JAKKS Pacific Inc (JAKK) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for joining the JAKKS Pacific third-quarter 2012 earnings call with management. Today, JAKKS will review the results for the third quarter ended September 30, 2012, which the Company released earlier this morning.

On the call today are Stephen Berman, President and Chief Executive Officer, and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will first provide an overview of the quarter, and then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of product lines and current business trends prior to opening up the call for your questions. (Operator Instructions).

Before we begin, the Company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales and earnings per share for 2012, as well as any other forward-looking statements concerning 2012 and beyond, are subject to Safe Harbor protection under federal securities laws. These statements reflect the Company's best judgment based on current market trends and conditions today 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 such risks and uncertainties, you should consult JAKKS's most recent 10-K and 10-Q filings with the SEC, as well as the Company's other reports subsequently filed with the SEC from time to time.

With that, I'll turn the call over to Mr. Berman.

Thank you for joining us today. I'd like to start off by saying our core business continues to be very strong. With our diversity, no one product will drive our year, and our expectations and contributions come from a broad range of evergreen products for all ages. Our diverse portfolio spans a wide spectrum that includes action figures, electronics, and dolls; dress-up and role-play from our CDI division; Halloween costumes from our Disguise division; kids furniture and seasonal products from our Kids Only! division; infant and preschool products from our Tollytots division; ride-on vehicles, wagons, inflatable environments, and tents from Moose Mountain; outdoor and junior sports products and impulse toys from Maui Toys; and even pet products from JAKKS Pets. These are the core product lines that make up our business and remain solid with little fluctuation. We are the leader in many of these product categories with our retailers viewing us as a dependable partner in these product segments.

Our products stem from organic and non-license innovative products developed right here at JAKKS, while others are innovative initiatives based on our stellar licensing portfolio.

The bottom line is there are exciting initiatives with solid potential coming from every area at JAKKS.

Highlights of our third quarter include Monsuno; the Winx Club; Cabbage Patch Kids; Disney Princess; and our Disguise Halloween costumes and accessories. We have a strong lineup of evergreen products, including our Disney Princess and Disney Fairy Dolls, dress-up and role-play based on upcoming Disney entertainment, and our boys role-play based on superhero licenses such as The Avengers, Spider-Man, and Batman.

Traditional core product lines such as our Big Wheels ride-on and outdoor Kids Only! furniture from Kids Only!, dolls and doll accessories from Tollytots, and now our outdoor seasonal and impulse products from Maui Toys help drive our business. This evergreen philosophy continues to be the core for JAKKS's success.

We recently announced the completed agreements with NantWorks to form the DreamPlay Toys joint venture, which provides us exclusive access to ground-breaking technology that we believe will have a profound impact on the playing value and marketing of toy products in the future. We are excited with the new opportunities that will present themselves with this partnership, which we will discuss further on the call.

I would like to now turn the call over to Joel Bennett to review our financial results for the third quarter of 2012, and then I will give a further update of our third quarter. Joel?

Thank you, Stephen, and good morning, everyone. Net sales for the third quarter of 2012 were $314.5 million compared to $332.4 million reported in the comparable period in 2011. The reported net income for the third quarter was $30.4 million or $1.10 per diluted share, which reflects $1 million or $0.03 per diluted share related to financial and legal advisory fees and expenses associated with the letter of interest and active as shareholder activities. This compares to net income of $34.8 million or $1.10 per diluted share reported in the comparable period in 2011, which included $700,000 or $0.01 per diluted share of financial and legal advisory fees and expenses. Excluding these advisory fees and expenses in 2011 and 2012, the third-quarter net income would have been $31.2 million or $1.13 per diluted share compared to net income of $35.3 million or $1.11 per diluted share in 2011.

Net sales for the nine months were $533.3 million compared to $536.7 million in 2011. The net earnings reported for the nine-month period was $14.7 million or $0.59 per diluted share, which included $4.1 million, or $0.12 per diluted share of financial and legal advisory fees and expenses. This compares to a net income for the first nine months of 2011 of $28.5 million, or $0.97 per diluted share, which included $1.8 million, or $0.04 per diluted share, of financial and legal advisory fees and expenses.

Excluding the financial and legal advisory fees and expenses, the nine month earnings would have been $17.7 million, or $0.68(sic-see press release "$0.69") per diluted share.

