JAKKS Pacific Inc (JAKK) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the JAKKS Pacific fourth quarter and year-end 2004 financial results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Jack Friedman, chairman and CEO. Please go ahead, sir.

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 our fourth quarter and year ended December 31, 2004.

With me on the call today are Stephen Berman, president and COO, and Joel Bennett, executive VP and CFO. I will provide an overview of the quarter and our operational results and then Joel will provide detailed comments regarding the financial results. I will then conclude the prepared portion of the call with highlights of our product lines and current business trends and try to provide guidance for 2005 before we open the call up to questions.

Before I 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 for 2005, and forward-looking statements subject to Safe Harbor protection under the federal security laws. Such 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 forward-looking statements. For details concerning these and other risks and uncertainties you should consult our most recent Form 10-K and 10-Q filed with the SEC, as well as the Company's other reports subsequently filed with the SEC from time to time. With that, I will begin.

We are extremely pleased with our record results for fourth quarter and the full year of '04. In what was a challenging retail environment for many of our peers, we increased our sales by 119% in the fourth quarter and realized record sales of $274.3m for the year. And excluding the assumed conversion of the company's convertible notes payable and the pretax noncash charges of stock-based compensation and amortization related to our Play Along acquisition, diluted shares per share for the year is expected to be $2.35.

As we mentioned in our earnings release this morning, our earnings have been issued as preliminary due to the noncash adjustments resulting from the amortization or impairment of intangible assets other than goodwill. This could reduce the company's net income for the '03 and '02 periods but would not affect the company's revenue or have a material effect on cash flow. Based on our preliminary review of the reclassification of portions of goodwill to other intangible assets with respect to the company's acquisitions concluded in '03 and '02, we believe that impact on 2004 results will not be material.

We achieved our growth this year, in part from the success of our TV game lines and our most recent acquisition, Play Along, as well as statistically expanding our marketing and advertising efforts for our portfolio of licensed and unlicensed products. Play Along further diversified our product offerings and immediately positioned JAKKS as one of the industry leaders in the plush toy and soft body doll category with brands such as Cabbage Patch Kids and Care Bears. Between Play Along, TV games, and other strategic marketing and advertising efforts, we secured expanded shelf space at the mass merchants and other retail distribution channels in '04.

Toward the end of '03 we conveyed to you that our strategy for the next few years was going to include more focus on our existing lines coupled with increased investments in our marketing, advertising, and product development efforts. We believe our commitment to these areas has led to strong revenue growth and increasingly diversified product portfolio, expanded shelf space, and top-selling products for JAKKS Pacific.

We continue to be the leader in the growing Plug-It-In-And-Play category created by JAKKS Pacific. With our TV games product line, as we enter 2005, we have more than 15 TV game units in the market up from four at the beginning of '04. In 2005 we believe we will be introducing 20 new exciting titles and product innovations and expect to see growth both domestically and internationally for this product line.

We have entered into a new era of TV games and truly have created a fun product for all ages and demographics by combining top licenses, unique controllers, and an amazing low price point. We have established and expanded our presence of JAKKS TV games product line at traditional toy and electronic outlets such as Wal-Mart, Toys 'R Us, Target, Best Buy, Circuit City, and Game Stop just to name a few. In addition, we have continued to grow our distribution in non-traditional outlets such as Walgreen's, Bed, Bath and Beyond, Robinson's May, and Urban Outfitters, to mention a few. We are now selling our TV games to more than 500 different retail customers in many different channels and countries worldwide.

We believe our product lines are well positioned for continued growth in 2005 and beyond, and our financial position remains quite strong. As of December 31, 2004, our working capital was approximately $225.4m including cash and equivalents and marketable securities of $195.6m. We continue to grow our business by executing on internal growth initiatives, securing new licenses that provide both near and long-term market share expansion opportunities, and we are continually actively pursuing accretive and complementary acquisitions.

Before I get into more details about our outlook for 2005, I would like to turn the call over to Joel for a review of our financial results for the fourth quarter and the year.

