of the licenses that you have announced, whether it be Atari, Pac-Man, Spider-Man, et cetera, that those are exclusive licenses to JAKKS Pacific TV games.

Every license that we have is exclusive either worldwide or expected to be worldwide. Some licenses first you signed North American and then you have to get international added on.

We have devised a system of making ours and working with factories that we're giving enormous quantities to have terrific price advantages and we're able to keep the prices down on it and they will continue to sell in the $25 range or less. Additionally, we have come out with two-player versions which we will be shipping later on this year and a pocket version that people can carry, are small enough to carry around in their pocket, also for later on this year. Does that answer your question?

It does. Thank you very much.

Your next question comes from Joe Yurman of Bear Stearns.

Hi, guys. Joel, a few questions and then one question about the forward guidance. What was the gross interest from cash balances for the quarter and if you can give us a sense maybe of what vehicle the funds are invested in. For the quarter what were the EPS benefit from foreign exchange? If you have a number for the reserve against doubtful accounts that you had at the end of the year? In relation to the lower effective tax rate, can you talk about the deferred tax liability jump to about $6 million at the end of the period? And as far as the guidance goes, the $1.20 to $1.30, and you say excluding the restricted stock expense, I'm not sure why you would have ever back that out anyway, but even if you didn't back that out, is it right to assume that if you include those expenses that your guidance for EPS is in the range of 95 cents to $1.05?

Boy, that was a long list. You should have faxed them over earlier.

Well, do you want me to go again?

EPS benefit for exchange was nominal. Most of the domestic sales are in the U.S., all the FOB sales are in U.S. dollars. We were somewhat detrimented because we do have operations in the U.K., and their operating expenses have gone up about 6% in the quarter just based on the change in the pound rate.

Okay. So it hurt you, then, is what you're saying.

Correct.

Okay.

Restricted stock, going to that one, it's more a call-out. Not that we're excluding it, but because it's a non-cash item, obviously the share count is affected by it, but it's a non-cash item, and for that purpose we're calling it out. So people can do with what it they will but we feel that it was an important number to be out there.

Okay.

The deferred taxes is basically the ordinary reversal of various timing differences. The tax rate for the quarter again based on the inter company charges management fees, transfer pricing, et cetera, we used an estimate for the year, and when it came in at 22% everything basically flushed through in the fourth quarter. We do look at it pretty closely each quarter but as the business changes, you know, it does, and can, change from time to time. Just the interest from cash balances? The convertible note runs us about $1.1 million a quarter. Actually, I have it right here. $500,000 in interest income. Interest expense was $1.1 million, which is primarily from the convertible note.

Okay.

Basically we're very conservative in our cash investing. It's highly liquid with the expectation that we will do an acquisition but most importantly it's more to be very safe. We're not in the money-making business in terms of interest, so. But that was the $500,000 for the quarter

Do you have the reserve against the doubtful account that you're in?

That was just on KB. I'll try to find it during the course of the call, Joe, and I'll -- just before we sign off.

Thanks, Joel.

Your next question comes from Chris Hanrahan of Sigma Capital.

Good morning, guys.

Good morning.

I had a question on the charge you took for customer bankruptcies. Could you break that out between, well, the FAO Schwarz?

KB was the lion's share. FAO we actually took the bigger hit when they filed the first time, and this last time, you know, we got caught with a little bit, but it's primarily KB.

So the KB is about 790 grand, so how do you get to --.

Our charge was $2.1 million. Where's the 790 grand coming from?

I just have it from the U.S. Bankruptcy Court from District of Delaware.

We deal with them with eight different operating companies. We have Road Champs, Inc. Unlimited, we've got Flying Colors, Inc., Unlimited, we've got JAKKS Pacific, Inc., Unlimited, Pentech, so there's, you know, Toymax, and the Inc. is the U.S. side, the limited is our Hong Kong company. You have to aggregate those eight or ten companies.

So just the cumulative list, I shouldn't look at the 788 grand?

No, they don't consolidate under JAKKS Pacific.

Okay. Thank you.

You're welcome.

There are no further questions at this time. Are there any closing remarks?

We thank you all for your attention this morning. We look forward with a very high sense of optimism for 2004. We had extremely good sell-throughs of our product.

There's a minimal amount of inventories carried over by our retailers over 2003. We have terrific up side for our plug-n-play games and hopefully as the quarters roll out we can get more optimistic and beat the numbers as we go through the year and we thank all of you as shareholders or analysts for your time and attention and for your shareholders for your continued confidence in us. We work very hard to prove you correct. Thank you very, very much.

This concludes today's conference. You may now disconnect.