Worldwide sales of products in our traditional toys and electronics segment, which includes dolls, action figures, vehicles, electronics, plush and pet products were $171.2 million for the third quarter of 2012 compared to $163.2 million for the third quarter of 2011. And sales for traditional toys were $284.8 million for the first nine months of 2012 versus $269.1 million for the first nine months in 2011.

2012 sales this quarter in this segment were led by Monsuno and Winx Club, Cabbage Patch Kids, and Disney Princess dolls.

Worldwide sales from our role-play, novelty, and seasonal toys segment, which includes role-play products, novelty toys, Halloween costumes, indoor and outdoor kits furniture and pool toys, were $143.3 million in third quarter of 2012 compared to $169.2 million for the third quarter in 2011. And sales for role-play, novelty, and seasonal toys were $248.5 million for the first nine months in of 2012 versus $267.6 million for the first nine months in 2011.

Halloween costumes and accessories dominated sales in this category this quarter followed by our Big Wheels ride-on. Included in the category numbers are international sales of $70.4 million for the third quarter of 2012 compared to $55.5 million for the third quarter of 2011. International sales for the first nine months in 2012 and 2011 were $109.6 million and $92.5 million, respectively. Our Monsuno product was a key driver in 2012 and performed above expectations in the international market.

Gross margin for the third quarter of 2012 and 2011 was 30.8% and 31.8% of net sales, respectively. And gross margin for the first nine months of 2012 was 31.3% of net sales compared to 32.6% of net sales in the first nine months of last year. The decline in 2012 was primarily due to a shift in product mix resulting in higher product costs and tooling amortization.

SG&A expenses in the third quarter of 2012 were $59.4 million or 18.9% of net sales as compared to $55.6 million or 16.7% of net sales in 2011. For the first nine months of 2012, SG&A expenses were $149.2 million or 28% of net sales compared to $137.8 million or 25.7% of net sales in the prior year. The increase as a percentage of net sales for the quarter is primarily attributable to marketing support for the launch of Monsuno and the incremental overhead added in connection with our acquisitions of Moose Mountain and Maui Toys, as well as legal and financial advisory expenses incurred in connection with the unsolicited indication of interests.

Consistent with the seasonality of our business, operations provided cash of $7.9 million for the first nine months of 2012 compared to having used cash of $2.6 million in 2011. As of September 30, 2012, the Company's working capital was $257.5 million, including cash and equivalents and marketable securities of approximately $141 million.

Depreciation and amortization was approximately $13.1 million in the third quarter of 2012 compared to $10.8 million for the third quarter of 2011. And for the first nine months of 2012, G&A was approximately $21.8 million compared to $20.6 million in 2011.

As for our tax rate, our effective tax rate for 2012 is expected to be approximately 25% before any FIN 48 or other adjustments. This may change if there is a shift in the sales between the US and Hong Kong companies.

Capital expenditures were $4.2 million for the third quarter of 2012 compared to $3 million for the third quarter of 2011 and $11.8 million for the first nine months of 2012 compared to $11.6 million in 2011. This was in line with our expectations with full-year CapEx expected to be around $14 million.

Accounts Receivable as of September 30 were $242.6 million, up from $239.7 million at the end of the third quarter of 2011 with DSOs increasing slightly to 69 days in 2012 from 65 days in 2011.

Inventory as of September 30, 2012 was $73.2 million, up from the September 30, 2011 level of $55.8 million to accommodate the higher proportion of domestic sales in 2012. Inventory levels are seasonally high with DSIs of 38 days in 2012, up from 28 days in 2011.

Our balance sheet remains very strong, and we continue to evaluate various uses of our funds and available financing capacity. We recently closed on the $75 million revolving line of credit that provides us flexibility in the repayment to our Hong Kong subsidiary of the amounts used to fund our recent self tender stock buyback, which was completed in July. Using our disciplined approach, we continue to look for accretive acquisitions to complement the growth of our business and effectively deploy our capital.

As for our earnings guidance for 2012, we are anticipating net sales for the full year in the range of $690 million to $700 million with diluted earnings per share in the range of $0.68 to $0.74 per diluted share, excluding nonrecurring legal and financial advisory charges.

In addition, if the Company does not achieve sufficient US taxable income, which is expected at approximately $0.74 per diluted share, the Company will be required to take a one-time non-cash charge of $82 million or $3.45 per diluted share for the full impairment of our domestic deferred tax assets.

Lastly, our Board of Directors has declared a regular quarterly cash dividend of $0.10 per common share payable on January 2, 2013 to shareholders of record at the close of business on December 14, 2012. We continue to have strong confidence in the future prospects for JAKKS Pacific and its shareholders.