Thank you, Jack. Our fourth quarter net sales increased 119% to $184.8m compared to $84.4m in the same period last year. Consistent with the basis of our previous guidance, net income for the fourth quarter of 2004 is expected to be $20.2m, or 75 cents per diluted share. This excludes the assumed conversion of our convertible notes as well as the noncash charges consisting of stock-based compensation and amortization related to Play Along acquisition assets. Reported net income for fourth quarter of 2004 is expected to be $11.1m, or 37 cents per diluted share. This includes pretax noncash stock-based compensation charges of $5.1m and amortization charges of $8.6m related to limited life intangible assets other than goodwill acquired in the Play Along acquisition and after giving effect to the recent accounting standard change requiring the presentation of contingently convertible notes on an as-converted basis beginning in the fourth quarter of 2004. This increased the outstanding shares by $4.9m.

The final allocation of the Play Along acquisition purchase price among various assets including intangible assets other than goodwill is based on the valuation prepared by a third-party consultant and this valuation updates the estimated allocation presented in prior quarters. Note that there will be certain noncash adjustments to 2003 and 2002 earnings due to noncash accounting adjustments to goodwill and intangible assets from prior acquisitions and, based on this, there are no comparisons to 2003 results other than to net sales.

In addition, the estimates of net income for the fourth quarter of 2004 and the year do not include any adjustments that may result from these noncash adjustments.

Our net sales for the year ended December 31, 2004, increased 82% to $574.3m from $315.8m in 2003. Consistent with the basis of our previous guidance, our net income for the year is expected to be $62.3m, or $2.35 per diluted share. This excludes the assumed conversion of the convertible notes and pretax noncash charges of stock-based compensation and amortization related to the Play Along acquisition.

Reported net income for the year ended December 31, 2004, is expected to be $45.9m, or $1.57 per diluted share, which does include pretax charges of $13.6m for stock-based compensation and aforementioned convertible notes and amortization charges.

As we mentioned in our earnings release earlier this morning, which we recommend you review, our results for the fourth quarter and year ending December 31, 2004, are preliminary due to noncash accounting adjustments to goodwill and intangible assets from prior acquisitions made in 2002 and 2003. The adjustments will result in the restatement of the 2003 and 2002 periods in net income but will not affect our revenue. Based on our preliminary review of the effects of the reclassification of portions of goodwill to intangible assets other than goodwill with respect to the acquisitions concluded in 2003 and 2002, we estimate that any impact on the 2004 results described in our release will not be significant, but this estimate is preliminary, and the amount, if any, of this adjustment will be finally determined upon the conclusion of our review of the 2002 and 2003 financial statements.

Turning to our sales by product categories, sales of traditional toys, which includes TV games, wheels, action figures, plush, dolls, and promotional products, were $144.6m for the fourth quarter and $406m for 2004. This compares to $41.3m for the fourth quarter and $107m for the year of 2003. This represents approximately 78.3% of sales for the fourth quarter and 70.7% of overall sales for 2004 and compares to approximately 48.9% and 33.9% of overall sales for 2003. In 2004, Play Along contributed approximately $151.6m for the year and $70.9m to the quarter. During the fourth quarter, our TV games continued to be the market leader with Ms. Pac-Man, SpongeBob and others selling particularly well, and we experienced solid sales from our Care Bears plush and Cabbage Patch Kids doll line.

In our seasonal product category which includes Go Fly a Kite, Funnoodle, Storm water toys, and junior sports items, sales were $5.5m for the fourth quarter and $24.8m for the year of 2004, as compared to $4.8m for the fourth quarter and $40.9m for the year of 2003. This represents approximately 3% and 4.3% of overall sales, respectively, for 2004 as compared to 5.7% and 13% of overall sales for 2003.

We had solid sales of our Funnoodle and Go Fly a Kite products in 2004, and we attribute the difference in overall sales of seasonal products in 2004 compared to 2003 mainly to our removal of Storm water guns and junior sports products from the market in 2004. We relaunched the Storm line for 2005 to the specialty market and internationally and will expand the line to our mass customers in 2006.

Art activities and writing instruments, which consists primarily of our Pentech and Flying Colors divisions, had sales of $15.6m for the fourth quarter and $75m for the year ended December 31, 2004. This compares to $28.3m for the quarter and $123.2m for the year of 2003. These represent approximately 8.5% and 13.1% of overall sales for 2004, and 33% and 39% of overall sales for 2003. A decrease in sales in this category was due to several factors including the discontinuation of our Tongue Tape candy line, a large decrease in our compound sales, as well as lower-than-expected sales of several of our activity lines including our scrapbooking line and Presto Plastic. Additionally, as other areas in our industry have grown, we have seen an overall softening and a decrease in shelf space of the activity sections overall at mass retailers.

