JAKK » Topics » Results of Operations

This excerpt taken from the JAKK 10-Q filed May 6, 2005.
Results of Operations

      The following unaudited table sets forth, for the periods indicated, certain statement of operations data as a percentage of net sales.

                 
Three Months
Ended
March 31,

2004 2005


Net sales
    100.0 %     100.0 %
Cost of sales
    58.8       59.7  
     
     
 
Gross profit
    41.2       40.3  
Selling, general and administrative expenses
    34.6       30.1  
     
     
 
Income from operations
    6.6       10.2  
Profit from joint venture
    0.5        
Interest, net
    (0.7 )     (0.1 )
     
     
 
Income before provision for income taxes
    6.4       10.1  
Provision for income taxes
    1.3       2.6  
     
     
 
Net income
    5.1 %     7.5 %
     
     
 
 
Comparison of the Three Months Ended March 31, 2005 and 2004

      Net Sales. Net sales were $134.7 million in 2005 compared to $74.0 million in 2004, representing an increase of 82%. The increase in net sales was primarily due to an increase in sales of our traditional toy products of $25.8 million, including TV Games, WWE action figures and accessories and wheels products, the addition of $30.8 million in sales from our recent Play Along acquisition and an increase in international sales of $9.3 million, partially offset by a decrease in sales of our crafts and activities and writing instruments of $5.1 million. Sales of our seasonal products of $9.2 million, including water guns and junior sports toys, were comparable to 2004.

      With the addition of Play Along, in addition to our other on-going initiatives in product development and marketing, we believe that the increased level of net sales of traditional toys should continue throughout 2005.

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Table of Contents

      Gross Profit. Gross profit increased $23.7 million, or 78%, to $54.2 million, or 40.3% of net sales, in 2005 from $30.5 million, or 41.2% of net sales, in 2004. The overall increase in gross profit was attributable to the increase in net sales. The decrease in gross profit margin of 0.9% of net sales was primarily due to an increase in royalty expense as a percentage of net sales due to changes in the product mix to more products with higher royalty rates from products with lower royalty rates or proprietary products with no royalties and the write-off of advances and guarantees related to expired or discontinued licenses, offset in part by lower product costs and tool and mold amortization.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses were $40.5 million in 2005 and $25.6 million in 2004, constituting 30.1% and 34.6% of net sales, respectively. The overall increase of $14.9 million in such costs was primarily due to the increase in direct selling expenses and an increase in legal and accounting expenses ($1.2 million), and the addition of overhead related to the operations of Play Along ($3.7 million). Due to the comparable grants of restricted stock awards and the increase in the price of our common stock in 2004 compared to a moderate decrease in the price of our common stock in 2005, we had stock-based compensation charges of $0.4 million compared to $1.7 million in 2004. The increase in direct selling expenses ($10.4 million) is primarily due to an increase in advertising and promotional expenses in 2005 in support of the sell-through of our various products at retail. We produced and aired television commercials in support of several of our products, including WWE action figures, TV Games, Care Bears, Cabbage Patch Kids, Fly Wheels and Flying Colors products in 2005, and WWE, Mucha Lucha and Dragon Ball action figures and Flying Colors products in 2004. From time to time, we may increase our advertising efforts, if we deem it appropriate for particular products.

      Profit from Joint Venture. Profit from joint venture in 2005 was $0.2 million as compared to $0.4 million in 2004 with stronger sales of existing titles in 2004 compared to 2005.

      Interest, Net. Interest income increased due to higher average cash balances and interest rates during 2005 than in 2004. Interest expense of $1.1 million for the convertible senior notes payable was comparable to 2004.

      Provision for Income Taxes. Provision for income taxes included Federal, state and foreign income taxes, at effective tax rates of 20.4% in 2004 and 26.0% in 2005, benefiting from a flat 17.5% Hong Kong Corporation Tax on our income arising in, or derived from, Hong Kong for 2004 and 2005, respectively. The increase in the effective tax rate in 2005 is due to a greater proportion of income generated in the United States. As of March 31, 2005, we had net deferred tax assets of approximately $1.9 million for which no allowance has been provided since, in the opinion of management, realization of the future benefit is probable. On October 22, 2004, the American Jobs Creation Act of 2004 (the “AJC Act”) was signed into law. The AJC Act creates a one-time incentive for U.S. corporations to repatriate undistributed earnings from their international subsidiaries by providing an 85% dividends-received deduction for certain international earnings. The deduction is available to corporations during the tax year that includes October 22, 2004 or in the immediately subsequent tax year. The Company is in the process of evaluating whether it will repatriate any international earnings under the provisions of the AJC Act.

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