And with that, I will return the call back to Stephen Berman.

Thank you, Joel. We finished the quarter with good performance by a number of product lines, including good sell-through at retail. However, due to the continuing shift we are experiencing in the buying patterns of some of our key US retailers and a shift we feel occurring in the consumer buying habits for the holiday season happening later in the year, we have taken a more conservative approach for the holiday season.

Here are some key highlights and brands for the third quarter. Monsuno core packs continue to drive the majority of the sales for the brand, and the TV commercials are on air in the US all fall, which we hope will drive sales of this product.

Our Monsuno products have been honored on a multiple retail top holiday toy list, including Toys "R" Us Holiday Hot Toy List and Kmart's Fab 15 toy list.

The Monsuno TV series continues to show increased ratings each week, despite the reruns currently airing. New Monsuno episodes started airing this month, which kicked off with a marathon of existing episodes followed by a brand-new episode airing weekly until Thanksgiving.

Domestically, Monsuno sales in the third quarter came in lower than we had expected. However, internationally Monsuno sales are exceeding expectations. We have retail distribution partners in over 40 international markets, and Monsuno is the number one action figure brand in Australia and the top three action figure property in Italy, Greece, and Turkey.

Currently in the UK, top retailer, Argos, is consistent with week-on-week sell-through increases, and the demand continues in Israel with 90% sell-through in the first week on the shelf. We recently signed an exclusive agreement allowing Mattel to distribute Monsuno toys to Eastern European territories, including Hungary, Czech Republic, Slovakia, and Poland beginning the spring of 2013.

Partnering with Mattel shows the great strides we are making with international distribution for Monsuno and exemplifies a growing worldwide momentum and enthusiasm for this franchise. The Monsuno TV series is placed in over 60 countries and is the top-rated program on Nickelodeon in South Africa and Holland and the top-rated program on CITV in the UK, and the Monsuno.com website is now live in over 14 languages.

Now moving on to the Winx Club. Across key accounts, Winx fall sales are meeting our expectations. Due to this early success, retailers have expanded their fall 2012 promotional support.

The Winx Club season five premiere approved upon key benchmarks and ranked number one in the time period across all TV in key demographics. Our Winx Club deluxe dolls was named to the Time to Play's Most Wanted Holiday Toy List and prestigious industry and media hot lists and on the Toys "R" Us Holiday Hot Toy List.

Superheroes and princesses continue to dominate our Disguise Halloween sales. Disguise is having a terrific year with Marvel's Avengers, Pixar's Brave, and Disney Junior JAKKS and the Neverland Pirates costumes as top sellers from online sites to warehouse clubs.

Disney Princess remains our top-performing girls brand with our Cinderella dolls, dress-up and role-play inspired by the platinum DVD release earlier this month, leading the charge. Many of our Cinderella theme products have been honored on multiple of the toy top-selling holiday toy list, including My Magical Wand Cinderella on the Toy Insider's Hot 20 Toy List; Disney Princess & Me Diamond Edition Cinderella doll on TRU's Holiday Hot toy list, and Cinderella Enchanted Carriage Vanity on Kmart's Fab 15 toy lists.

Our Disney Fairy Dolls dress-up and role play ran, and the new Secret of the Wings DVD continue to perform extremely well at retail, Sky High Tink 9-inch fashion dolls, dress-up and electronics were some of the most popular items at retail.

Cabbage Patch Babies launched at retail at a great value of $24.99. Sales are off to a promising start. The TV spot for babies began in October, which should give it a bigger lift for the holiday season. We also launched Cabbage Patch Kids in Europe, and sales are performing well at retail and orders have increased.

The original Big Wheels is now at almost all our major retailers nationwide, and sales continue to look extremely positive. Numerous retailers will be promoting the Big Wheels line during that all-important holiday selling season through in-store stackouts, end-caps and retail circulars. Big Wheels is also included on the Toys "R" Us 2012 Holiday Hot Toy List.

Other nice lines of business in the quarter include JAKKS own power trains motorized train sets, which are selling extremely well at retail and have an upside potential. Boys who love our superhero role play costumes and accessories based on Marvel's The Avengers and our awesome 31-inch Batman figure.

We have also teamed up with several action sports most prominent figures on our own Action Shot video camera line, which has extremely nice placement at retail. Professional skateboarder and television star, Rob Dyrdek; freestyle and motorcross legend and NASCAR star, Travis Pastrana; X- Games BMX Freestyle gold medalist Scotty Cranmer and Big Air/Mega Ramp up and comer Alex Sorgente are now promoting our Action Shot camera system to the action sports audience via digital, social, and traditional media platforms.