We have new marketing and product development teams in place that have been addressing all these factors, and we are striving to revitalize both our activity and stationery businesses for 2005 and beyond.

Finally, international sales were $19.1m for the quarter and $68.5m for the year of 2004. This compares to $10.1m for the quarter and $44.7m for 2003. This represents approximately 10.3% and 11.9% of overall sales for 2004 and 11.9% and 14.2% of overall sales for 2003. In 2004, Play Along contributed $5.6m for the quarter and $13.9m for the year in international.

We are beginning to see more opportunities in our international division, and in the process of positioning ourselves for this continued growth, we have begun to streamline our international operations. This included securing a new distributor in the UK area. We believe this move will improve our international efficiencies and prove to be more cost-effective for the long-term expansion of our international division.

Below the line, gross margins for the fourth quarter decreased 2.3% to 39.2% and 0.7% to 39.4% for the year when compared to the same period last year. Cost of sales increased compared to 2003 due to high royalty expenses associated with TV games and the discontinuation of some licenses during the latter half of 2004, which temporarily affected gross margins due to the write-off of advance payments for these licenses in addition to the step-up of $1.3m on the inventory acquired in the Play Along acquisition. These increases were offset in part by lower tool-and-mold amortizations. We do expect our gross margins to improve in 2005 and be back to above 40%.

Excluding any purchase accounting, amortization adjustments, and stock-based compensation, SG&A expenses for the quarter increased to $56.5m from $31.6m last year. While on a dollar basis this was a significant increase, it represents 30.6% of sales compared to 37.4% in the same period last year. The dollar increase is due primarily to our increase in advertising and marketing and product development spending, the addition of overhead and operating costs associated with the operations of Play Along, as well as $8.6m in purchase price accounting amortization related to Play Along.

For the year of 2004, SG&A expenses increased $56m to $155.8m, or 27.1% of net sales. This is down from 31.5% for 2003. The dollar increase is due to those same factors noted for the quarter.

During the quarter, we posted $6.6m in profit from the WWE video game joint venture with THQ, which compares to a profit of $6m for the comparable period last year. For the year of 2004, the JV profit was approximately $7.9m, up $500,000 from the same period last year. Cash flow from operations for the year was $131m compared to $7.2m for the 2003. Our financial position remains very strong, and we ended the year with $196m in cash and marketable securities and $225m in net working capital.

Other accomplishments include that our accounts receivable at the end of the year decreased to $102.3m from $129m in the prior quarter with DSOs decreasing to historical lows of 50 days from 56 days in the previous quarter. Inventory at the end of the fourth quarter was approximately $50m, which is up slightly from $49.3m at the end of the third quarter. DSIs were at near-historical lows of 48 days compared to 44 days at the end of the third quarter.

With that, I'll return the call back to Jack.

Thank you, Joel. In 2004, we continued to show that our company is able to anticipate, adapt, and influence demand within our markets even in a challenging retail environment such as in 2003 and 2004. JAKKS Pacific has repeatedly delivered excellent products from our diverse portfolio of brands and continued to expand and improve upon our offerings.

As we look into 2005, we believe our product lines are properly positioned for continued growth. We look forward to building upon our successes we have achieved, and we are committed to making improvements in certain areas of our business that did not meet our goals in 2004. We are showing our entire line this week at the International Toy Fair in New York and response this far has been nothing short of fantastic. There are several areas in our new product offerings that are being very well received at this week's Toy Fair, and I'll touch upon some of the opportunities as we see them.

Our new Fly Wheels toy line from our Road Champs Team hit retail in the last month and is off to a phenomenal start. We have sell-in at all the major accounts, and the core items are already selling briskly. We believe that we are again capitalizing on the trend right now in automotive customization with our Fly Wheels line as well as other vehicle lines called "Custom Garage," and our retail customers and kids are truly buying the toys to a large degree. This Fly Wheels line, we are proud to say, with its rapid selling, was developed internally.

In Boys Action, our WWE Classic Superstar assortment and other figure assortments have increased for both the quarter and year-over-year. For the Dragon Ball Z franchise, we partnered with Bandai in late 2004 to distribute authentic Japanese consumer packaged Dragon Ball action figures in the U.S. market. Early sales results are outstanding with the ultimate figure series becoming a top-10 unit seller at several U.S. accounts.