These third-quarter highlights are showing promise for the full year.

In addition, we are also pleased with the progression of our international business, which continue to grow with our highest third-quarter shift total since 2008. Top-performing brands internationally include Monsuno and Spy Net.

We continue to pursue and review acquisition opportunities in search of quality additions to our portfolio. The Maui acquisition is the most recent example of the Company's strategy to diversify its product offerings and introduce greater stability and predictability into future top- and bottom-line performance. Our Company is more diversified than ever before.

We are now in the midst of Fall Toy Fair, and the reaction to our 2013 lineup by retailers and licensors have been extremely positive. We have many exciting new products in the pipeline, including many new Disney products, new electronic products, the launch of our popular Fly Wheels and XPV lines, and we are working on a number of new licenses to expand our evergreen product lines.

And now I would like to touch upon our new DreamPlay Toys initiative, which we believe will present truly transformative opportunities for our business going forward. DreamPlay has a partnership between NantWorks and JAKKS to develop, market, and sell toys and consumer products incorporating NantWorks' proprietary ID image recognition technology, which creates rich interactivity between the physical objects and the digital platforms that have never been experienced before.

NantWorks ID technology combines powerful recognition technology into one unified platform that provides endless opportunities for operators, brands, retailers, marketers, and consumers. By combining image, object, face, code, text, speech, and music recognitions and GPS location, ID is truly a next-generation sensory browser of the physical world.

We believe this groundbreaking patented technology will have a profound impact on the way kids play with toys and the marketing of toys and consumer products.

At retail, ID can be used as a mobile marketing platform by activating the ads and/or products. ID can work across existing advertising campaigns in print, TV, outdoor, objects, and in-store allowing richer and deeper engagements. With our toy products, this innovative technology enables the consumer to create magic in the real world, using a smartphone or smart device to instantly link the physical toy to a video content, animation, and interactive gameplay right on their own device. DreamPlay Toys will introduce a broad product line next fall, which will combine this revolutionary technology with exciting new content, launching an entire new generation of interactive toys.

In conclusion, we are optimistic about our future business and continue to focus on our corporate strategy of international expansion, growth of organic brands, grow through acquisitions, and securing the hottest children's and entertainment licenses to complement our portfolio and continually seeking the latest cutting-edge technologies to bring innovations to our industry.

With this, we will build a more profitable and successful JAKKS Pacific for our stockholders and employees. Thank you.

(Operator Instructions). Drew Crum, Stifel Nicolaus.

Stephen, can you talk about the delta or the difference in terms of performance for Monsuno domestic versus international? That would be my first question.

On that first question, as we don't break out the actual delta, I could say that the increase internationally versus the I would say, the moderate sales that we had which were consistent pretty much with our forecasts for the US were quite dramatic compared to what we originally forecasted internationally. The reason for the dramatic increase internationally, it is on free TV in the majority of the countries where it's performed extremely well, which we've seen as it's on free TV in these major territories.

The sales have been exceptional. We even heard from the company in Israel. In the last 15 years, they've never seen another boy's property perform as well.

Then you take it to the US where we've spent a good amount of marketing dollars and have it on Nick Tunes. The viewership of Nickelodeon itself or Nick Tunes has dropped last year, as well it's dropped significantly over the last two years, so we're not getting the retention of the boys here. So it's more working based off of advertising. So while it's extremely growing on a rapid basis all overseas, it's doing well here, but not as to what we expected the [euphorinism].

In terms of international distribution on television, are you fully distributed at this front in time, and when would you expect the toy rollout to catch up with the television distribution?

As the television is still expanding throughout major territories, as I expressed earlier, Mattel acquired the rights for Eastern European territories. It's in the process of expansion.

So it's not -- it's in its, I would say, immaturity state. It's growing throughout the fall. It will pick up, we believe, from listening to our retails and distributors throughout next year. While the show has just recently been launched during fall, it has a longer lifespan right now as it started later in international territories or not even started in some. It started earlier in North America.

Okay.

And then as far as your role play and novelty toys are concerned, I think you mentioned that the Halloween business had a decent quarter, along with the sell-in for Big Wheels, yet the business was down 15%. What happened with the business? What was weak? What did not do well?

I would say a couple of things. One is on Halloween it's primarily based off of some of the strong licenses, as well as when it's comes during the year. So I believe it lands on Wednesday.

So you don't get the same impact of the sales of more accessories and products for when it lands on a Friday, Saturday or Sunday, because people utilize the costumes for holiday parties, both adult and children. But now that it lies on a Wednesday, you have a drop-off.

And then in addition, some of the people, our retailers had some direct response, direct from the licensor.

So, as we shifted with some retailers and lost a little business, we picked up in others, and I think it's been more of licenses and when Halloween falls. But it wasn't a dramatic decrease. It pretty much -- Halloween fluctuates within the ranges that we've had over the last four years. We're very happy that we're right on track to our forecasts internally or slightly above. So we are internally very happy with our performance.

Okay. Just last question for me. Your balance sheet inventory up year on year, could you comment on the retail inventory position going into the fourth quarter?

Yes, so what we did earlier in the, I believe, it was this month is we looked at -- our sell-throughs are doing terrific. So it is unique that our sell-throughs are well, but there has been a lot of layaway starting earlier from Walmart and Toys "R" Us.

Our retail inventory is very low. And what is coming is we're not going to have what occurred for us last year -- not just for us, for many people in our industry and not just in our industry, out of our industry, is we don't want to hold the inventory for the late orders that are coming in from retailers. Retailers are ordering later and later as consumers are coming in later and later. And we've learned from last year is by watching our sell-throughs and watching what's occurring with layaway and the consumer habits, we are looking at consumer habits in addition to retailer habits as they are not taking high inventory levels, and they're ordering when needed.

And as an example I think it was this week, one of our major retailers has sold out on an area of our Halloween costumes, and we're asking for an immediate order of a nice quantity. But we don't keep that inventory. So we're trying to keep the inventory levels, have the right inventory for the fall season and then the appropriate inventory going into first quarter.

So we are being cautious. We have a -- that being said, our core business is very strong. We're not dropping off in one segment that is really impacting us. It's a lot of different areas and segments that are adding up to what we did in lowering our forecasts.

So, as a Company, our business is extremely solid. We are very proud of it. But as the retail buying patterns are changing as we saw last year and what we're seeing this year, data that we use three years ago cannot help us looking forward right now. So that's the reason for our decision in the preannouncement and looking at our inventory levels at retail and in-house.

I hope that answers your question, Drew.

Okay. Thanks, guys.

Ed Woo, Ascendiant Capital.

Yes, I had a question on your DreamPlay joint venture. Have you disclosed your financial investment or how much do you think it's going to require to invest in this business?

First, we have not disclosed the financial terms of DreamPlay, but I will tell you a few things to elaborate on what kind of -- the action has been to DreamPlay.

One, we will be having a, I would say, medium to significant investment building what we are doing for next year, fall. We have been spending money on R&D, but more of it will come into next year for the DreamPlay initiatives. We have met with some of the largest retailers around the world, as well as some of the major content holders from around the world, and there is extremely strong interest, and we're in the process of engagement with these retailers, as well as content providers.

In addition is, because of the structure of DreamPlay, we have the exclusive technology for JAKKS itself. And with that exclusivity, we are also in the process of meetings with some of the largest kids and consumer products companies from around the world to sublicense the technology where we see appropriate. So where JAKKS feels there is a great connection with companies that will enhance the playability and engagement, we will then utilize the technology to sublicense so we can actually build this complete DreamPlay environment for the future.

Remember, this DreamPlay or NantWorks technology is proprietary to networks. It's been worked on for over 12 years. It's already been proven. There's well over 1000 claims in this various technology, so we'll be announcing it, we believe, at CES this year with our partnerships.

Great. And the other question I had is on the retail environment. Have you seen any particular differences in US retail versus international retailers, particularly --?

Yes, we see a dramatic difference on domestic compared to international. On international, the majority of our business is on a FOB basis, and a lot of it has been booked. And we have exceeded our forecast.

Domestically, and what we saw last year that happened after I'd call it, Black Friday, we were still waiting for the orders to come in and consumers to come in. And what we're seeing now is our sales rate picked up during the layaway programs that have occurred through some of our retailers and some of the discounting, but the pattern of the retailers buying inventory, which they did much earlier last year, they're holding off on releasing orders until the November/December time. And since that is occurring, as a company, we made a decision. We do not want to go through the liabilities that happen at retail if you are stuck with inventory as occurred with us last year. And we think it's better to play it safe and be with our solid business, not have heavy inventory at retail and not handle heavy inventory internally.