From Play Along, we have a fantastic new line of Cabbage Patch Kids, Care Bears, and Teletubbies for 2005. In 2004, we successfully reintroduced the world-famous Cabbage Patch Kids toy line with one SKU that retails for $29.99. Only beginning in the fall of 2004, our Cabbage Patch Kids dolls quickly became on of 2004's bestselling toys, winning multiple industry awards. For 2005, we have increased the line to four SKUs for the spring, and we will have over eight new Cabbage Patch Kid products planned for the fall. Our retail presence is growing significantly, and we feel we are well on our way to establishing Cabbage Patch Kids as a top-selling girls brand in the market along with Barbie and Bratz.

Care Bears continue to be the number-one licensed plush branded retail in 2004, and we expect this to continue in 2005. In its fourth consecutive year of shipping the product line, our Play Along division has established the toy brand as Evergreen and JAKKS has extended the licenses to our Flying Colors brand as well. We are showing the activities line here at the Toy Fair and can offer our retailers a full Care Bears line of merchandise.

We are now shipping Teletubbies into the marketplace for the third calendar year, and we believe this line helps establish JAKKS Pacific as a major player in the preschool plush toy category. New lines that will be seen from our Play Along division this year includes Sky Dancers and Doodle Bears, a small doll line and plush bear line, both of which were big hits in the '90s, and which we believe will be loved by a new generation of young kids today and are off to an excellent start at retail.

In 2004, our award-winning TV games line of Plug-It-In-And-Play video games performed extremely well, far exceeding our expectations, and we could hardly keep up with the demand. But as we look at the opportunity for 2005, we are even more encouraged about this category. We continue to sign key licenses for classic video game titles and for top entertainment lifestyle brands. We have premier shelf space at over 500 different retailers, and this product line of gaming products housed in unique toy-like controllers is growing by leaps and bounds.

We announced on Friday the introduction of a new breakthrough technology that we have alluded to in the past -- Gamekey. Gamekeys are expansion packs that allow customers to expand the number of games playable with their TV game units. We have already gotten retail support on this line extension and are optimistic for the potential opportunities associated with the enhancement in the fall of this year. We have also introduced a wireless version of our Plug-and-Play games version of our Ms. Pac-Man TV game at Wal-Mart stores late in the fourth quarter and announced last week that we will ship at least four wireless TV game units this year -- another example of JAKKS expanding and improving upon the TV games technology as we look ahead to the future of this area.

In addition, we believe that our core lineup of TV games is stellar, with some of our biggest titles including Star Wars Revenge of the Sith, TV games based on the new movie; Mortal Kombat TV games; new TV kids based on SpongeBob, Dora the Explorer, Care Bears, and Disney Princesses with new adult-interest titles based on game shows such as Family Feud, Wheel of Fortune, and several other areas.

International growth for TV games, seasonal products, and other areas have been robust, so far. You can find TV games in Europe, Australia, New Zealand, Latin America, and many other territories worldwide. Overall, we expect TV games to become a staple of our product offerings for many years to come.

In our stationery area, we have been working to expand and improve upon our Vivid Velvet activities and have really come up with some innovative new licensed and non-licensed items for the brand. Additionally, we're marking a new revolutionary pencil, new paper products, and our new marketing and product development team has already made inroads to grow the business with strategic partnerships with people such as Office Depot and other key retailers.

In Seasonal, we've relaunched the Storm brand of water guns into the specialty market for 2005, and we will expand the line to mass in 2006. Three of the SKUs are particularly selling well and many new customers are viewing this line at Toy Fair this week, and we look to expand the sell -- in -- in the Storm line in the future.

Under our Go Fly a Kite divisions, Air Creations brand, we have statistically driven sales in the licensed Poly Kite category, leveraging off the strength of our JAKKS license portfolio. Many listings in Wal-Mart and other key mass customers, plus the addition of the dollar-type store accounts including Dollar General, Dollar Tree, and Family Dollar, who have give us their complete kite business. We have also secured the Sam's Club kite business, the largest kite retailer in dollars in the U.S., and Sam's is reporting excellent sell-through, so far. These are just a few examples of opportunities that we expect to capitalize in in 2005.