So we know what we're going into 2013 with a great, amazing portfolio of basic evergreen products, which is our portfolio, the diversity of it is from the Disguise area business where we are leaders in the license costume business from Kids Only!, which is a leader in the kids outdoor play environment, scooter business. The Moose Mountain, which is the leader in the foot-to-floor ride-on and outdoor ball pits; Maui Toys, which is a new family member of this company, which has a strong evergreen product of outdoor nonlicensed products; from our Tollytots preschool area, which is the leading area of preschool with Disney -- My First Disney Princess; JAKKS Girls and CDI -- they are the leaders in role play; and JAKKS boys, as you know, with the Spy Net electronics and action figures.

So, if you just take those areas of business, it's extremely solid.

Then you take what we're looking at going into 2013, which is truly transformative. And we're not just saying it based off of our own opinion, it's the opinions of the people that have seen it. And these people that have seen it are some of the largest retailers in the world, as well as content providers in the world. And for them to come out and their CEOs and Chairmen's and their tech people, their belief in it has given us stronger initiatives to make sure that this is really where the toy industry and consumer product industry is going.

As we all know, smart devices are part of everyone's life. Whether the kids have it their own or they have the accessibility to it, they utilize the smart devices of their parents. So incorporating the physical products, which we do great, with the smart devices and the digital world, we think we have the combination to change our industry going forward.

Great. Well, thank you and good luck.

Sean McGowan, Needham & Company.

I have a --

Sorry I missed you when you were here for last week.

Yes, it was nice to see the products. Wish I could have seen more of DreamPlay. That was one of the reasons that I came out there. So I'm hoping that you could maybe describe -- I saw one application, the EyeClops brought back with that extra technology, and I could see how that could work.

That is I would say a nominal portion of it. And to explain -- the people that we have shown from retail to content providers have had to sign NDAs due to the proprietary technology that networks has developed, and what we're doing now is we've been working on this for quite some time. And now it's matured internally, as well as the maturity with our retail partners and some of our content providers.

And, at that time, we decided at the appropriate time -- because it's still physical product, but it truly has gone into the technology world like never before. And I know it sounds hard to understand, but we will be showing this at CES because it's much more of a technology-driven segmentation of our world as you see it today. But I will tell you, some of the top CEOs from some of the top Fortune 100 companies -- their CMOs, their CTOs, their head of technologies have flown out, reviewed the technology, has checked everything within the technology.

So, as much as we want to show the world, we want to show it when it's ready to be able to explain exactly the use cases that will be used by JAKKS and its toy world, as well as some of the sublicensing partners that we're engaging in today.

So CES will be the first time that we are launching this with some partners that we are in the midst of signing. But I will tell you again from some of the top Fortune 100 companies, we've had Chairmen, CEOs, some of the Board members come out to look at this technology. And these companies that are very heavily driven in technology, I would say, were mesmerized of this complete ecosystem of technology.

It's not bits and pieces. It's a totality of an ecosystem of technology that really has the right use cases for children of all ages to even adults. And I know, Sean, it's hard when I'm explaining it, and that's why these people have come out to meet us because to explain it over a phone or a conference call, they have had to fly out, and we had to present them the technology.

Well, that's what I find frustrating. You mentioned that after the second quarter and said, you got to come out and see it. I came out to see it, and I didn't get to see it. So here we are listening to how great it is, and you're saying that Fortune 100 companies are falling in love with it, and all we have to do is go on a vague description. So I don't --

The best way I can describe it to you -- I am sorry I didn't get to see you and explain it to myself while you were here. I know --

Well, can you give us a couple of examples of like a particular play pattern that the toy suddenly is more fun because of the technology?

The physical toy that a child will be able to play at home versus the actual product in store -- first of all, you will not utilizing -- there's no QR codes, there's no UPC codes and there's no markers.

So the engagement at store with a parent, with a child, they will be able to see either how the toy works or animation that is provided by us or our content provider. It can be an item that will actually link you to a preview of a movie that is from one of the items that we're making. It could actually show you some of the virtual environments that when you bring the product home. You'll be able to have this virtual world. And then while you're at home, this three-dimensional object, which is a regular toy product -- again, with no QR codes, markers -- it's all based off this patented recognition technology. You will be able to have the environment that you have from a physical object and create a complete virtual world that a child can play in continuously. They could film it. They could take pictures. And that virtual world based on whoever the content provider is, can change on a weekly basis, a monthly basis, a yearly basis.

Okay. I think I get it.

A couple of other questions, if I can. Joel, just so that I understand, so you took this bank line, which is great, because it's great to have a bank line. Could you give us some terms of the bank line, and had you borrowed money from the Hong Kong subsidiary to fund the self tender? Were there any tax implications of that transfer or that doesn't trigger anything?

Actually there were -- mine is for $75 million, but it's an asset-based line. So the availability was in the $70 million range. We used $80 million for -- actually, there were assorted things. We did the tender. We also did the Maui acquisition. But most of the cash that we have is in Hong Kong. So as not to retrigger repatriation, we did the line.

In the quarter, there was probably $600,000 tax expense for the portion that wasn't repaid timely, again, because of the significant use of cash during the third quarter. The terms are basically -- it's a LIBOR-based line, LIBOR plus 2. But basically standard, pretty standard commercial rates.

Okay. And then last question, I want to circle back to Drew's question on inventory, because, Stephen, I don't really understand the explanation you were giving on inventory. Inventory is up 31% year over year. Whether or not it sits at retail or is on your books, there is still -- there is still a question about how fresh the inventory is. If you're seeing cancellations and you're seeing retailers reluctant to take product --

To answer your question --

-- it's up 31%? Doesn't that give you some concern?

So I can answer your question because it's very simplistic. We brought domestic inventory in various FOB as some of the retailers were looking at doing on a domestic basis. So the inventory levels are up on a domestic basis because we're doing more domestic sales for the fourth quarter. I think you even saw even in Hasbro's release that they are expecting much more in fourth quarter.

We're not expecting a dramatic amount. We have come out with our forecast. We're being very conservative. Also, we brought in specific goods as we have first-quarter shipments on different areas of our business.

So the inventory we brought in is fresh inventory. The inventory we have -- the majority of it is fresh. But we won't go through what we did last year of building up inventory and not selling it. So we brought it in because a couple of our customers have delayed and they have requested from an October shift to November shift to sell the inventory. So that's the reason for it.

Okay. Thank you.

Thank you.

Jonathan Fite, KMS Investments.

We have been shareholders of JAKKS for several years now, and given our tenure, just bear with me for a moment.

Early in our ownership, we watched you guys impressively navigate the downturn, even while you dealt with the loss of key properties like WWF. But over the past two years or so, we've been baffled by some of your capital allocation decisions. And I'd like to understand a little bit better your process, your thought process, behind your capital allocation decisions?

Let me give you a few examples. So through the crisis, you managed the cash horde, which was great. But rather than leveraging that cash horde to either pay down or renegotiate your convertible bonds, you refinanced the bonds with lower strike prices, which diluted your shareholders.

Next, about 18 months ago, you began touting the wondrous prospects of Monsuno, but these failed to deliver. You've severely missed earnings projections in 2011, and you've lowered expectations again for 2012.

Most recently, you refuse to negotiate in good faith with a firm willing to offer shareholders $20-plus, but instead you decided to spend shareholder money on a tender at the same price. Since that tender took place, you've weakened the balance sheet and presented over a 30% drop in the share price. Yet you've had your compensation contract renewed at pretty substantial levels.

So can you explain to me why you might deserve to have that contract renewed and why you think your capital allocation record over the past three years really deserves to be rewarded?

Sure. We'll deal with your capital allocation question first.

Yes, first, I think that internally and I think by the market it was generally held that we had excess cash. But to your first point regarding the refinance of the last convert, the convert was well underwater, and as we were still engaged in a lawsuit at the time, we didn't have access to less dilutive financing. So we did the comfort, and again, given the fact pattern at the time, we felt it was the best way to go, and we would probably do the same if we were to have the same fact pattern.

So what all the information from your question was wasn't entirely clear. We had -- our preference would have been a more standard commercial and certainly less dilutive financing.

With regard to the tender, we view it as a dividend to the shareholders. We expected that because it was above market that we would have had virtually all shareholders tender. And in essence, they would be holding the same percentage of the Company after the tender as they had before, and it was just a unique structure for a dividend.

Again, with the excess cash position, we felt it was prudent. We wanted to return value to the shareholders and we did. We have ample leverage on our balance sheet, so we can still undertake all the activities that we do to build a business, acquisitions, as well as internal development.

So I think -- Jonathan, does that answer the question on the capital allocation?

Well, it seems that you have taken an approach of doing things that keep you and your management team in place, earning a really nice salary, but do that at the expense of shareholders, whether it's -- you have the choice of paying off the convert altogether and being completely debt-free, you would have lowered the cash, but you'd be a completely debt-free business that earns lots of cash flow, but instead, you diluted shareholders, right?