Turning to guidance, we are very excited about 2005 and anticipate growth in net sales of 15%-plus for 2005 to approximately $660m with net income fully diluted of approximately $70m, or $2.28 a share. This guidance gives effect to the assumed conversion of our convertible notes and includes noncash charges of $4.7m for stock-based compensation including the expenses of stock options pursuant to statement of financial accounting standards, SFAS 123-R, which will be effective for the company beginning in the third quarter of 2005, and $5.5m amortization related to the Play Along acquisition.

For comparison on the same basis as 2004 guidance, 2005 would be $2.91 per diluted share. In 2005, we will strive to expand our core lines through innovative product development, strategic marketing, and complementary acquisitions. We will continue to leverage our top brands and licenses to increase shelf space with our existing retailers and expand our distribution channels both internationally and domestically. Overall, we are excited about our near and long-term opportunities at JAKKS Pacific and look forward to continued growth in 2005 and beyond. With that, I would like to open this meeting to question-and-answer session. Thank you very much.

[OPERATOR INSTRUCTIONS] Tony Gikas of Piper Jaffray.

What percentage of sales during the quarter came from the video game category, number one; number two, could you give us a quick update on the license agreement that you have with the WWE? Have there been any changes or any update for us on that? Third question -- could you break down the 2005 growth by category that you had given us -- you know, basically the traditional toys and seasonal and international -- that would be very helpful. And then I might have a quick follow-up.

TV games, if you're calling that the video games, that's contained within the traditional category, and we don't break specific product lines out as is typically -- you know, historically. In terms of the WWE, there's no change to the license. There hasn't been, and there's not expected to be any changes to revenue or the JV profit. The only thing is that we have increased legal expenses, but on the advice of counsel, we can't really comment further on the litigation.

Could you help us with a little bit of breakdown on the 2005 growth by category -- at least some visibility there? And then a follow-up on the TV video games -- we're seeing a lot more competition in that category including from a couple of the larger toy companies in the category as well as some of the smaller toy manufacturers. What's your outlook as far as that category this year? Do you still see double-digit growth for the industry and, if so -- I mean -- if you could define that a little bit more that would be helpful.

Well, with the significant growth in 2004, we do expect positive comps with our own TV games products, and I'll let Jack address the other points in your question.

Any time you create a category and become a market leader in something, you are always going to have competition, and people are going to try to leverage and get their piece of it. And we welcome competition -- you're never alone, whether it be fashion dolls or any other category of the business. We think we are, by far, the market leader. We have a very, very substantive advertising budget to go along with our substantial revenue in the category. We have, we believe, spectacular licenses and, most importantly, we believe that content within our games are especially wonderful. It's the highest quality. We have advanced chips that we don't believe anyone else has to take our games to a new level. When kids and young adults see our new products this year, they will look much different than the original games that we came out with in terms of the quality.

Additionally, I think a very important feature in our line -- we are developing our Gamekeys. Gamekeys are exclusive to JAKKS Pacific. Our Gamekeys, say, for Star Wars will only work in the Star Wars game. If the consumer wants to buy these games and buy add-ons, it can only come from JAKKS Pacific as well as -- we've even added an adapter, which only works on our TV games, and all of these things have been internally developed. We've been working feverishly at this stuff, and we think it's just going to be great. Our reaction to our new Gamekeys by the retailers has been nothing short of sensational. We'll begin shipping in early fall of this year, and we've also created at most of the major retailers very specific displays and centers for our Plug-It-In-And-Play line. It has truly become a very significant and major part of the industry that we're in.

How about the breakdown of growth by category. Can you give us a little bit of help there for '05?

I think that's a bit early. We gave guidance to last year, Joel will try to help a little bit, but it's a little different at this point, but, Joel?

Within the traditional category, we'll anniversary the Play Along acquisition in June, so we'll have implicit growth in there. Again, we do expect favorable comps within the TV games line. We have a new line called Fly Wheels. I think Jack mentioned it in his section, which is getting very good placement, and it's getting very good response at retail. In addition, the WWE action figures has grown year-over-year and we expect that to continue as we continue to add marketing and development dollars to those areas.