Instead of engaging in the discussion at $20 or north for the entire business --

Jonathan, I want to talk about the capital allocation. Then I'll go into your other questions because you're repetitive on your questions. But I'll go to those questions next.

On a capital allocation, I would think you gave us an accolade in 2007 and 2008. We had all this cash, and I think we are -- some investors wanted us to deploy the cash. But we kept it and try to build our balance sheet.

In 2009, 2010, the crisis came, and everyone applauded us for having the clean balance sheet.

Then 2011, 2012 came, and under the circumstances that the Company was facing with regards to different groups, we deployed and did an $80 million buyback. We couldn't bring back our money from Hong Kong due to repatriation, so we got the revolver.

On the part of someone giving us an offer, we've never had an offer given to us. It was a letter of interest, Jonathan, that was subject to many variations. So you keep saying an offer. It was a letter of interest that the Company received. We've never received a full-blown offer. And in our filings, it explains what has occurred, so I won't go through that part of the detail in grave detail. But in the filings that have recently been filed from ourselves or Oaktree, that will explain it to you in the best of detail to go through the management.

The management has been -- during the uncertainty of when an investor was looking with interest, there's a lot of uncertainty to this Company, and it was very difficult to get employees, to keep licenses when they weren't sure if the current management was in place, was very disruptive. We were moving an office from one state to another -- very difficult to get employees when they thought there would be a likelihood of a change. So I thought we've dealt with these rough waters quite well. And speaking on behalf of myself, the extension of my agreement was part and parcel of us getting the NantWorks technology. The agreement with NantWorks goes for a specific period of time, and that specific period of time aligns my goals and my agreement with that. That was part of the deal in order for us to get the exclusivity and the rights.

And I think -- I may not have answered it the way you want to hear it, but this is the way that we feel. I'm sorry if you feel otherwise. We've had the last two years have been a unique time, not just for us, it's been from last year from the Hasbro, the summer infant to various companies, have had difficult times.

If you look at today, the economy is very uncertain. I will disagree with you on Monsuno. Monsuno has done terrific for us as a company. Maybe it has fluctuated versus US to international, but we have a very solid business. We still have a very strong balance sheet. We try to appease as many shareholders as we can. We tried to do the right thing for our stockholders.

And, again, that's what our goal is. If you are displeased, I'm sorry. If you'd like to come and have a meeting, we have no problem meeting with our stockholders. But for that, I think that's where we stand with our answers.

Gerrick Johnson, BMO Capital Markets.

How about some easy ones here. Maui, what did that add to the quarter?

It was less than $3 million.

Less than $3 million. And that's more of a summer business anyway?

Yes, I don't know if you had a chance to come out, Gerrick, because I've been traveling, but it's a great nonlicensed summer business. It's like the hula hoops --

Yes, I'm familiar with it, yes.

It's a really great little niche business. And not just a niche business, the gentleman, Brian Kessler who has ran, I think, over 20 years, they are just from our Toy Fair, are getting new distribution channels that they've never had because they were a very nimble company.

So our added distribution just in itself has given them growth besides their creativity. I've known Brian for a long time. He's a great guy. And we think there's a great opportunity for us, especially because it's a summer business.

Okay. I just want to clear up some things on the balance sheet. Your intangibles are up $72 million since December 31. I think the Maui deal was $32 million. So what is the increase in intangibles there?

And while you're looking at the balance sheet, the other one was other liabilities grew by $25 million, and I was wondering what impacted that?

Most of it is the Maui, including booking what we expect of his earnout.

And that would be in the intangibles number?

Yes.

Okay. So you're basically another $30 million in potential earnout if you put that there?

$18 million.

$18 million.

Yes. The base price was $32 million, of which working capital was, I think, $4 million or $5 million. So most of the others were product lines, trademarks, noncompetes and goodwill.

All right. And then other liabilities? That's $25 million higher.

Yes, we accrued the earnout to that. That would be the offset. And they are long term because these are three-year payouts.

Okay. All right. I'm good. Thank you.

Thank you.

That concludes the question and answer session for today. Please go ahead with any final remarks.

We appreciate everybody's comments and questions during the call. Thank you for joining us on our third-quarter conference call, and we look forward to our call at the year-end numbers. Thank you.

Thank you for participating in the JAKKS Pacific third-quarter 2012 earnings call.

This concludes the call for today. You may all disconnect at this time.