This is Jack again, Tony. What's very difficult to respond to is, as example, our Fly Wheels are flying off the shelf. Many of our retailers are telling us, "Ship as many as you can make to us." It's too early to know what up is on it, so it's too hard to project. We are making many, many sets of tools, expanding the line, reaction to the line. Some people have told us it will be the boys' toy of the year. But we can't forecast on it now until we see that actually happening and, quarter-by-quarter, we will be able to update everyone on that.

All of the initiatives that we've mentioned on the call to this point, we do expect growth in each of the areas -- stationery, craft, et cetera. In addition, of the 15% growth that is implied in our '05 guidance, a little more than half is growth in the core business, and the other being the anniversarying of Play Along. So we do expect growth in all categories.

Okay, just two other quick housekeeping questions. On the Cabbage Patch products, did you say that was going to be four or eight products by the year-end? I missed that on the call.

Eight.

I'm sorry, go ahead?

Eight, Tony, by year-end.

Okay, thanks. And then what are the costs that are now associated with the JV -- the joint venture with THQ? I know you report the net number. Do you disclose -- I mean -- is there $1m of cost that net out against that, or is it higher?

It's about a $1.4m for the year. It's $365,000 a quarter, and that's SG&A including travel, salary, and employee benefits loads for people that work directly with either the WWE or THQ relative to the TV games.

Arvind Bhatia of Southwest Securities.

The first question is regarding the Toy Fair, just a macro question -- how do you see the year playing out for the industry? Have you seen anything that you think would be a traffic driver at the retail stores this year that would change the dynamics of the industry -- just more of a macro question.

I don't think we have any desire to comment on the industry or our competitors, and it's very early in the year, and when you're talking about 3%, 4%, 5%, 6% or 8% increases, that would be too difficult of a question. We can address ours. Once again, our Fly Wheels look like they're doing great. Our Sky Dancers from Play Along have just been introduced; they've just been on TV for a short time. They are taking off. Our Doodle Bear line from Play Along has been on TV for less than 10 days. It's doing extremely well and, most importantly, our TV games are a phenom. The retails sales at this time of year are probably going at a rate 80% over last year, year-to-date. And we're extremely excited about us, but reference to reporting on our hot items around -- we'd really rather not make a comment on that.

So TV games, you said, are up 80%?

I'm not talking about -- sell-throughs are up 80% year-over-year.

Okay. And just a housekeeping question for Joel -- the share count for 2005, as we do the math, it looks like it's about $30m, a little bit over $30m. We would have thought it would be around $32m including the convert. Am I missing something there?

No, the share count is $32,150,000 for the year. So that was correct. What were you --

Well, I look at the $70m and the 2.28, the share.

Oh, you have to add back the interest, so it's not a -- if you take net income, you have to add back the interest, which is about $3.4m net of tax. So there's a little disconnect, so you'll have to incorporate that in your model.

How should we model the legal expenses on an ongoing basis? In other words, the guidance you are providing, is there a way to think in terms of -- the impact of the legal expenses and without those your earnings might be "x" percentage higher or -- some sort of ballpark number so we can do the operating income model better.

At this juncture, depending on the activities of the various lawyers, it can vary quite dramatically. We had some initial filings in December. It wasn't that significant, and you never know, based on the timing of the activities of the court what the fees will be. What we've done is obviously stepped it up a little bit, but there is no way to project the timing or magnitude. So what we'll do is, in the event or at the time, the legal fees in a given quarter or the period is dramatically higher, we'll call it out, but in terms of forecasting it's difficult enough to forecast our business let alone -- well beyond outside factors like that.

But you were saying there are some legal expenses built in your guidance for '05.

Absolutely.

TV games pricing -- is there any pressure on pricing, given that Wal-Mart tends to be a big customer for TV games, any changes there or are you seeing prices actually going up at the new stuff that you are doing, like wireless, et cetera?

Well, we have -- this is Jack -- we have a number of different categories now, but to the first part of your question, we are not feeling any price pressure at all. It's a very hot category, and we're doing innovative things, and our retail partners appreciate all the things that we're doing, and, no, we're not feeling any price pressure. Wireless, where we kind of tested it, is just doing great at that $34.95. We have been very consistent in our pricing, we have exclusive chips that we've manufactured, and we think we have a leg up over any competitors in that category.

We have been able to establish new retail price points based on innovations, whether it's LCD panel, game-score saving, the wireless, et cetera, and we developed the items with our required margins in mind. So between the two, we've not felt that pressure.

Last question -- on the reclassification, Joel, you mentioned that the impact would not be there on the top line, and it seems like it's mostly noncash. Should we expect any impact, though, on the cash flows at all?

We would have indicated that there was no cash flow impact. The only impact would be any change in the -- any tax impact, tax liability. But for the most part, the charge itself will not have a cash impact but, again, we wanted it to be crystal clear, so we would rather fault on the conservative side, and we didn't say cash flow. But the charges themselves will not result in a changing cash flow. It's just that there could be some income tax payable implications, and that might have an impact on cash flow.

Garrett Edson of Monarch Research.

A couple of questions -- number one, I was curious how the sell-through is, so far, on the EA Sports TV game, both the one-controller and the two-controller, and I also wanted to get a sense of it Mortal Kombat was out yet in the stores?

The first part of your question -- our EA Sports game is off to -- I'd call it a "fair start." I wouldn't call it one of our homerun titles at this point. Regarding Mortal Kombat, that is not on shelf as yet.

I'm curious about going forward for TV games in 2005 -- where do you see technology costs, specifically chip costs? Do you see a rise in chip costs, going forward?

No.

I was also curious about Lazy Town. I saw that it's a new property for you guys. What are your expectations for that?

Well, Lazy Town is merely in our activities category, so it's not a significant part of our forecasting and probably, if it's a success, it will impact 2006 or late fall of this year.

The final question I have is just regarding Care Bears. Obviously, it's been a huge brand for you guys. Are your expectations for continued positive comps, going forward, in 2005 for Care Bears?

Our position on that is we think it will be, at worst case, flat and possibly up. There are new entries in it, which you don't know at this point. It's too early to say whether an item will be 500,000 pieces or 700,000 pieces. There's been some wonderful innovations in it in both the preschool part of it and the older-kid part of it. It's a great brand for us.

Sean McGowan of Harris Nesbitt.

Could you give us an idea of how much of the SG&A spending that we're seeing will show up throughout the year? How much of that is fixed in anticipation of growth versus variable throughout the year?

Fixed in terms of overhead runs around $75m. We've got in direct selling, which is a big portion of it, is about $78m to $80m, and that is seasonal. And then a big part of that is the TV advertising and also that includes co-op, which would be based on the seasonality of the sales.

But the direct selling expenses have their own expense line.

The $75m is not evenly per quarter, since there are certain elements that -- whether it's certain bonus or compensation structures. There are things that do hit one quarter higher than others, but that would be the closest to an average per quarter.

Would advertising be on top of that in the SG&A line?

Yes, it's in the $80m figure. So overhead is about $75m; direct selling is about $80m. So in direct selling is the commission, co-op, advertising.

A second question -- would you mind repeating the Play Along numbers -- sales contribution for the quarter and the year, both U.S. and international?

In traditional for the year was $151.m and $70.9m for the quarter. Internationally, it was $13.9m for the year and $5.6m for the quarter.

A question on the possible restatements from these noncash items -- would that have any impact on the management compensation plan, you know, meeting certain goals if you wind up with different numbers?

To the extent that the compensation is based on EPS growth, no, because the magnitude is not expected to be that significant, but it is something for the comp committee to consider, because in 2002 and 2003, certain executives had cash bonuses based on pretax income.

A last question -- what's the price point on the wireless Plug-and-Play?

Somewhere between $30 and $35 retail.

Bill Hanover [ph] of Wellington Management.

Can you just tell us, have you been contacted by the SEC, the attorney's office of the U.S. or the OIG or -- actually, the FBI -- in the last, let's say, six months in any way? Thanks.

We can't comment on that, but in our release this morning, we did indicate that the -- actually I don't know what particular arm, but you can refer to the press release, but we did get comments on our S3 registration statement that is giving rise to the review and restatement of the purchase accounting on those three acquisitions that we did in 2003 and 2002.

So is that the only time they have contacted you in the last six months?

I believe so, yes.

Okay, it's a pretty straightforward question.

All right, thank you.

At this time I am showing no further questions.

Thank you all very, very much. Thanks for your -- and we look forward to continuing excellent performance by JAKKS Pacific. Thank you very much.

Ladies and gentlemen, that concludes the JAKKS Pacific fourth quarter and year-end 2004 financial results conference call. You may now disconnect.